<PAGE> 1
Pursuant to Rule 424B5
Registration Statement Numbers 333-68937
333-68937-01
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SUBJECT TO COMPLETION, DATED JUNE 25, 1999
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MAY 7, 1999)
[LOGO]
$300,000,000
UNITS
% ADJUSTABLE CONVERTIBLE TRUST SECURITIES
- --------------------------------------------------------------------------------
THE COMPANY:
- - We are a leading diversified energy company operating in the United States and
around the world.
- - CMS Energy Corporation
Fairlane Plaza South, Suite 1100
330 Town Center Drive
Dearborn, Michigan 48126
(313) 436-9200
- - New York Stock Exchange Symbol: CMS
THE OFFERING:
- - We are offering units of Adjustable Convertible Trust Securities.
- - This is an initial public offering of Adjustable Convertible Trust Securities
and no public market currently exists for these securities.
- - We will apply to list the units on the New York Stock Exchange under the
symbol .
- - We intend to use the proceeds from the offering to repay various lines of
credit and our existing revolving credit facility.
- - Closing: , 1999.
THE ADJUSTABLE CONVERTIBLE TRUST SECURITIES:
- - Each unit of Adjustable Convertible Trust Securities consists of a purchase
contract for not more than
shares of our common stock and a preferred security of CMS Energy Trust II, a
Delaware business trust.
- - Each unit obligates the holder to purchase from us not more than and not
less than shares, based on the average trading price of our common stock
during a 20-day period ending before July 1, 2002.
- - The trust will use the proceeds from the sale of the trust preferred
securities to buy our % subordinated deferrable debentures due 2004.
- - The trust preferred securities will mature on July 1, 2004.
- - The trust will pay annual distributions of % on the trust preferred
securities. Such distributions will be paid quarterly on January 1, April 1,
July 1 and October 1 of each year, commencing on October 1, 1999.
- - Each trust preferred security will be subject to a call option granted by the
holder of the unit to Donaldson, Lufkin & Jenrette Securities Corporation.
- - We will pay annual contract payments of % on each purchase contract. Such
payments will be paid quarterly on January 1, April 1, July 1 and October 1 of
each year, commencing on October 1, 1999.
- - The trust may defer distributions on the trust preferred securities and we may
defer contract payments on the purchase contracts. Distribution and contract
payment deferrals will bear additional distributions and contract payments at
% and %, respectively.
- - Each holder will pledge the trust preferred securities to secure its
obligation under the purchase contract. Unless a holder substitutes another
pledged security for this collateral, and as long as a purchase contract is
effective for a unit, a holder cannot separate or separately transfer the
purchase contract and the trust preferred securities (or other pledged
securities).
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PER UNIT TOTAL
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Public offering price of units: $ $
Proceeds from sale of call options: $ $
Underwriting fees: $ $
Proceeds to us and the trust: $ $
- ----------------------------------------------------------------------------------------------------------
</TABLE>
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING PAGE S-14.
- --------------------------------------------------------------------------------
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS DETERMINED WHETHER THIS
PROSPECTUS SUPPLEMENT AND ACCOMPANYING BASE PROSPECTUS IS TRUTHFUL OR COMPLETE,
NOR HAVE THEY MADE, NOR WILL THEY MAKE, ANY DETERMINATION AS TO WHETHER ANYONE
SHOULD BUY THESE SECURITIES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
JOINT BOOK-RUNNING MANAGERS
SALOMON SMITH BARNEY DONALDSON LUFKIN & JENRETTE
BANC OF AMERICA SECURITIES LLC
We will amend and complete the information in this prospectus supplement. This
prospectus supplement and a base prospectus are part of an effective
registration statement filed with the SEC. This prospectus supplement and the
base prospectus are not offers to sell these securities or our solicitation of
your offer to buy these securities in any jurisdiction where that would not be
permitted or legal.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PROSPECTUS SUPPLEMENT
Forward-Looking Statements........ i
Prospectus Supplement Summary..... S-1
Risk Factors...................... S-14
Use of Proceeds................... S-21
Ratio of Earnings to Fixed
Charges......................... S-22
Accounting Treatment.............. S-22
Price Range of Common
Stock and Dividend Record....... S-23
Capitalization.................... S-27
The Company....................... S-28
Description of Units.............. S-31
Description of the Purchase
Contracts....................... S-34
Description of the Call Options... S-39
Pledged Securities and Pledge
Agreement....................... S-40
Termination of Purchase
Contracts....................... S-41
Book-Entry System................. S-42
Certain Provisions of the
Principal Agreements............ S-43
Description of the Trust Preferred
Securities...................... S-46
Description of the Junior
Subordinated Debentures......... S-56
Governing Law..................... S-60
Information Concerning the
Trustee......................... S-60
Description of the Guarantee...... S-60
</TABLE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Relationship Among the Trust
Preferred Securities, the Junior
Subordinated Debentures and the
Guarantee....................... S-63
Certain Federal Income Tax
Consequences.................... S-65
ERISA Considerations.............. S-72
Underwriting...................... S-73
Legal Opinions.................... S-75
Experts........................... S-75
Unaudited Pro Forma Financial
Information..................... F-1
PROSPECTUS
Available Information............. 2
Incorporation of Certain Documents
by Reference.................... 3
CMS Energy Corporation............ 4
CMS Energy Trusts................. 6
Use of Proceeds................... 8
Ratio of Earnings to Fixed Charges
and Ratio of Earnings to Fixed
Charges and Preferred Stock
Dividends....................... 8
Description of Securities......... 9
Legal Opinions.................... 29
Experts........................... 29
Plan of Distribution.............. 29
</TABLE>
FORWARD-LOOKING STATEMENTS
The prospectus supplement and the accompanying base prospectus contain or
incorporate by reference forward-looking statements. The factors identified
under "Risk Factors" are important factors (but not necessarily all important
factors) that could cause actual results to differ materially from those
expressed in any forward-looking statement made by, or on behalf of, us (or our
subsidiaries).
Where any forward-looking statement includes a statement of the assumptions
or bases underlying such forward-looking statement, we caution that, while such
assumptions or bases are believed to be reasonable and are made in good faith,
assumed facts or bases almost always vary from actual results, and the
differences between assumed facts or bases and actual results can be material,
depending upon the circumstances. Where, in any forward-looking statement, we,
or our management, express an expectation or belief as to future results, this
expectation or belief is expressed in good faith and is believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation or belief will result or be achieved or accomplished. The words
"BELIEVE", "EXPECT," "ESTIMATE," "PROJECT" and "ANTICIPATE" and similar
expressions identify forward-looking statements.
i
<PAGE> 3
PROSPECTUS SUPPLEMENT SUMMARY
This summary may not contain all the information that may be important to
you. You should read the entire prospectus supplement and the accompanying base
prospectus, including the financial data and related notes, before making an
investment decision. The terms "CMS", "CMS ENERGY", "COMPANY", "OUR" and "WE" as
used in this prospectus supplement and the accompanying base prospectus refer to
CMS Energy Corporation and its subsidiaries.
THE COMPANY
We are a leading diversified energy company operating in the United States
and around the world. Our two principal subsidiaries are Consumers Energy
Company ("CONSUMERS") and CMS Enterprises Company ("ENTERPRISES"). Consumers is
a public utility that provides natural gas and electricity to almost six million
of the nine and one-half million residents in Michigan's Lower Peninsula.
Enterprises, through subsidiaries, is engaged in several domestic and
international energy businesses including:
- Natural gas transmission, storage and processing;
- Independent power production;
- Oil and gas exploration and production;
- International energy distribution; and
- Energy marketing, services and trading.
Our consolidated operating revenue in 1998 was $5.1 billion. 51% of our
operating revenue was generated from our electric utility operations, 21% from
our gas utility operations, 18% from our energy marketing, services and trading
operations, 6% from our independent power production and other non-utility
activities, 3% from natural gas transmission, storage and processing and 1% from
our oil and gas exploration and production activities. Our acquisition of the
Panhandle Companies described below will significantly increase our percentage
of operating revenues from natural gas transmission, storage and processing.
Consumers' consolidated operations account for a majority of our total
assets, revenues and income. Consumers' service areas include automotive, metal,
chemical, food and wood products and a diversified group of other industries. At
December 31, 1998, Consumers provided service to 1.64 million electric customers
and 1.55 million gas customers. Consumers' consolidated operating revenue in
1998 was $3.7 billion. 70% of Consumers' operating revenue was generated from
its electric utility business, 29% from its gas utility business and 1% from its
non-utility business.
We routinely evaluate, invest in, acquire, construct and divest
energy-related assets and/or businesses both domestically and internationally.
Cash or securities are routinely the consideration for such transactions.
We were incorporated in Michigan in 1987 and our world wide web address is
http://www.cmsenergy.com. Our web site is not part of this prospectus
supplement. Our telephone number is (313) 436-9200.
S-1
<PAGE> 4
BUSINESS STRATEGY
We seek to be a leader in the domestic and international energy industry,
focusing our growth primarily in three energy sectors: electric utility, natural
gas and diversified energy. As a result of our acquisition of the Panhandle
Companies described below, approximately one-third of our assets is in each of
these three energy sectors. Our Consumers subsidiary is a leading producer and
distributor of electricity and natural gas in Michigan's Lower Peninsula. Our
acquisition of the Panhandle Companies significantly enhanced our domestic
natural gas assets. Through our Enterprises subsidiary, we intend to become a
leading diversified energy company with operations in virtually all segments of
the North American and worldwide energy industry.
In pursuing these business objectives, we intend to:
- generate stable earnings and cash flow from our regulated businesses
through maximization of retail electricity and natural gas services
and natural gas transportation revenues, as well as active cost
management;
- invest in energy-related projects which complement and expand our
non-regulated and diversified energy business, as well as in
selected projects in regulated businesses which management believes
are capable of generating favorable risk-adjusted returns; and
- pursue new areas for energy-related business expansion, including
strategic acquisitions and joint ventures.
We expect to continue to capitalize on emerging trends in the energy
industry, including the growing worldwide demand for energy infrastructure and
the privatization of existing government energy assets, as well as the
deregulation of the natural gas and electricity industries in the United States.
We believe that our recent acquisition of Panhandle Eastern Pipe Line
Company ("PANHANDLE") and its principal subsidiaries, Trunkline Gas Company
("TRUNKLINE") and Pan Gas Storage Company, as well as its affiliates Panhandle
Storage Company and Trunkline LNG Company ("TRUNKLINE LNG" and, collectively,
the "PANHANDLE COMPANIES"), as further described below enhances our ability to
achieve our business objectives. See "-- Recent Developments". In fact, we are
implementing our business strategy to capitalize on the ownership of the
Panhandle Companies by: (i) participating in the construction, ownership and
operation of a 710 megawatt natural gas-fired cogeneration facility in Dearborn,
Michigan which will require approximately 130 million cubic feet of natural gas
per day which we will seek to transport using the Panhandle Companies; and (ii)
integrating the operations of the Panhandle Companies with those of our existing
and in-development natural gas distribution, transmission, processing and
storage operations. This integration includes connecting our natural gas
gathering and processing systems in the mid-continent region to our Midwestern
markets. It also includes expanding into new markets through the pending
development of the TriState Pipeline running from a natural gas transportation
hub outside Chicago through a combination of new and existing pipelines to
ultimately connect to a natural gas transportation hub in southwest Ontario as
well as the pending development of the Guardian Pipeline running from the
Chicago hub to southeast Wisconsin.
S-2
<PAGE> 5
RECENT DEVELOPMENTS
ACQUISITION OF THE PANHANDLE COMPANIES
On March 29, 1999 we acquired all of the outstanding common stock of the
Panhandle Companies from Duke Energy Corporation. We paid $1.9 billion in cash
to Duke Energy Corporation and assumed approximately $300 million of existing
Panhandle debt.
The Panhandle Companies are primarily engaged in the interstate
transmission and storage of natural gas. The Panhandle Companies operate one of
the nation's largest natural gas pipeline networks, providing customers in the
Midwest and Southwest with a comprehensive array of transportation services.
This interconnected 10,400 mile system accesses virtually all major natural gas
regions in the United States.
Panhandle's transmission system consists of four large-diameter parallel
pipelines and extends approximately 1,300 miles from producing areas in the
Anadarko Basin of Texas, Oklahoma and Kansas through the states of Missouri,
Illinois, Indiana and Ohio into Michigan. Panhandle's system connects with the
Trunkline system at Tuscola, Illinois.
Trunkline's transmission system consists principally of three
large-diameter parallel pipelines extending approximately 1,400 miles from the
Gulf Coast areas of Texas and Louisiana through the states of Arkansas,
Mississippi, Tennessee, Kentucky, Illinois and Indiana to a point on the
Indiana-Michigan border. Trunkline also owns and operates two offshore Louisiana
natural gas supply systems consisting of 337 miles of pipeline extending
approximately 81 miles into the Gulf of Mexico.
Panhandle's major customers include approximately 20 utilities located in
the Midwest market area that encompasses large portions of Michigan, Ohio,
Indiana, Illinois and Missouri. Trunkline's major customers include six
utilities located in portions of Illinois, Indiana, Michigan, Ohio and
Tennessee. Transportation service for Consumers accounted for approximately 10%
of the combined revenue of the Panhandle Companies.
The Panhandle Companies own and operate five underground gas storage fields
located in Illinois, Michigan, Kansas, Oklahoma and Louisiana with a combined
maximum working gas storage capacity of 70 billion cubic feet.
Trunkline LNG owns a liquified natural gas ("LNG") regasification plant and
related LNG tanker port, unloading facilities and LNG and gas storage facilities
located at Lake Charles, Louisiana. The LNG plant has the capacity to deliver
700 million cubic feet per day but has been operated on a limited basis for a
number of years.
The rates and services of the Panhandle Companies are subject to regulation
by the Federal Energy Regulatory Commission.
We used approximately $600 million in bridge financing, $500 million in
long term debt and $800 million of senior unsecured notes issued by CMS
Panhandle Holding Company to fund the cash portion of the purchase price for the
acquisition of the Panhandle Companies.
Please refer to our Forms 8-K dated January 20 and April 6, 1999 for
further information concerning this transaction.
S-3
<PAGE> 6
CONSUMERS' REGULATORY MATTER
On May 27, 1999, the Michigan Public Service Commission ("MPSC") issued an
order in a matter arising from the Michigan-based Association of Business
Advocating Tariff Equity's ("ABATE") November 1997 complaint alleging that
Consumers' earnings are in excess of its authorized rate of return and seeking
an immediate reduction in Consumers' electric rates. The MPSC staff conducted an
investigation and concluded in an April 1998 report that no formal rate
proceeding was warranted at that time. The May 1999 order reversed an April 1999
decision of an administrative law judge which had restricted the scope of this
matter to a determination whether there should be a subsequent proceeding to
examine Consumers' electric rates. However, the order confirmed that ABATE and
intervenors bear the burden of persuading the MPSC in this matter that a rate
reduction is warranted. In the absence of meeting the burden that a reduction is
warranted, Consumers' rates will remain unchanged. This matter has now been
scheduled for further proceedings which should lead to more definitive MPSC
resolution in the first quarter of 2000.
ISSUANCE OF RHINOS
On June 11, 1999, an affiliated trust of ours privately placed $250 million
of Redeemable Hybrid Income Overnight Shares (the "RHINOS") through Banc of
America Securities LLC. The entire issue of trust preferred securities, which
pays quarterly distributions at a floating rate, was purchased by a trust
organized by Banc of America Securities LLC. We have guaranteed the obligations
of our affiliated trust, including payments of distributions. The $250 million
proceeds to the trust were used to purchase our subordinated notes, which pay
quarterly interest payments at the same floating rate. We used the proceeds of
the sale of the RHINOS to pay off a portion of the bridge loan used to finance
the acquisition of the Panhandle Companies. In addition, we also agreed with
Banc of America Securities LLC to sell $250 million of our common stock within
the next two years, with the proceeds required to be used to retire the trust
preferred securities.
ISSUANCE OF SENIOR NOTES
On June 22, 1999, we sold $400 million of senior notes/reset put securities
in two tranches in a registered offering. $250 million of the senior notes
mature in 2011 and pay interest at 8%, and $150 million mature in 2013 and pay
interest at 8 3/8%. The 2011 senior notes and the 2013 senior notes are subject
to a call option and mandatory put in 2001 and 2003, respectively. We used the
proceeds of the sale of the senior notes to pay off the balance of the bridge
loan used to finance the acquisition of the Panhandle Companies.
THE TRUST
CMS Energy Trust II is a Delaware business trust with no prior operations.
The trust will sell its preferred securities to the Underwriters and its common
securities to us. The Trust will use the proceeds from these sales to buy our
% subordinated deferrable debentures due 2004 (the "JUNIOR SUBORDINATED
DEBENTURES"). We will, on a subordinated basis, fully and unconditionally
guarantee the junior subordinated debentures. There are four trustees of the
trust. Two of the trustees are our employees, and the Bank of New
S-4
<PAGE> 7
York will act as the property trustee and one of its affiliates will act as the
Delaware trustee.
RISK FACTORS
You should carefully consider all the information set forth in this
prospectus supplement and the accompanying base prospectus. In particular, you
should evaluate the specific risk factors set forth under "Risk Factors"
beginning on page S-14 to ensure that you understand the risk associated with an
investment in the Adjustable Convertible Trust Securities. Please be aware when
reading the accompanying base prospectus that information contained in the base
prospectus may have been updated or superceded by information in this prospectus
supplement or reports that we have filed with the SEC.
S-5
<PAGE> 8
THE OFFERING
THE UNITS
Securities Offered........... % Adjustable Convertible Trust Securities (the
"UNITS").
Issuers...................... CMS Energy Corporation and CMS Energy Trust II.
Stated Amount................ $ per unit.
Distributions................ Annual rate: %.
Quarterly Payment Date....... Every three months on January 1, April 1, July 1
and October 1.
First Payment................ October 1, 1999.
Stock Purchase Date.......... July 1, 2002.
Stock Purchase
upon Settlement............ On the stock purchase date, a holder of a unit
must purchase, for the stated amount in cash, a
number of newly issued shares of common stock, or
fraction thereof, equal to the settlement rate.
Settlement Rate.............. The settlement rate per unit will be not more
than
newly issued shares and not less than newly
issued shares of common stock, depending on the
average trading price of the common stock during
a 20-day period ending before July 1, 2002 and
will be determined as described under
"Description of the Purchase
Contracts--General." The following table
illustrates the applicable settlement rate and
approximate market value of the common stock
receivable upon settlement of the units at
certain assumed applicable market values:
S-6
<PAGE> 9
<TABLE>
<CAPTION>
VALUE OF SHARES
RECEIVED PER
IF THE APPLICABLE SETTLEMENT UNIT UPON
MARKET VALUE IS RATE SETTLEMENT(*)
- ------------------------------- ------------------------------- -------------------------------
<S> <C> <C>
$ per share $
(that is, 150% of (that is, % of
stated amount) stated amount)
$ per share $
(that is, "THRESHOLD (that is, % of
APPRECIATION PRICE") stated amount)
$ per share $
(that is, 1/2 way (that is, % of
between stated stated amount)
amount and threshold
appreciation price)
$ per share $
(that is, stated (that is, % of
amount) stated amount)
$ per share $
(that is, 1/2 way (that is, % of
between floor price stated amount)
and stated amount)
$ per share $
(that is, the (that is, % of
"FLOOR PRICE") stated amount)
$ per share $
(that is, 50% of (that is, % of
stated amount) stated amount)
</TABLE>
- -------------------------
(*) Assumes that applicable market value accurately reflects fair market value
on the stock purchase date.
Components of the units...... Each unit will initially consist of:
(1) a purchase contract under which (a) the
holder will purchase, on the stock purchase
date, a newly issued share of common stock,
or fraction thereof, equal to the settlement
rate and (b) the Company will pay contract
payments to the holder at % of the
stated amount per year; and
(2) a trust preferred security of the trust
having a liquidation amount equal to the
stated amount, a distribution rate of %
of the stated amount per year and mandatory
redemption date of July 1, 2004, subject to
a call option granted by the holder of the
unit to Donaldson, Lufkin & Jenrette
Securities Corporation (in its capacity as
the holder of the call options, and together
with any transferee of the call options in
such capacity, the "CALL OPTION HOLDER").
Under the call option, the call option
S-7
<PAGE> 10
holder is entitled to acquire, on or before
the last quarterly payment date before the
stock purchase date, the trust preferred
securities underlying the units.
The trust preferred securities and any
substituted securities will be pledged to The
Chase Manhattan Bank, as collateral agent for the
Company and the call option holder, to secure the
holder's obligations to the Company and the call
option holder under the purchase contract and
call option underlying the unit. If a holder of
units fails to provide cash for the purchase of
the shares of common stock as required by the
corresponding purchase contracts, the purchase
obligation will be funded by the proceeds from
the sale of pledged securities.
Normal Units and Stripped
Units...................... We sometimes refer to the above units as "normal
units" in this prospectus supplement. These
normal units will become "stripped units" if a
holder of normal units substitutes Treasury
Securities for trust preferred securities, as
collateral under the purchase contract.
Contract Payments............ We will be required to pay contract payments to
the holders of units. Contract payments payable
by us may be deferred and will bear additional
contract payments at the rate of % per year,
as adjusted for the period after the call option
expiration date to reflect adjustments to the
distribution rate on the trust preferred
securities until paid.
Listing...................... We will apply to list the units on the New York
Stock Exchange under the symbol .
Termination.................. The purchase contract will automatically
terminate if we become subject to certain events
of bankruptcy, insolvency or reorganization. If
the purchase contract is terminated, the call
options also will terminate and the collateral
agent will release the pledged securities held by
it to the unit agent for distribution to the
holders.
THE TRUST PREFERRED SECURITIES
The Trust Preferred
Securities................... Each trust preferred security represents an
undivided beneficial ownership interest in the
assets of the trust. Each trust preferred
security will entitle the holder to receive
quarterly cash distributions as described in this
prospectus supplement. The trust is offering
trust
S-8
<PAGE> 11
preferred securities at a price of $
for each trust preferred security.
Distributions................ If you purchase the trust preferred securities,
you are entitled to receive cumulative cash
distributions at an annual rate of % of the
liquidation amount of $ per trust preferred
security, as adjusted for the period after the
call option expiration date to reflect
adjustments thereon. Distributions will
accumulate from the date the trust issues the
trust preferred securities and will be paid
quarterly in arrears on January 1, April 1, July
1 and October 1 of each year, beginning October
1, 1999.
Distribution Rate Reset...... On the call option expiration date, a nationally
recognized investment banking firm chosen by us
may be required to reset the distribution rate on
the trust preferred securities to the rate that
it determines is sufficient to cause the then
current aggregate market value of such trust
preferred securities to be approximately equal to
100.75% of the cash equivalent of the aggregate
call option exercise consideration; provided,
that we may limit such rate to the maximum trust
preferred securities and debenture rate, and
provided, further that such rate shall in no
event exceed the maximum rate permitted by
applicable law.
Distribution Deferral
Provisions................... We can defer interest payments on the junior
subordinated debentures. A deferral of interest
payments cannot extend, however, beyond the
maturity date of the junior subordinated
debentures (which is July 1, 2004). If we defer
interest payments on the junior subordinated
debentures, the trust will also defer
distributions on the trust preferred securities.
In addition, the deferred distributions will
themselves accrue interest at an annual rate of
% (to the extent permitted by law).
Maturity..................... The trust will redeem all of the outstanding
trust preferred securities when the junior
subordinated debentures are paid at maturity on
July 1, 2004.
THE JUNIOR SUBORDINATED DEBENTURES
Indenture.................... We will issue the junior subordinated debentures
under the indenture between The Bank of New York,
as trustee, and us, in an aggregate principal
amount equal to the aggregate stated amount.
Interest..................... % of the principal amount. Interest will be
payable quarterly in arrears on each quarterly
payment date, subject to the deferral provisions
described below.
S-9
<PAGE> 12
Interest Rate Reset.......... On the call option expiration date, a nationally
recognized investment banking firm chosen by us
may be required to reset the interest rate on the
junior subordinated debentures to the rate that
it determines is sufficient to cause the then
current aggregate market value of such junior
subordinated debentures to be approximately equal
to 100.75% of the cash equivalent of the
aggregate call option exercise consideration;
provided, that we may limit such rate to the
maximum trust preferred securities and debenture
rate, and provided, further that such rate shall
in no event exceed the maximum rate permitted by
applicable law.
Interest Deferral
Provisions................... As noted above, we may defer the payments of
interest on the junior subordinated debentures.
Any deferred payments of interest will bear
additional interest at a rate per year equal to
the deferral rate of % until paid.
Maturity..................... We must repay the principal amount plus unpaid
accrued interest on the junior subordinated
debentures on July 1, 2004. We do not have the
option to redeem the junior subordinated
debentures before this date.
Junior Subordinated
Debentures Put Options....... In the event the call option is not exercised,
each holder of junior subordinated debentures may
elect to require us to repurchase the junior
subordinated debentures on the stock purchase
date or in the event of certain mergers involving
cash, at a price equal to the principal amount
plus unpaid accrued interest, but only if the
cash received on the exercise of such option is
used to settle the purchase contracts.
Each holder of trust preferred securities will
have the option to require the trust to
distribute the underlying junior subordinated
debentures to the put agent, who is the same as
the collateral agent, on the stock purchase date,
in exchange for such trust preferred securities,
in connection with the concurrent exercise by the
put agent on behalf of such holder of the junior
subordinated debenture put option related thereto
as described above.
Exchange of the Trust
Preferred
Securities for Junior
Subordinated Debentures.... We will have the right at any time to terminate
the trust and cause the junior subordinated
debentures to be distributed to the holders of
the trust preferred securities and trust common
securities in liquidation of the trust.
The Guarantee................ Pursuant to a guarantee agreement between us and
Bank of New York, as the "GUARANTEE TRUSTEE", we
will guarantee the payment of distributions and
other payments on the
S-10
<PAGE> 13
Trust Preferred Securities to the extent that
the Trust has funds on hand sufficient therefor.
Federal Income Tax
Consequences............... Provided we do not exercise our right to defer
interest payments on the junior subordinated
debentures, a holder of units and trust
preferred securities will include in gross
income its pro rata share of stated interest on
the junior subordinated debentures when the
interest is paid or accrued in accordance with
the holder's regular method of tax accounting.
We intend to report contract payments as income
to holders of units, but holders should consult
their tax advisors concerning the possibility
that the contract payments may be treated as
loans, purchase price adjustments, rebates or
option premiums rather than being includible in
income on a current basis. Upon the creation of
stripped units or the exercise of the call
option by the call option holder, a holder will
be required to include in gross income any items
of income with respect to the Treasury
Securities. See "Certain Federal Income Tax
Consequences."
S-11
<PAGE> 14
SELECTED HISTORICAL AND PRO FORMA
FINANCIAL INFORMATION
The following selected historical and pro forma financial information has
been derived from our historical consolidated financial statements. We have
prepared pro forma financial information to reflect our acquisition of the
common stock of Panhandle Eastern Pipe Line Company, Panhandle Storage Company
and Trunkline LNG Company (the "ACQUISITION"). Please refer to our Form 8-K
dated April 6, 1999 which is incorporated by reference. The financial
information set forth below should be read in conjunction with our consolidated
financial statements, related notes and other financial information incorporated
by reference in the accompanying base prospectus. See "Where to Find More
Information" in the base prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ ---------------------------
PRO FORMA PRO FORMA
1996 1997 1998 1998(1) 1998 1999 1999
------ ------ ------ --------- ------ ------ ---------
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenue..... $4,324 $4,781 $5,141 $5,566 $1,374 $1,538 $1,650
Operating expenses.... 3,648 4,065 4,366 4,625 1,177 1,293 1,345
Pretax operating
income............. 676 716 775 941 197 245 305
Income taxes.......... 137 108 100 128 19 37 50
Consolidated net
income before
cumulative effect
of change in
accounting
principle.......... 224 244 242 277 45 98 119
Cumulative effect of
change in
accounting for
property taxes, net
of tax(1).......... -- -- 43 43 43 -- --
Consolidated net
income............. 224 244 285 320 88 98 119
Net income
attributable to
common stocks(2)
CMS Energy......... 210 229 272 307 79 88 109
Class G............ 14 15 13 13 9 10 10
Average common shares
outstanding
CMS Energy......... 92 96 102 116 101 108 121
Class G............ 8 8 8 8 8 8 8
Earnings per average
common share(2)
CMS Energy
Basic............ $ 2.27 $ 2.39 $ 2.65 $ 2.66 $ 0.79 $ 0.82 $ 0.90
Diluted.......... 2.26 2.37 2.62 2.63 0.77 0.80 0.88
Class G Basic and
Diluted.......... 1.82 1.84 1.56 1.56 1.09 1.19 1.19
Dividends declared per
common share
CMS Energy......... $ 1.02 $ 1.14 $ 1.26 $ 1.26 $ 0.30 $ 0.33 $ 0.33
Class G............ 1.15 1.21 1.27 1.27 0.31 0.33 0.33
</TABLE>
S-12
<PAGE> 15
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
------------------------------------- ----------------
PRO FORMA
1996 1997 1998 1998(1) 1998 1999
------ ------ ------- --------- ------ -------
(UNAUDITED)
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.... $ 58 $ 69 $ 101 $ 101 $ 72 $ 104
Net plant and property....... 5,029 5,144 6,040 7,616 5,114 7,089
Total assets............ 8,363 9,508 11,310 13,784 9,505 13,767
Long-term debt, excluding
current maturities........ 2,842 3,272 4,726 6,344 3,755 7,258
Non-current portion of
capital leases............ 103 75 105 105 74 99
Notes payable................ 333 382 328 328 245 139
Other liabilities............ 3,093 3,361 3,304 3,560 2,933 3,342
Company-obligated mandatorily
redeemable trust preferred
securities of Consumers
Power Company Financing
I(3)...................... 100 100 100 100 100 100
Company-obligated mandatorily
redeemable trust preferred
securities of Consumers
Energy Company Financing
II(3)..................... -- 120 120 120 120 120
Preferred stock of
subsidiary................ 356 238 238 238 238 244
Company-obligated convertible
trust preferred securities
of CMS Energy Trust
I(4)...................... -- 173 173 173 173 173
Common stockholders'
equity.................... $1,536 $1,787 $2,216 $2,816 $1,867 $2,292
</TABLE>
- -------------------------
(1) The pro forma selected financial information illustrates the effects of (i)
various restructuring, realignment, and elimination of activities between
the Panhandle Companies and Duke Energy Corporation prior to the closing of
the acquisition of the Panhandle Companies by CMS Energy; (ii) the
adjustments resulting from the Acquisition; and (iii) certain Panhandle and
CMS Energy financing transactions which have been or will be completed,
including the issuance of $800 million of senior notes by Panhandle, $780
million of senior debt by CMS Energy and 13 million shares of common stock
(representing an estimated per share offering price of $45) by CMS Energy
aggregating approximately $600 million.
(2) During the first quarter of 1998, our subsidiary, Consumers implemented a
change in the method of accounting for property taxes which had the
cumulative effect of increasing other income by $66 million, including $18
million attributable to the portion of our business relating to Class G
Common Stock. Earnings, net of tax, increased by $43 million or $0.40 per
share for CMS Energy Common Stock and $12 million or $0.36 per share for
Class G Common Stock.
(3) 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.
(4) The primary asset of CMS Energy Trust I is $178 million principal amount of
7.75% convertible subordinated debentures due 2027 from us.
S-13
<PAGE> 16
RISK FACTORS
In addition to the information in the accompanying base prospectus and this
prospectus supplement, you should carefully consider the risks described below
before making an investment in the units. The risks described below are not the
only ones facing us. Additional risks not presently known to us or that we
currently deem immaterial may also impair our business operations.
RISK OF DECLINE IN EQUITY VALUE
The market value of the common stock that will be received upon settlement
of the purchase contracts may be materially different from the price you are
required to pay for such common stock as established at the time of this
offering. If the applicable market value of the common stock on the stock
purchase date is less than the floor price (that is, less than $ , or
% of the closing price of the common stock on the date of this prospectus
supplement), you will, on the stock purchase date, be required to purchase our
shares of common stock for an amount in excess of the value of those shares.
Accordingly, you, as a holder of units, assume the risk that the market value of
our common stock may decline below the floor price. Any such decline could be
substantial. See "Prospectus Supplement-Summary-The Offering- Settlement Rate"
for a tabular presentation of the settlement rate and the approximate market
value of our common stock receivable upon settlement of the units at certain
assumed applicable market values.
LIMITATION ON EQUITY APPRECIATION POTENTIAL
The number of shares of common stock that will be issued upon settlement of
each purchase contract may decline by up to % as the applicable market
value increases. Therefore, your opportunity for equity appreciation provided by
an investment in the units is less than that provided by a direct investment in
common stock. Assuming the applicable market value accurately reflects fair
market value, the applicable market value on the stock purchase date must exceed
the threshold appreciation price of $ per share before you, as a holder of
the units, will realize any equity appreciation.
LIMITATION ON VALUE OF THE TRUST PREFERRED SECURITIES (OR JUNIOR SUBORDINATED
DEBENTURES) AS A RESULT OF CALL OPTIONS
If the value of the trust preferred securities or the junior subordinated
debentures underlying the normal units is greater than the value of the
aggregate call option exercise consideration (as is expected), it is likely that
the call option holder will exercise its call options. In that case, the call
option holder rather than you, as a holder of normal units, will realize the
benefit of that greater value. See "Description of the Junior Subordinated
Debentures-Market Rate Reset."
LIMITATIONS ON RIGHT TO CREATE STRIPPED UNITS
As a holder of normal units, you will have the right to substitute, as
pledged securities, Treasury Securities that will generate cash payments
matching your obligations under the underlying purchase contracts, in return for
the trust preferred securities that had been the pledged securities. As long as
the call options underlying the normal units remain exercisable, the holder may
exercise its substitution right only if the holder pays an amount in cash to the
call option holder equal to the present value of the portion of the
S-14
<PAGE> 17
call option relating to the trust preferred securities that the holder wishes to
have released. See "Description of Units-Formation of the Units." Upon such
payment, the call option holder will deliver to the holder a document releasing
its security interest in the pledged securities.
PLEDGED SECURITIES ENCUMBERED
Although you, as a holder of units, will be a beneficial owner of the
underlying pledged securities, those pledged securities will be pledged with the
collateral agent to secure your obligation under the purchase contracts and the
call options. Therefore, so long as the purchase contracts remain in effect,
you, as a holder, will not be allowed to withdraw your pledged securities from
this pledge arrangement except in the limited circumstances described in this
prospectus supplement.
SUBORDINATION OF COMPANY OBLIGATIONS
The ability of the trust to pay amounts due on the trust preferred
securities is dependent upon our making payments on the junior subordinated
debentures as and when required.
Our obligations under the junior subordinated debentures and the guarantee
will be unsecured and subordinate and rank junior in right of payment to all of
our present and future senior indebtedness as described in the indenture and the
guarantee, respectively. We cannot make payments of principal of or interest on
the junior subordinated debentures (including payments on exercise of junior
subordinated debenture put options) if (1) we are in default under any payment
obligation with respect to senior indebtedness beyond any applicable grace
period, (2) we are otherwise in default with respect to any senior indebtedness
permitting the holders of the senior indebtedness to accelerate the maturity of
the senior indebtedness, unless such default has been cured or waived or has
ceased to exist and such acceleration has been rescinded or annulled, or (3) any
judicial proceeding is pending with respect to any default as described in the
indenture and this prospectus supplement.
In the event of the acceleration of the maturity of junior subordinated
debentures, the holders of all senior indebtedness outstanding at that time will
first be entitled to receive payment in full of all amounts due in respect of
such senior indebtedness before the holders of junior subordinated debentures
will be entitled to receive or retain any payment in respect of junior
subordinated debentures.
None of the indenture, the guarantee, the declaration under which the Trust
will issue the trust preferred securities (the "DECLARATION") or the agreement
relating to the units (the "MASTER UNIT AGREEMENT") places any limitation on the
amount of additional secured or unsecured debt, including senior indebtedness,
that may be incurred by us.
See "Description of Securities--Subordinated Debentures-Subordination" in
the accompanying base prospectus.
OPTION TO DEFER PAYMENTS
We will generally have the right to defer interest payments on the junior
subordinated debentures at any time or from time to time. We cannot defer
payments beyond the trust preferred securities' redemption date and junior
subordinated debentures maturity date.
S-15
<PAGE> 18
Deferred payments of interest on the junior subordinated debentures will bear
additional interest at a rate per year equal to the deferral rate (compounding
on each following quarterly payment date) until paid. See "Description of the
Junior Subordinated Debentures--Interest" and "--Option to Extend Interest
Payment Date."
We will generally have the right to defer the payment of contract payments
on the purchase contracts at any time or from time to time. We cannot defer
payment of contract payments beyond the stock purchase date. Deferred payments
of contract payments will bear additional contract payments at a rate per annum
equal to the deferral rate (compounding on each following quarterly payment
date) until paid. You will have no right to receive contract payments, including
deferred contract payments, if the purchase contracts are terminated. The
purchase contracts will terminate if we experience certain events of bankruptcy,
insolvency, or reorganization.
Should we exercise our right to defer payments of interest on the junior
subordinated debentures or contract payments, the market price of the trust
preferred securities or, for so long as the purchase contracts remain in effect,
the Units, is likely to decrease. As such, if you, as a holder, dispose of your
trust preferred securities or units during such deferral period you might not
receive the same return on your investment as if you had continued to hold the
trust preferred securities or units. In addition, the mere existence of our
right to defer such payments may cause the market price of the trust preferred
securities or units to be more volatile than the market prices of other
securities that are not subject to such deferrals rights.
For information about the taxation of holders in the event that we exercise
our right to defer payments, see "Certain Federal Income Tax Consequences--Trust
Preferred Securities."
MASTER UNIT AGREEMENT NOT QUALIFIED UNDER TRUST INDENTURE ACT; LIMITED
OBLIGATIONS OF UNIT AGENT
Although the trust preferred securities portion of the normal units will be
issued pursuant to the declaration, the master unit agreement will not be
qualified under the Trust Indenture Act. The unit agent who will act as the
agent and the attorney-in-fact for you, as a holder of the units, will not be
qualified as a trustee under the Trust Indenture Act. Accordingly, you, as a
holder of the units, will not have the benefits of the protections of the Trust
Indenture Act. Under the terms of the master unit agreement, the unit agent will
have only limited obligations to you, as a holder of the units. See "Description
of the Units--Certain Provisions of the Principal Agreements--Information
Concerning the Unit Agent."
RIGHTS UNDER THE GUARANTEE
The guarantee will guarantee payments due by the trust to you, as a holder
of the trust preferred securities (including if you are a holder of normal units
so long as the normal units include the trust preferred securities), but only to
the extent that the trust has sufficient and legally available funds on hand. If
we default on our obligation to pay amounts payable under the junior
subordinated debentures, the trust will not have sufficient funds to make the
corresponding payments due under the trust preferred securities. If this were to
happen, you, as a holder of the trust preferred securities (including if you are
a holder of normal units so long as the normal units include trust
S-16
<PAGE> 19
preferred securities) will not be able to rely upon the guarantee for payment of
such amounts.
ENFORCEMENT RIGHTS IN RESPECT OF JUNIOR SUBORDINATED DEBENTURES
If a junior subordinated debenture event of default occurs and is
continuing and such event is attributable to our failure to pay principal or
interest on the junior subordinated debentures on the dates they are due, then
you, as a holder of record of the trust preferred securities, may institute a
legal proceeding directly against us for payment of the portion of principal or
interest attributable to the junior subordinated debentures having a principal
amount equal to the aggregate liquidation amount of the trust preferred
securities held by you (or held as part of your normal units) (a "DIRECT
ACTION"). Except as described herein, you, as a holder of trust preferred
securities, will not be able to exercise directly any other remedy available to
the holders of the junior subordinated debentures or to assert directly any
other rights in respect of the junior subordinated debentures. See "Description
of the Trust Preferred Securities-Events of Default; Notice." The declaration
will provide that you, as a holder of the trust preferred securities, by
acceptance thereof agree to the provisions of the indenture and the guarantee.
LIMITED VOTING AND OTHER RIGHTS
You, as a holder of trust preferred securities, generally will have voting
rights with respect to the trust preferred securities relating only to the
modification of the terms of the trust preferred securities and the exercise of
the trust's rights as holder of the junior subordinated debentures. You, as a
holder of trust preferred securities, will not be entitled to vote to appoint,
remove or replace, change the number of trustees. These voting rights are vested
exclusively in the holder of the trust common securities, except as described
under "Description of the Trust Preferred Securities-Voting Rights; Amendment of
the Declaration."
You, as a holder of units, will not be entitled to any rights with respect
to the common stock until we have delivered shares of common stock upon
settlement of the purchase contracts on the stock purchase date.
ABSENCE OF PUBLIC MARKET FOR THE UNITS
Prior to this offering, there has been no public market for the units and
the units are being sold by us exclusively to the underwriters. We cannot assure
you that any market for the units will develop or, if one does develop, that it
will be maintained. If an active market for the units fails to develop or be
maintained, the trading price of the units could be adversely affected. No
assurance can be given as to the liquidity of the trading market for the units.
TAX MATTERS
No statutory, judicial or administrative authority directly addresses the
treatment of the units or instruments similar to the units for United States
federal income tax purposes. As a result, certain United States federal income
tax consequences of the purchase, ownership and disposition of units are not
entirely clear. See "Certain Federal Income Tax Consequences."
S-17
<PAGE> 20
LEVERAGE, DEBT SERVICE AND ABILITY TO PAY DIVIDENDS
We, as a parent holding company, have substantial leverage and significant
debt service obligations which must be serviced by dividends or other
distributions and cash transfers from our subsidiaries or jointly owned
enterprises. As of March 31, 1999, we had outstanding $4.208 billion of
unsecured senior debt. On a consolidated basis, we and our subsidiaries had
outstanding $8.504 billion of long-term indebtedness and mandatorily redeemable
trust preferred securities. On a consolidated basis our debt was 74% of total
capitalization as of March 31, 1999. As a result of restrictions contained in
Consumers' mortgage bond indenture and preferred stock provisions, and other
legal restrictions, Consumers' ability to pay dividends or acquire its own stock
from us is limited. Based upon the most restrictive provision, as of March 31,
1999, Consumers would be able to pay an aggregate of $55 million in dividends to
us. In the four years ending December 31, 1998, Consumers paid out $729 million
or 60% of its earnings in cash dividends to us. Enterprises is also limited in
the amount of dividends it is able to pay since it is expanding its developing
businesses at a rapid rate and also has various restrictions on its ability to
pay dividends or acquire its own stock. Adverse financial or other economic
circumstances affecting our subsidiaries may adversely affect our ability to
meet our obligations to make payments on the junior subordinated debentures.
Our high debt leverage as well as restrictions on the issuance of
additional debt in our financing agreements, could limit our ability to obtain
additional capital for future operating requirements and capital expenditures.
Our ability to take full advantage of opportunities and to adjust to rapidly
changing conditions in the markets we now serve or plan to enter and to react to
possible adverse national and international financial markets also could be
adversely affected. In turn, these factors could adversely affect our ability to
make payments on the junior subordinated debentures.
STRUCTURAL SUBORDINATION
Due to our holding company structure and the restrictions on dividend and
other types of payments by our subsidiaries to us as the parent company, the
junior subordinated debentures are effectively subordinated to the payment of
interest, principal and preferred distributions on the debt, preferred
securities and other liabilities of Consumers and Enterprises and each of their
subsidiaries. None of these entities will be obligated to pay amounts due on the
junior subordinated debentures.
DOMESTIC COMPETITION AND REGULATORY RESTRUCTURING
Federal and state regulation of electric and natural gas utilities,
interstate pipelines and independent electric power producers has changed
dramatically in the last two decades and could continue to change over the next
several years. In general, such regulatory changes have resulted and will
continue to result in increased competition in our domestic energy businesses.
The regulatory changes have been particularly significant in our natural
gas businesses. As a result of these changes, gas distribution companies like
Consumers deliver the natural gas which is sold directly to customers by gas
producers, marketers and others, some of whom are our competitors for these
sales. While Consumers' current rates allow it to charge gas delivery rates
which enable Consumers to maintain its margins in retail gas service, the full
impact of competition remains to be seen, particularly if and when Consumers'
existing pilot program providing other gas suppliers direct access to
S-18
<PAGE> 21
Consumers' customers is extended to all of Consumers' gas customers. Our
unregulated gas marketing subsidiary is an experienced and successful competitor
in this new market environment, but rapidly changing competitive conditions
could adversely affect its margins and market share and add volatility to its
financial results. Further changes in federal and state regulation of the
natural gas industry could also adversely affect Consumers' gas utility business
and Enterprises' non-utility gas marketing business.
Since we have completed the acquisition of the Panhandle Companies, a
significant portion of our domestic cash flow and revenue comes from our
interstate pipeline business. Federal Energy Regulatory Commission ("FERC")
policy allows the issuance of certificates authorizing the construction of new
interstate pipelines which are competitive with existing pipelines. A number of
new pipeline and pipeline expansion projects have been approved or are pending
approval by the FERC in order to transport large additional volumes of natural
gas to the Midwest from Canada. These pipelines will be able to compete with
Panhandle and Trunkline. Increased competition could reduce the volumes of gas
transported by Panhandle and Trunkline to their existing markets or cause them
to lower rates in order to meet competition. This could lower the financial
benefits we expect from the acquisition of the Panhandle Companies.
Federal regulation of wholesale sales and transmission of electricity and
state regulation of the retail sale and distribution of electricity have also
changed significantly. This is particularly true since 1992 when the Energy
Policy Act was enacted. This legislation and FERC regulations which followed it
have effectively granted independent power producers and electricity marketers
"direct access" to the interstate electric transmission systems owned by
electric utilities. All electric utilities are required to offer transmission
services to new market entrants on a non-discriminatory basis. As a result,
wholesale electricity markets have become much more competitive. While this has
not adversely affected us to date, and does present us with opportunities to
expand our market reach for electric power sales by both Consumers and our
non-utility generating facilities, the rapidly changing nature of the
marketplace creates the opportunity for competitors to market electricity to our
wholesale customers, such as municipal systems in Michigan. Ultimately, these
new power suppliers may sell power directly to our retail customers when
Consumers' electric distribution system is open for competitors to transmit
power to Consumers' retail markets. While Consumers would be allowed under
current regulations to charge compensatory rates for distributing electricity
supplied by others, it is uncertain whether Consumers' profit margins on retail
electric service will be maintained over the long run.
The MPSC issued several orders in 1997, 1998 and 1999 restructuring the
electric power industry in Michigan. Under these orders as currently in effect,
Consumers is required to allow certain customers to elect to purchase electric
power directly from other suppliers, such as independent power producers, power
marketers and other utilities. This direct access program is expected to
commence in September this year and will be phased in to cover 750 megawatts of
Consumers' retail market by 2001. By January 1, 2002, all of Consumers'
customers will have this option. It is not possible at this time to predict the
extent to which Consumers' customers will elect this option or what the ultimate
financial impact will be to Consumers. Under the current orders, however,
Consumers believes it will be able to maintain its profit margins on and
continue to expand its retail electric service.
In 1998, the Governor of Michigan supported legislation introduced to
restructure the electric power industry in Michigan in a manner similar to the
MPSC's restructuring
S-19
<PAGE> 22
orders. The legislation was not enacted, but electric industry restructuring
legislation may be reconsidered in 1999. While Consumers supported the
legislation supported by the Governor, the uncertainty as to whether legislation
will be enacted and what effect any enacted legislation will have on Consumers
represents a risk to investors purchasing the units. Similar uncertainty exists
with respect to the possibility that federal legislation restructuring the
electric power industry will be enacted. A variety of bills changing existing
federal regulation of the industry and, in some cases, affecting state
regulation have been introduced in the Congress in recent years but none has
been enacted.
Adverse federal or state legislation or adverse future rate determinations
by the MPSC in the electric markets could result in Consumers being unable to
collect rates sufficient to recover fully its current investment in electric
generating facilities and the cost of purchased power.
INTERNATIONAL PROJECT RISKS AND EXCHANGE RATE FLUCTUATIONS
Our international investments in 22 countries in electric generating
facilities, oil and gas exploration, production and processing facilities,
natural gas pipelines and electric distribution systems face a number of risks
inherent in acquiring, developing and owning these types of facilities. There is
significant time and expense in preparing proposals or competitive bids,
obtaining the numerous required permits, licenses and approvals, negotiating the
necessary agreements with governmental and private parties and obtaining
financing. Money spent for these purposes is at risk until all these elements
are successfully finalized and it is often impractical to finalize all elements
before significant sums have been spent. As a result, there is a risk that these
up-front expenditures will be of little value if one of the required approvals
or other elements is not finally achieved and the project does not go forward or
is not completed. More importantly, international investments of the type we are
making are subject to the risk that they may be expropriated or that the
required agreements, licenses, permits and other approvals may be changed or
terminated in violation of their terms. In addition, the local foreign currency
may be devalued or the conversion of the currency may be restricted or
prohibited or other actions may be taken which adversely affect the value and
the recovery of the investment such as taxes, royalties, or import duties being
increased. In some cases the investment may have to be abandoned or disposed of
at a loss. These factors could significantly adversely affect the financial
results of the affected subsidiary and, in turn, our growth plans for
Enterprises' international investments and our financial position and results of
operations.
RISK OF YEAR 2000 NONCOMPLIANCE
Many existing computer programs were designed and developed without
considering the upcoming change in the century, which could lead to the failure
of computer applications or create erroneous results by or at the year 2000.
This issue is referred to as the "YEAR 2000 ISSUE." The Year 2000 Issue is a
broad business issue, whose impact extends beyond traditional computer hardware
and software to possible failure of automated plant systems and instrumentation
as well as to business third parties. Also, there can be no guarantee that third
parties of business importance to the Company will successfully reprogram or
replace, and test, all of their own computer hardware, software and process
control systems to ensure such systems are Year 2000 compliant. Failure by the
Company, third parties of business importance to the Company and/or other
constituents such as governments to become Year 2000 compliant on a timely basis
could
S-20
<PAGE> 23
have a material adverse effect on the Company's financial position and results
of operations.
RESULTS COULD DIFFER MATERIALLY FROM CERTAIN FORWARD-LOOKING STATEMENTS
From time to time, we may make statements regarding our assumptions,
projections, expectations, intentions or beliefs about future events. These
statements are intended as "FORWARD-LOOKING STATEMENTS" under the Private
Securities Litigation Reform Act of 1995. We caution that these statements may
and often do vary from actual results and the differences between these
statements and actual results can be material. Accordingly, we cannot assure you
that actual results will not differ materially from those expressed or implied
by the forward-looking statements. Some of the factors that could cause actual
achievements and events to differ materially from those expressed or implied in
any forward-looking statements are:
- the ability to achieve operating synergies and revenue enhancements;
- international, national, regional and local economic, competitive
and regulatory conditions and developments;
- capital and financial market conditions, including currency exchange
controls, interest rates and availability of non recourse financing;
- weather conditions;
- adverse regulatory or legal decisions, including environmental laws
and regulations;
- the pace of deregulation of the natural gas and electric industries;
- energy markets, including the timing and extent of changes in
commodity prices for oil, coal, natural gas, natural gas liquids,
electricity and certain related products;
- the timing and success of business development efforts;
- potential disruption, expropriation or interruption of facilities or
operations due to accidents or political events;
- nuclear power performance and regulation;
- technological developments in energy production, delivery and usage;
and
- other uncertainties, all of which are difficult to predict and many
of which are beyond our control.
USE OF PROCEEDS
We will apply the net proceeds from the sale of the units being offered
hereby to repay outstanding balances under various lines of credit and our $600
million revolving credit facility with The Chase Manhattan Bank, as
administrative agent (the "REVOLVING CREDIT FACILITY"). The Revolving Credit
Facility has a weighted average interest rate of 6.24%. In addition to
borrowings used for working capital, the lines of credit and Revolving Credit
Facility have been drawn over the past year to fund various investments in our
subsidiaries. The most significant such investments include $150 million and
$100 million capital contributions to Consumers in June 1999 and December 1998,
respectively, and a $500 capital contribution to Enterprises in connection with
our March 1999 acquisition of the Panhandle Companies.
S-21
<PAGE> 24
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges and the ratio of earnings to fixed
charges and preferred stock dividends for each of the years ended December 31,
1994 through 1998 and for the three months ended March 31, 1999 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------- THREE MONTHS ENDED
1994 1995 1996 1997 1998 MARCH 31, 1999
---- ---- ---- ---- ---- ------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed
charges.......................... 2.07 1.90 1.96 1.78 1.59 1.97
Ratio of earnings to fixed charges
and preferred stock dividends.... 1.88 1.74 1.75 1.59 1.43 1.78
</TABLE>
For the purpose of computing the ratio, earnings represent net income
before income taxes, net interest charges and the estimated interest portions of
lease rentals.
ACCOUNTING TREATMENT
The purchase contracts are forward transactions in the common stock. Under
generally accepted accounting principles, the purchase contracts will not be
recorded on the Company's consolidated balance sheets but will be disclosed in
the notes to the Company's consolidated financial statements. Upon settlement of
a purchase contract, the Company will receive the stated amount of such purchase
contract and will issue the requisite number of shares of common stock. The
stated amount thus received will be credited to holders' equity allocated
between the common stock and additional paid-in capital accounts.
Prior to the issuance of shares of common stock upon settlement of the
purchase contracts, it is anticipated that the units will be reflected in the
Company's diluted earnings per share calculations using the treasury stock
method. Under this method, the number of shares of common stock used in
calculating diluted earnings per share is deemed to be increased by the excess,
if any, of the number of shares issuable upon settlement of the purchase
contracts over the number of shares that could be purchased by the Company in
the market (at the average market price during the period) using the proceeds
receivable upon settlement. Consequently, it is anticipated there will be no
dilutive effect on the Company's diluted earnings per share except during
periods when the average market price of common stock is above the threshold
appreciation price described below.
S-22
<PAGE> 25
PRICE RANGE OF COMMON STOCK AND DIVIDEND RECORD
The closing price of our common stock on June 25, 1999, as reported on the
New York Stock Exchange ("NYSE") was $42 13/16 per share. As of May 31, 1999,
there were 108,797,274 shares of common stock held by 90,716 holders of record.
The Company's common stock is traded on the NYSE under the symbol "CMS." The
following table sets forth, for the periods indicated, the high and low sales
prices for the common stock, as reported on the NYSE Composite Transactions
Tape, and quarterly cash dividends declared on shares of common stock.
<TABLE>
<CAPTION>
COMMON STOCK
PRICES
-------------------------------
HIGH LOW CASH DIVIDENDS
------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
1997:
First Quarter..................................... $34 1/2 $31 1/2 $0.27
Second Quarter.................................... $35 5/8 $31 1/8 $0.27
Third Quarter..................................... $38 1/16 $34 7/8 $0.30
Fourth Quarter.................................... $44 1/16 $35 11/16 $0.30
1998:
First Quarter..................................... $47 5/16 $41 7/8 $0.30
Second Quarter.................................... $47 3/16 $40 11/16 $0.30
Third Quarter..................................... $44 3/4 $38 3/4 $0.33
Fourth Quarter.................................... $50 1/8 $43 3/16 $0.33
1999:
First Quarter..................................... $48 7/16 $39 9/16 $0.33
Second Quarter (through June 25, 1999)............ $47 1/16 $39 1/4 $0.33
</TABLE>
On May 28, 1999, the Company's Board of Directors approved an increase in
the cash dividend to an annualized rate of $1.46 per share ($0.365 per quarter).
The increase will be effective with the next scheduled quarterly dividend
payment in August 1999.
RESTRICTIONS AND LIMITATIONS ON ABILITY TO PAY DIVIDENDS
Reference is made to "Description of Securities -- Common Stock -- Dividend
Rights and Policy; Restrictions on Dividends" and "-- Primary Source of Funds of
CMS Energy; Restrictions on Sources of Dividends" in the accompanying base
prospectus for information about CMS Energy's dividend policies and other
matters relating to dividends on the Common Stock, including restrictions and
limitations on CMS Energy's ability to pay such dividends.
In addition to the restrictions and limitations on payment of dividends
described in the accompanying base prospectus, CMS Energy is subject to the
following contractual restrictions on its ability to pay dividends:
Under the terms of the Revolving Credit Facility among CMS Energy and
certain banks, CMS Energy has agreed that it will not, and will not permit
certain of its subsidiaries, directly or indirectly, to (i) declare or pay any
dividend, payment or other distribution of assets, properties, cash, rights,
obligations or securities on account of any share of any class of capital stock
of CMS Energy or such subsidiaries, or (ii) purchase, redeem, retire or
otherwise acquire for value any such capital stock (a "RESTRICTED PAYMENT"),
unless: (1) no event of default under the Revolving Credit Facility, or event
that with the lapse of time or giving of notice would constitute such an event
of default,
S-23
<PAGE> 26
has occurred and is continuing, or would occur as a result of such Restricted
Payment and (2) after giving effect to any such Restricted Payment, the
aggregate amount of all such Restricted Payments since September 30, 1993 shall
not have exceeded the sum of: (a) $120,000,000, (b) 100% of CMS Energy's
consolidated net income (as defined in the SENIOR DEBT INDENTURE as defined
below) since September 30, 1993 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 (c) the
aggregate net proceeds (as defined in the Senior Debt Indenture) received by CMS
Energy for the issuance or sale of, or contribution with respect to, its capital
stock subsequent to September 30, 1993. At March 31, 1999, CMS Energy could pay
cash dividends of $1.850 billion pursuant to this restriction.
Under the terms of an Indenture dated as of September 15, 1992, as amended
and supplemented, between CMS Energy and NBD Bank, as Trustee, (the "SENIOR DEBT
INDENTURE") pursuant to which CMS Energy's 6.75% Senior Notes Due 2004, 8 1/8%
Unsecured Notes Due 2002, 7 5/8% Unsecured Notes Due 2004, 7 3/8% Unsecured
Notes Due 2000, 8% Senior Notes Due 2011, 8 3/8% Senior Notes Due 2013, and
X-TRAS(SM) Pass-Through Trust I Certificates Due 2005 were issued, so long as
any of the Notes are outstanding and until the Notes are rated BBB -- or above
(or an equivalent rating) by Standard & Poor's and one Other Rating Agency (as
defined therein), at which time CMS Energy will be permanently released from the
provisions of this limitation, CMS Energy has agreed that it will not, and will
not permit any of its Restricted Subsidiaries as defined in the Senior Debt
Indenture, directly or indirectly, to (i) declare or pay any dividend or make
any distribution on the Capital Stock (as defined in the Senior Debt Indenture)
of CMS Energy to the direct or indirect holders of its Capital Stock (except
dividends or distributions payable solely in its Non-Convertible Capital Stock
(as defined in the Senior Debt Indenture) or in options, warrants or other
rights to purchase such Non-Convertible Capital Stock and except dividends or
distributions payable to CMS Energy or a subsidiary; (ii) purchase, redeem or
otherwise acquire or retire for value any Capital Stock of CMS Energy, or (iii)
purchase, repurchase, redeem, defease or otherwise acquire or retire for value,
prior to scheduled maturity or scheduled repayment thereof, any Subordinated
Indebtedness (as defined in such Indenture) (any such dividend, distribution,
purchase, redemption, repurchase, defeasing, other acquisition or retirement
being hereinafter referred to as a "SENIOR DEBT INDENTURE RESTRICTED PAYMENT")
if at the time CMS Energy or such Subsidiary makes such Senior Debt Indenture
Restricted Payment: (1) an Event of Default (as defined in the Senior Debt
Indenture), 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 Senior Debt
Indenture Restricted Payment and all other Senior Debt Indenture Restricted
Payments made since May 6, 1997 would exceed the sum of: (a) $100,000,000 plus
100% of Consolidated Net Income of CMS Energy (as defined in the Senior Debt
Indenture) from May 6, 1997 to the end of the most recent fiscal quarter ending
at least 45 days prior to the date of such Senior Debt Indenture 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 CMS Energy (as defined in such
Indenture) from the issue or sale of or contribution with respect to its Capital
Stock after May 6, 1997. At March 31, 1999, CMS Energy could pay cash dividends
of $885 million pursuant to this restriction.
The Indenture, dated as of January 15, 1994, as amended and supplemented,
between CMS Energy and The Chase Manhattan Bank, as Trustee (the "GTN
INDENTURE"), pursuant to which CMS Energy's General Term Notes, Series A, Series
B, Series C,
S-24
<PAGE> 27
Series D or Series E ("GTNS") have been issued, provides that so long as any
GTNs issued thereunder are outstanding and are rated BBB- or above (or an
equivalent rating) by Standard & Poor's and one Other Rating Agency (as defined
in the GTN Indenture), at which time CMS Energy will be permanently released
from the provisions of this limitation, CMS Energy will not, and will not permit
any of its Restricted Subsidiaries (as defined in the GTN Indenture), directly
or indirectly, to, (i) declare or pay any dividend or make any distribution on
the Capital Stock (as defined in the GTN Indenture) (except dividends or
distributions payable solely in Non-Convertible Capital Stock (as defined in the
GTN Indenture) of CMS Energy or in options, warrants or other rights to purchase
such Non-Convertible Capital Stock and except dividends or distributions payable
to CMS Energy or a Subsidiary (as defined in the GTN Indenture)) or (ii)
purchase, redeem or otherwise acquire or retire for value any Capital Stock of
CMS Energy (any such dividend, distribution, purchase, redemption, repurchase,
other acquisition or retirement, being hereinafter referred to as a "GTN
RESTRICTED PAYMENT") if at any time CMS Energy or such Subsidiary makes such GTN
Restricted Payment: (1) an Event of Default (as defined in the GTN Indenture),
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 GTN Restricted Payment
and all other GTN Restricted Payments made since September 30, 1993, would
exceed the sum of: (a) $120,000,000 plus 100% of Consolidated Net Income (as
defined therein) from September 30, 1993 to the end of the most recent fiscal
quarter ending at least 45 days prior to the date of such GTN Restricted Payment
(or, in case such sum shall be a deficit, minus 100% of the deficit) and (b) the
aggregate Net Proceeds (as defined therein) received by CMS Energy from the
issue or sale of or contribution with respect to its Capital Stock after
September 30, 1993. At March 31, 1999, CMS Energy could pay cash dividends of
$1.850 billion pursuant to this restriction.
The foregoing provisions relating to restricted payments do not prohibit:
(i) dividends or other distributions paid by CMS Energy in respect of the
capital stock issued in connection with the acquisition of any business or
assets by CMS Energy where such payments are payable solely from the net
earnings of such business or assets; (ii) any purchase or redemption of capital
stock made by exchange for, or out of the proceeds of the substantially
concurrent sale of, capital stock of CMS Energy (other than certain redeemable
stock or exchangeable stock); (iii) dividends paid within 60 days after the date
of declaration thereof if at such date of declaration such dividends would have
complied with the aforementioned limitations; or (iv) payments pursuant to the
tax sharing agreement among CMS Energy and its subsidiaries.
In June 1997, a CMS Energy affiliated trust issued $172.5 million of 7 3/4%
convertible Trust Preferred Securities ("PREFERRED SECURITIES"). The Preferred
Securities are convertible at the option of the holder thereof into shares of
Common Stock. Such Preferred Securities are convertible at an initial conversion
rate of 1.2255 shares of CMS Energy Common Stock for each Preferred Security
(equivalent to a purchase price of $40.80 per share of CMS Energy Common Stock),
subject to certain adjustments. On or after July 16, 2001, CMS Energy may, at
its option, cause the conversion rights of the holders of the Preferred
Securities to expire upon certain conditions.
Under the terms of the Indenture dated June 1, 1997 between CMS Energy and
The Bank of New York, as Trustee, as amended and supplemented (the "SUBORDINATED
DEBT INDENTURE") and the Guarantee Agreement dated June 20, 1997 among CMS
Energy and The Bank of New York relating to the Preferred Securities of CMS
Energy Trust I
S-25
<PAGE> 28
pursuant to which the Preferred Securities and the related Convertible
Subordinated Debentures due 2027 ("SUBORDINATED DEBENTURES") were issued, CMS
Energy will not, and it will not cause any of its subsidiaries to, (i) declare
or pay any dividends or distributions on, or redeem, purchase, acquire, or make
a liquidation payment with respect to, any of CMS Energy's capital stock, if at
such time (i) there shall have occurred any event of which CMS Energy has actual
knowledge that (a) with the giving of notice or the lapse of time, or both,
would constitute an Event of Default (as defined in the Subordinated Debt
Indenture) and (b) in respect of which CMS Energy shall not have taken
reasonable steps to cure, (ii) CMS Energy shall be in default with respect to
its payment of any obligations under the Guarantee or (iii) CMS Energy shall
have given notice of its selection of an Extension Period (as defined in the
Subordinated Debt Indenture) as provided in the Subordinated Debt Indenture with
respect to the Subordinated Debentures and shall not have rescinded such notice,
or such Extension Period, or any extension thereof, shall be continuing.
In addition, Michigan law prohibits payment of a dividend if, after giving
it effect, CMS Energy would not be able to pay its debts as they become due in
the usual course of business, or its total assets would be less than the sum of
its total liabilities plus, unless the articles permit otherwise, the amount
that would be needed, if CMS Energy were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the
distribution (including the rights of holders of Preferred Stock, if any). CMS
Energy's net assets available for payment of dividends under the Michigan
Business Corporation Act at March 31, 1999, were $2.291 billion.
Consumers' ability to pay dividends to CMS Energy is restricted by
Consumer's Articles of Incorporation and certain agreements to which it is a
party, as described under "Description of Securities -- Primary Source of Funds
of CMS Energy; Restrictions on Sources of Dividends" in the accompanying base
prospectus.
Under the provisions of the Michigan Business Corporation Act, at March 31,
1999, Consumers' net assets available for payment of dividends were $1.719
billon. Under the most restrictive of the conditions on dividend payments to
which Consumers is subject, and Consumers' dividend policies, in each case as
described herein and in the accompanying base prospectus, at March 31, 1999, $55
million of Consumers' retained earnings were available to pay cash dividends on
its common stock. In May 1999, Consumers declared and paid a $76 million common
dividend.
S-26
<PAGE> 29
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of
the Company at March 31, 1999, and as adjusted to reflect the sale of the units
offered hereby, and the sale of the senior notes and the RHINOS discussed in
"Prospectus Supplement Summary -- Recent Developments" and the application of
the net proceeds from such sales and certain other items referred to below. See
"Use of Proceeds." The table should be read in conjunction with the Company's
consolidated financial statements and notes thereto included in the incorporated
documents as described under "Where to Find More Information" in the
accompanying base prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
----------------------
ACTUAL AS ADJUSTED
------- -----------
(UNAUDITED)
(DOLLARS IN MILLIONS)
<S> <C> <C>
Non-current portion of capital leases....................... $ 99 $ 99
------- -------
Long-term debt:
Other long-term debt (excluding current maturities)(1).... 7,258 6,358
Senior Notes, 8% Reset Put Securities, Due 2011........... -- 250
Senior Notes, 8 3/8% Reset Put Securities, Due 2013....... -- 150
------- -------
Total long-term debt................................. 7,258 6,758
------- -------
Total stockholders' equity:
Company-obligated mandatorily redeemable preferred
securities of:
Consumers Power Company Financing I(2)................. 100 100
Consumers Energy Company Financing II(3)............... 120 120
CMS RHINOS Trust(4).................................... -- 250
Company-obligated convertible preferred securities of:
CMS Energy Trust I(5)..................................... 173 173
CMS Energy Trust II(6).................................... -- 300
Preferred stock of subsidiary(7)............................ 244 --
Common stockholders' equity................................. 2,292 2,292
------- -------
Total stockholders' equity........................... 2,929 3,235
------- -------
Total capitalization.............................. $10,286 $10,092
======= =======
</TABLE>
- -------------------------
(1) Adjusted to reflect the payment from the proceeds of the units offered
hereby of $300 million of CMS Energy long-term debt as well as the payment
from the proceeds of the Senior Notes and the RHINOS of the $600 million CMS
Energy bridge loan used to finance the acquisition of the Panhandle
Companies.
(2) The primary asset of Consumers Power Company Financing I is approximately
$103 million principal amount of 8.36% subordinated interest notes due 2015
from Consumers.
(3) The primary asset of Consumers Energy Company Financing II is approximately
$124 million principal amount of 8.20% subordinated interest notes due 2027
from Consumers.
(4) The primary asset of CMS RHINOS Trust is approximately $258 million
principal amount of floating rate, subordinated interest notes due 2001 from
CMS Energy.
(5) The primary asset of CMS Energy Trust I is approximately $178 million
principal amount of 7.75% convertible subordinated debentures due 2027 from
the Company.
(6) The primary asset of CMS Energy Trust II will be approximately $309 million
principal amount of Junior Subordinated Debentures being issued in
connection with the units being offered hereby.
(7) Adjusted to reflect the redemption of $200 million of Consumers' preferred
stock on April 1, 1999.
S-27
<PAGE> 30
THE COMPANY
We are a leading diversified energy company operating in the United States
and around the world. Our two principal subsidiaries are Consumers and
Enterprises. Consumers is a public utility that provides natural gas and
electricity to almost six million of the nine and one-half million residents in
Michigan's Lower Peninsula. Enterprises, through subsidiaries, is engaged in
several domestic and international energy businesses including:
- Natural gas transmission, storage and processing;
- Independent power production;
- Oil and gas exploration and production;
- International energy distribution; and
- Energy marketing, services and trading.
Our consolidated operating revenue in 1998 was $5.1 billion. 51% of our
consolidated operating revenue was derived from electric utility operations, 21%
from gas utility operations, 18% from energy marketing, services and trading
operations, 6% from independent power production and other non-utility
operations, 3% from natural gas transmission, storage and processing operations,
and 1% from oil and gas exploration and production operations. Our acquisition
of the Panhandle Companies described below will significantly increase our
percentage of operating revenues from natural gas transmission, storage and
processing.
CONSUMERS
Consumers, formed in Michigan in 1968, is the successor to a corporation
organized in Maine in 1910 that did business in Michigan from 1915 to 1968.
Consumers was named Consumers Power Company from 1910 to the first quarter of
1997, when Consumers changed its name to Consumers Energy Company. Consumers'
consolidated operations currently account for a majority of our total assets,
revenues and income. Consumers' service areas include automotive, metal,
chemical, food and wood products and a diversified group of other industries. At
year end 1998, Consumers provided service to 1.6 million electric customers and
1.5 million gas customers. Consumers' consolidated operating revenue in 1998 was
$3.7 billion. 70% of Consumers' operating revenue was generated from its
electric utility business, 29% from its gas utility business, and 1% from its
non-utility business.
Electric Utility Operation. Consumers' electric utility operation
constitutes the twelfth largest electric company in the U.S. It serves 1.64
million customers in 61 of 68 of Michigan's Lower Peninsula counties. Principal
cities served include Battle Creek, Flint, Grand Rapids, Jackson, Kalamazoo,
Midland, Muskegon, and Saginaw. Consumers' electric utility customer base
includes a mix of residential, commercial, and diversified industrial customers,
the largest segment of which is the automotive industry. Consumers' electric
operations are not dependent upon a single customer, or even a few customers,
and the loss of any one or even a few of such customers would not have a
material adverse effect on its financial condition.
Consumers' owned and operated an aggregate of 6,190 megawatts ("MW") of
electric generating capacity in 1998. In 1998, Consumers purchased 2,545 MW of
net capacity, which amounted to 34% percent of Consumers' total system
requirements, from
S-28
<PAGE> 31
independent power producers, the largest being the MCV Facility. Consumers,
through wholly-owned subsidiaries, owns a significant ownership and lessor
interest in the MCV Facility, a natural gas-fueled cogeneration facility. Total
electric sales in 1998 were 40 billion kilowatt hours ("KWH"), a 6% increase
over 1997 levels. Consumers' electric operating revenue in 1998 was $2.6
billion, an increase of 3.6% from 1997.
Gas Utility Operation. Consumers' gas utility operation purchases,
transports, stores and distributes natural gas. It renders gas service to 1.55
million customers and is authorized to serve in 54 of the 68 counties in
Michigan's Lower Peninsula. Principal cities served include Bay City, Flint,
Jackson, Kalamazoo, Lansing, Pontiac and Saginaw, as well as the suburban
Detroit area. Consumers owns gas transmission and distribution mains and other
gas lines, compressor stations and facilities, storage rights, wells and
gathering facilities in several storage fields in Michigan. Consumers and its
wholly-owned subsidiary, Michigan Gas Storage, inject natural gas into storage
during the summer months of the year for use during the winter months when
demand is higher. Consumers' gas operation is not dependent upon a single
customer, or even a few customers, and the loss of any one or even a few of such
customers would not have a material adverse effect on its financial condition.
Consumers' gas operation is seasonal to the extent that peak demand occurs
in winter due to colder temperatures. Total deliveries of natural gas sold by
Consumers and from other sellers over Consumers' pipeline and distribution
network to ultimate customers, including the MCV Partnership, totaled 360
billion cubic feet ("BCF") in 1998. Consumers' gas operating revenue in 1998 was
$1.1 billion, a decrease of 12.7% from 1997.
ENTERPRISES
Transmission, Storage and Processing of Natural Gas. CMS Gas Transmission
and Storage ("CMS GTS"), formed in 1988, owns, develops and manages domestic and
international natural gas transmission, processing and storage projects
consisting of a total of 12,996 miles of pipeline with a capacity of
approximately 6.3 Bcf per day. In addition, CMS GTS has processing capabilities
of over 760 million cubic feet per day ("MMCF/D") of natural gas. In our
Michigan carbon dioxide removal plants, we process over 330 MMcf/d, representing
more natural gas processed than by any other processor in the state.
We have expanded the importance of this line of business with the recent
acquisitions of the Panhandle Companies, a natural gas pipeline in Western
Australia and gathering systems and processing plants in the panhandle region of
Texas and Oklahoma. See "Prospectus Summary C Recent Developments C Acquisition
of the Panhandle Companies."
CMS GTS's operating revenue in 1998 was $160 million, an increase of 67%
from 1997.
Independent Power Production. CMS Generation, formed in 1986, acquires,
develops, invests in, constructs and operates non-utility electric power
generation projects both in the United States and internationally. As of
December 31, 1998, CMS Generation had ownership interests in 32 operating power
plants totaling 7,300 gross MW (3,236 net MW) throughout the United States and
in Argentina, Australia, India, Jamaica, Morocco and the Philippines. Our net
generating capacity has more than tripled since 1993. Projects range in size
from 3 MW to 2,000 MW and are fueled by hydro, coal, natural gas, oil,
S-29
<PAGE> 32
wood, wind, and waste material. Additional projects totaling approximately 6,500
MW are under construction or advanced development.
The rapid growth in our generating capacity has been matched by growth in
this business segment's operating revenue. CMS Generation's operating revenue in
1998 was $277 million, an increase of 65% from 1997.
Oil and Gas Exploration and Production. CMS Oil & Gas (formerly known as
CMS NOMECO Oil & Gas), formed in 1967, conducts oil and gas exploration and
development operations throughout the U.S. and seven other countries. Most of
the domestic operations focus on gas exploration and production in Michigan and
Louisiana while the international operations focus on oil exploration and
production and are distributed across three other continents.
CMS Oil & Gas achieved production levels in 1998 of 7.7 million barrels of
oil, condensate and plant products and 26.5 Bcf of gas. CMS Oil & Gas' proven
oil and gas reserves total 182.6 million net equivalent barrels reflecting a
balanced portfolio of high-quality reserves, including 49% oil and condensate
and 51% natural gas.
CMS Oil & Gas' operating revenue, including sales between business
segments, was $127 million in 1998, a decrease of 24% from 1997.
International Energy Distribution. CMS Electric and Gas Distribution,
formed in 1996, is our international energy distribution subsidiary. We have
ownership interests in electric distribution companies which provide service in
the states of Rio de Janeiro, Sergipe and Minas Gerais in Brazil, the province
of Entre Rios in Argentina, and on Margarita Island in Venezuela. These electric
distribution companies served a total of 992,000 customers with electricity
sales of 4,790 GWh in 1998. We are currently negotiating on an exclusive basis
for the acquisition of Turkey's Bursa-Yalova electric distribution system which
distributes 3,300 GWh of electricity annually to 700,000 customers near Bursa,
about 60 miles south of Istanbul.
Energy Marketing, Services and Trading. CMS Marketing, Services and Trading
("CMS MST"), formed in 1996, provides gas, oil, coal and electric marketing,
risk management and energy management services to industrial, commercial,
utility and municipal energy users throughout the United States and
internationally. CMS MST has grown dramatically since its inception. Currently,
it has more than 7,000 customers, including 30 major gas distribution companies,
and is active in 30 states and 3 countries. CMS MST's operating revenue in 1998
was $939 million, an increase of 36% from 1997.
S-30
<PAGE> 33
DESCRIPTION OF UNITS
The summaries of documents described below are not necessarily complete.
Potential investors should read the description of the components of the
Adjustable Convertible Trust Securities (the "UNITS") contained in the related
base prospectus and the copies of such documents which are on file with the
Securities and Exchange Commission (the "COMMISSION"). Wherever particular
sections of, or terms defined in, such documents are referred to in this
prospectus supplement, such sections or defined terms are incorporated by
reference in this prospectus supplement. Capitalized terms not defined in this
prospectus have the meanings set forth in the Principal Agreements (as defined
herein). The following description of the specific terms of the Units, including
underlying agreements, supplements and, to the extent inconsistent with,
replaces the description of the general terms of the Units set forth in the
related base prospectus. See "Description of Securities-Subordinated Debentures"
and "Description of Stock Purchase Contracts and Stock Purchase Units" in the
related base prospectus.
GENERAL
Each Unit will have a Stated Amount of $ . Each Unit will
initially consist of:
(1) a purchase contract (a "PURCHASE CONTRACT") under which (a) the holder
will purchase from the Company on the stock purchase date of July 1,
2002 (the "STOCK PURCHASE DATE"), for cash in an amount equal to the
Stated Amount, between of a newly issued share and
newly issued shares of common stock, par value of $0.01 per share, of
the Company (the "COMMON STOCK"), which will have the terms set forth
in the Company's certificate of incorporation, (depending on the
Applicable Market Value of the Common Stock on the Stock Purchase Date,
as described below) subject to adjustment in certain circumstances, and
(b) the Company will pay the holders of Units Contract Payments at the
Contract Payment Rate of % of the Stated Amount per year
as described below (see "--Description of the Purchase Contracts"), and
(2) a preferred security (a "TRUST PREFERRED SECURITY") of CMS Energy Trust
II (the "TRUST") having a Liquidation Amount equal to the Stated
Amount, a distribution rate of % of the Stated Amount per annum
(until reset as set forth herein) and a mandatory redemption date of
July 1, 2004 (see "--Description of the Trust Preferred Securities"),
subject to a call option (the "CALL OPTION") granted by the holder of
the Unit to the holder of the Call Option (the "CALL OPTION HOLDER")
which (when aggregated with the Call Options underlying all other
Units) will entitle the Call Option Holder to acquire the Trust
Preferred Securities underlying the Units (or the Junior Subordinated
Debentures substituted therefor) on or before the last Quarterly
Payment Date prior to the Stock Purchase Date or, if such date is not a
Trading Day, the next Trading Day (that is, the "CALL OPTION EXPIRATION
DATE") in exchange for the Aggregate Call Option Exercise Consideration
(see "--Description of the Call Options").
The Trust Preferred Securities and any substituted securities (the "PLEDGED
SECURITIES") will be pledged to The Chase Manhattan Bank, as collateral agent
(the "COLLATERAL AGENT") for the Company and the Call Option Holder, to secure
the holder's
S-31
<PAGE> 34
obligations to the Company and the Call Option Holder under the Purchase
Contract and Call Option underlying the Unit. If a holder of Units fails to
provide cash for the purchase of the shares of Common Stock as required by the
corresponding Purchase Contracts, the purchase obligation will be funded by the
proceeds from the sale of Pledged Securities.
Unless and until substitution of the Pledged Securities is made as
described herein, as long as a Purchase Contract remains in effect, such
Purchase Contract and the Trust Preferred Securities or other Pledged Securities
securing it (and, for so long as the Call Option relating to such Pledged
Securities is exercisable, the obligations of the holder to the Call Option
Holder) cannot be separated and may be transferred only as an integrated Unit.
Between the date of issuance of the Units and the Stock Purchase Date, each
holder of a Unit (other than a Stripped Unit) will be entitled to receive cash
payments of % of the Stated Amount per year, payable in arrears on the
Quarterly Payment Dates of January 1, April 1, July 1 and October 1 of each year
(unless deferred as described herein). Such payments will consist of payments on
the Trust Preferred Securities or other Pledged Securities plus Contract
Payments payable by the Company. See "--Description of the Call Options" and
"--Description of the Purchase Contracts--Contract Payments." If a holder of a
Unit does not provide cash to settle the underlying Purchase Contract in the
manner described in this prospectus supplement, cash proceeds from the Trust
Preferred Securities or other Pledged Securities will be applied on the Stock
Purchase Date to the purchase of Common Stock pursuant to such Purchase
Contract.
Each holder will pledge the Trust Preferred Securities or other Pledged
Securities underlying a Normal Unit to the Collateral Agent to secure the
holder's obligations to the Company and the Call Option Holder under the
Purchase Contract and Call Option underlying such Unit. If Treasury Securities
are exchanged for Pledged Securities, upon exercise of the Call Options, the
Treasury Securities will automatically be substituted as Pledged Securities.
Each holder, by accepting the Units, will, under the terms of the Principal
Agreements and the Purchase Contracts and Call Options underlying such Units, be
deemed to have (1) irrevocably agreed to be bound by the terms of the Principal
Agreements and such Purchase Contracts and Call Options for so long as such
holder remains a holder of such Units, and (2) duly appointed the Unit Agent as
such holder's agent and attorney-in-fact to enter into and perform such Purchase
Contracts and Call Options on behalf of such holder.
Subject to applicable law (including, without limitation, United States
federal securities law), the Company or its subsidiaries may at any time and
from time to time purchase outstanding Units, in the open market or by private
agreement.
FORMATION OF THE UNITS
At the closing of the offering of the Units, Salomon Smith Barney Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation and Banc of America
Securities LLC (the "UNDERWRITERS") will (1) enter into Purchase Contracts with
the Company and (2) purchase Trust Preferred Securities from the Trust for cash.
The Underwriters will fund that cash in part by the sale of the Units to the
initial investors and in part by the sale of the Call Options (on behalf of such
investors) to the Call Option Holder. The Trust will use the cash received from
the sale of the Trust Preferred Securities to purchase
S-32
<PAGE> 35
Junior Subordinated Debentures from the Company. The Trust Preferred Securities
will then be pledged to the Collateral Agent to secure the obligations owed to
the Company under the Purchase Contracts and the obligations owed to the Call
Option Holder under the Call Options. The rights to purchase Common Stock under
a Purchase Contract, together with the Trust Preferred Securities or other
Pledged Securities, subject to (1) the obligations owed to the Company under
such Purchase Contract, (2) the obligations owed to the Call Option Holder under
the Call Option relating to such Trust Preferred Securities or other Pledged
Securities and (3) the pledge arrangements securing the foregoing obligations,
are collectively referred to in this prospectus supplement as a "NORMAL UNIT."
Each holder of Normal Units will have the right, at any time on or prior to
the second Business Day before the Stock Purchase Date, to substitute, as
Pledged Securities, Treasury Securities that will generate payments matching
such holder's obligations under the underlying Purchase Contracts, in return for
the Trust Preferred Securities that until then had been the Pledged Securities
underlying such Units. For so long as the Call Options underlying such Units
remain exercisable, such substitution right may be exercised only if the holder
pays for each Call Option an amount in cash to the Call Option Holder equal to
the Present Value of each Call Option, at such time, relating to each Trust
Preferred Security that the holder wishes to have released. Upon such payment,
the Call Option Holder will deliver to the holder an instrument releasing the
Call Option Holder's security interest in the Pledged Securities.
"PRESENT VALUE" means, with respect to each Call Option relating to the
Trust Preferred Securities which the holder of Normal Units seeks to replace
with Treasury Securities, the present value of 0.60% of the Stated Amount on the
Substitution Date of such Call Option, which shall be computed using a discount
rate equal to the Treasury Rate. For purposes of this definition, the Present
Value of the Call Option will be determined in good faith by the Call Option
Holder in accordance with generally accepted principles of financial analysis.
"TREASURY RATE" means the bond equivalent yield on United States Treasury
notes or bills having a term interest nearest in length to the length of the
period from the Substitution Date to the Call Option Expiration Date.
"SUBSTITUTION DATE" means the date on which a holder of Normal Units
exercises its right to substitute Treasury Securities for Pledged Securities.
If a holder of Normal Units exercises its right to substitute Treasury
Securities for Pledged Securities, the securities that until then had been the
Pledged Securities will be released from the pledge arrangement and delivered to
the holder. Such holder's remaining rights and obligations under such Normal
Units will then become "STRIPPED UNITS" that will no longer generate cash
payments (other than Contract Payments payable by the Company pursuant to the
underlying Purchase Contracts) and will no longer be fungible with Normal Units.
A holder of Normal Units may exercise the right referred to in the
preceding paragraph by presenting and surrendering the certificate evidencing
such Normal Units, at the offices of the Unit Agent, together with the completed
and executed "Request to Create Stripped Units," and concurrently delivering to
the Collateral Agent (1) Treasury Securities that will generate, on the Stock
Purchase Date, an amount of cash equal to the aggregate Stated Amount of such
Normal Units and (2) if the Call Options underlying
S-33
<PAGE> 36
any Normal Units remain exercisable, the instrument from the Call Option Holder
referred to above. If Treasury Securities are the Pledged Securities underlying
such Normal Units, such right to substitute Trust Preferred Securities must be
exercised with respect to a number of Normal Units that will result in the
release of Treasury Securities in denominations of $1,000 and integral multiples
thereof. A certificate representing the newly created Stripped Units to replace
the surrendered Normal Units will then be issued and delivered to such holder or
such holder's designee. In addition, the securities that until then had been the
Pledged Securities underlying such Normal Units will then be released from the
pledge under the Pledge Agreement and delivered to such holder or such holder's
designee, upon payment by the holder of any transfer or similar taxes payable in
connection with the transfer of Units or the securities that until then had been
Pledged Securities to any person other than such holder.
The Company will enter into (1) the Master Unit Agreement with the Unit
Agent, governing the appointment of the Unit Agent as the agent and
attorney-in-fact for the holders of the Units, the Purchase Contracts, the
transfer, exchange or replacement of certificates representing the Units and
certain other matters relating to the Units and (2) an agreement (the "PLEDGE
AGREEMENT") among the Company, the Collateral Agent and the Call Option Holder
creating a pledge and security interest for the benefit of the Company to secure
the obligations of holders of Units under the Purchase Contracts and a pledge
and security interest for the benefit of the Call Option Holder to secure the
obligations of the holders of Units under the Call Options. In addition, the
Unit Agent will enter into an agreement (the "CALL OPTION AGREEMENT") with the
Call Option Holder governing the Call Options. The Master Unit Agreement, the
Pledge Agreement and the Call Option Agreement are collectively referred to
herein as the "PRINCIPAL AGREEMENTS."
DESCRIPTION OF THE PURCHASE CONTRACTS
GENERAL
The Purchase Contracts will be governed by the Master Unit Agreement.
Each Purchase Contract underlying a Unit (unless earlier terminated) will
require the holder of such Unit to purchase, and the Company to sell, on the
Stock Purchase Date, for cash in an amount equal to the Stated Amount, a number
of newly issued shares of Common Stock equal to the Settlement Rate. The
Settlement Rate will be calculated as follows (subject to adjustment under the
circumstances described below under "--Anti-Dilution Adjustments"):
(a) if the Applicable Market Value is greater than or equal to the
Threshold Appreciation Price of $ (that is, % higher than the
Stated Amount), the Settlement Rate will be ;
(b) if the Applicable Market Value is between the Threshold Appreciation
Price and the Floor Price, the Settlement Rate will equal the Stated
Amount divided by the Applicable Market Value (that is, the Settlement
Rate will be calculated so that the Applicable Market Value of the
Common Stock purchasable under each Purchase Contract would equal the
Stated Amount payable therefor) rounded to the nearest 1/10,000th of a
share; and
(c) if the Applicable Market Value is less than or equal to the Floor
Price, the Settlement Rate will be .
S-34
<PAGE> 37
"APPLICABLE MARKET VALUE" means the average of the Closing Prices per share
of Common Stock on each of the twenty consecutive Trading Days ending on the
last Trading Day before the Stock Purchase Date.
"CLOSING PRICE" of the Common Stock on any date of determination means the
closing sale price (or, if no closing price is reported, the last reported sale
price) of the Common Stock on the NYSE on such date, or if the Common Stock is
not listed for trading on the NYSE on any such date, as reported in the
composite transactions for the principal United States securities exchange on
which the Common Stock is so listed, or if the Common Stock is not so listed on
a United States national or regional securities exchange, as reported by The
Nasdaq Stock Market, or if the Common Stock is not so reported, the last quoted
bid price of the Common Stock in the over-the-counter market as reported by the
National Quotation Bureau or similar organization, or if such bid price is not
available, the market value of the Common Stock on such date as determined by a
nationally recognized investment banking firm retained for this purpose by the
Company.
"TRADING DAY" means a day on which the Common Stock (1) is not suspended
from trading on any national or regional securities exchange or association or
over-the-counter market at the close of business and (2) has traded at least
once on the national or regional securities exchange or association or
over-the-counter market that is the primary market for the trading of the Common
Stock.
The Company will not issue any fractional shares of Common Stock pursuant
to the Purchase Contracts. In lieu of a fraction of a share otherwise issuable
in respect of Purchase Contracts being settled by a holder of Units, the holder
will be entitled to receive an amount of cash equal to such fraction times the
Applicable Market Value.
Cash payments on the Units will accrue at a rate per year that is greater
than the current dividend yield on the Common Stock. However, since the number
of shares of Common Stock issuable upon settlement of each Purchase Contract may
decline by up to approximately % as the Applicable Market Value increases, the
opportunity for equity appreciation afforded by an investment in the Units is
less than that afforded by a direct investment in the Common Stock.
Prior to the Stock Purchase Date, the Common Stock purchasable on
settlement of Purchase Contracts will not be deemed to be outstanding for any
purpose and no holder of Units will have any voting rights, rights to dividends
or other distributions or other rights or privileges of a stockholder of the
Company by virtue of holding such Units.
SETTLEMENT
In order to settle the Purchase Contracts underlying any Units, the holder
of such Units will, by no later than 10:00 a.m., New York City time, on the
Stock Purchase Date, deliver payment (in the form of a certified or cashier's
check payable to the order of the Company in immediately available funds), at
the offices of the Unit Agent, of an amount equal to the aggregate Stated Amount
of such Units; provided, however, that the holder's obligation to satisfy such
Purchase Contracts may be offset by Contract Payments due and owing by the
Company to such holder. The Common Stock purchased on settlement of such
Purchase Contracts will then be issued and delivered to such holder or such
holder's designee and the Pledged Securities securing such Purchase Contracts
(or, in the case of Treasury Securities, the proceeds from the payment of such
Treasury Securities at maturity) will then be released from the pledge under the
Pledge Agreement and delivered
S-35
<PAGE> 38
to such holder or such holder's designee, upon presentation and surrender of the
certificate evidencing such Units and payment by the holder of any transfer or
similar taxes payable in connection with the issuance of Common Stock or the
transfer of Pledged Securities to any person other than such holder.
On the Stock Purchase Date, if a holder of Units has not delivered cash to
settle the underlying Purchase Contracts in the manner described above and no
event described under "--Termination" below has occurred, then (a) the Unit
Agent will notify the Collateral Agent and (i) if Trust Preferred Securities
underlie such units, the Collateral Agent, on behalf of such holder, will
exercise such holder's right to require the Trust to distribute Junior
Subordinated Debentures having an aggregate principal amount equal to the
aggregate Liquidation Amount of such Trust Preferred Securities, in exchange for
such Trust Preferred Securities, and, upon receiving such Junior Subordinated
Debentures, will thereupon, as Put Agent, exercise the Junior Subordinated
Debenture Put Option with respect thereto, and (ii) if Junior Subordinated
Debentures underlie such Units, the Collateral Agent, on behalf of such holder,
will, as Put Agent, exercise the Junior Subordinated Debenture Put Option with
respect thereto (see "Description of the Junior Subordinated Debentures--Junior
Subordinated Debenture Put Options"), (b) a portion of the proceeds from the
exercise of such Junior Subordinated Debenture Put Option (or, if Treasury
Securities underlie such Units, a portion of the proceeds from the payment of
such Treasury Securities at maturity) will be applied to satisfy in full such
holder's obligation to purchase Common Stock under such Purchase Contracts and
(c) the remainder of such proceeds, if any, will be paid to such holder. Such
Common Stock will then be issued and delivered to such holder or such holder's
designee, upon presentation and surrender of the certificate evidencing such
Units and payment by the holder of any transfer or similar taxes payable in
connection with the issuance of Common Stock to any person other than such
holder.
EARLY SETTLEMENT
Prior to the Stock Purchase Date, in the event of a merger involving the
Company in which at least 30% of the consideration for the Common Stock consists
of cash or cash equivalents ("CASH MERGER"), on or after the date of the Cash
Merger each holder of the Units has the right to accelerate and settle the
underlying Purchase Contracts at the Settlement Rate (this right, the "EARLY
SETTLEMENT RIGHT") as set forth above. The Company will provide each of the
holders with a notice of the completion of a Cash Merger. The notice will
specify a date on which the optional early settlement will occur (the "EARLY
SETTLEMENT DATE") and a date by which each holder's Early Settlement Right must
be exercised. The notice will set forth, among other things, the applicable
Settlement Rate and the amount of the cash, securities and other consideration
receivable by the holder upon settlement. To exercise his or her Early
Settlement Right, a holder must deliver to the Unit Agent, on or before the
Early Settlement Date, his or her certificate evidencing such Units and payment
of the applicable purchase price in the form of a certified or cashier's check.
If a holder has exercised his or her Early Settlement Right, the Company will
deliver or cause to be delivered to such holder the cash, securities and other
property as set forth in the notice.
CONTRACT PAYMENTS
The Company will be required to pay Contract Payments to the holders of
Units, as specified under "--General" above.
S-36
<PAGE> 39
The Company's obligation to pay Contract Payments to the holder of Units is
subordinated and junior in right of payment to the Company's obligations under
its Senior Indebtedness (as defined herein), in a manner substantially similar
to the manner in which the Junior Subordinated Debentures are subordinated as
described under "--Description of the Junior Subordinated Debentures" below.
So long as no default in the Company's obligations under the Principal
Agreements has occurred and is continuing, the Company will have the right to
defer the payment of Contract Payments at any time or from time to time for a
period not extending beyond the Stock Purchase Date. To exercise such right, the
Company must give the holders and the Unit Agent notice at least five Business
Days before the earlier of (1) the date such payment would otherwise have been
payable, (2) the date the Company is required to give notice to any securities
exchange or to holders of Units of the record date or the date such payment is
payable and (3) such record date. During any such deferral period, the Company
may not take any of the actions that it would be prohibited from taking during
an Extension Period as described under "--Description of the Junior Subordinated
Debentures--Option to Extend Interest Payment Date" below.
Any deferred Contract Payments will bear additional Contract Payments at
the Deferral Rate of % (compounding on each succeeding Quarterly Payment Date)
until paid (the "DEFERRAL RATE"). Contract Payments payable for any period will
be computed on the basis of a 360-day year consisting of twelve 30-day months.
Contract Payments will accrue from and including the date of issuance of the
Units to but excluding the Stock Purchase Date and will be payable in arrears on
the Quarterly Payment Dates (unless deferred as described above). If the
Purchase Contracts are terminated, the right of holders of Units to receive
Contract Payments (including any deferred Contract Payments) will also
terminate.
ANTI-DILUTION ADJUSTMENTS
The formula for determining the Settlement Rate may be adjusted if certain
events occur, including: (1) the payment of a stock dividend or other
distributions on Common Stock; (2) the issuance to all holders of Common Stock
of rights or warrants entitling them to subscribe for or purchase Common Stock
at less than the Current Market Price (as defined herein); (3) subdivisions of
Common Stock (including an effective subdivision of the Common Stock through
reclassification of the Common Stock); (4) distributions to all holders of
Common Stock of evidences of indebtedness of the Company, securities, cash or
other assets (excluding any dividend or distribution covered by clause (1) or
(2) above and any dividend or distribution paid exclusively in cash); (5)
distributions consisting exclusively of cash to all holders of Common Stock in
an aggregate amount that, when combined with (a) other all-cash distributions
made within the preceding 12 months and (b) the cash and the fair market value,
as of the date of expiration of the tender or exchange offer referred to below,
of the consideration paid in respect of any tender or exchange offer by the
Company or a subsidiary for the Common Stock concluded within the preceding 12
months, exceeds 15% of the Company's aggregate market capitalization (such
aggregate market capitalization being the product of the Current Market Price of
the Common Stock multiplied by the number of shares of Common Stock then
outstanding) on the date fixed for the determination of stockholders entitled to
receive such distribution; and (6) the successful completion of a tender or
exchange offer made by the Company or any subsidiary for the Common Stock which
involves an aggregate consideration that, when combined with (a) any cash and
the fair
S-37
<PAGE> 40
market value of other consideration payable in respect of any other tender or
exchange offer by the Company or a subsidiary for the Common Stock concluded
within the preceding 12 months and (b) the aggregate amount of any all-cash
distributions to all holders of the Common Stock made within the preceding 12
months, exceeds 15% of the Company's aggregate market capitalization on the date
of expiration of such tender or exchange offer.
The "CURRENT MARKET PRICE" per share of Common Stock on any day means the
average of the daily Closing Prices for the five Consecutive Trading Days
selected by the Company commencing not more than 20 Trading Days before, and
ending not later than, the earlier of the day in question and the day before the
"ex date" with respect to the issuance or distribution requiring such
computation. For purposes of this paragraph, the term "ex date", when used with
respect to any issuance or distribution, shall mean the first date on which the
Common Stock trades on such exchange or in such market without the right to
receive such issuance or distribution.
Certain reclassifications, consolidations, mergers, sales or transfers of
assets or other transactions may cause the Common Stock to be converted into the
right to receive other securities, cash or property. If this happens, each
Purchase Contract would, without the consent of the holders of Units, become a
contract to purchase only the kind and amount of securities, cash or other
property that the holder would be entitled to receive if the holder had settled
its Purchase Contract immediately before such transaction.
If at any time the Company makes a distribution of property to its
stockholders which would be taxable to such stockholders as a dividend for
United States federal income tax purposes (that is, distributions of evidences
of indebtedness or assets of the Company, but generally not stock dividends or
rights to subscribe to capital stock) and, pursuant to the Settlement Rate
adjustment provisions of the Master Unit Agreement, the Settlement Rate is
increased, such increase may be deemed to be the receipt of taxable income to
holders of Units. See "Certain Federal Income Tax Consequences--Adjustment of
Settlement Rate."
In addition, the Company may increase the Settlement Rate if the Board of
Directors of the Company deems it advisable to avoid or diminish any income tax
to holders of shares of Common Stock resulting from any dividend or distribution
of stock (or rights to acquire stock) or from any event treated as a dividend or
distribution for income tax purposes or for any other reasons.
Adjustments to the Settlement Rate will be calculated to the nearest
1/10,000th of a share. No adjustment in the Settlement Rate will be required
unless such adjustment would require an increase or decrease of at least one
percent in the Settlement Rate. If any adjustments are not required to be made
because they would not change the Settlement Rate by at least one percent, then
the adjustment will be carried forward and taken into account in any subsequent
adjustment.
The Company will be required, as soon as practicable, following the
occurrence of an event that requires or permits an adjustment in the Settlement
Rate, to provide written notice to the holders of Units of the occurrence of
such event. The Company will also be required to deliver a statement in
reasonable detail setting forth the method by which the adjustment to the
Settlement Rate was determined and setting forth the revised Settlement Rate.
S-38
<PAGE> 41
NO CONSENT TO ASSUMPTION
Each holder of Normal Units or Stripped Units, by acceptance thereof, will
under the terms of the Purchase Contract Agreement and the Normal Units or
Stripped Units, as applicable, be deemed expressly to have withheld any consent
to the assumption (i.e., affirmance) of the related Purchase Contracts by the
Company or its trustee in the event that the Company becomes the subject of a
case under the Bankruptcy Code.
TERMINATION
The Purchase Contracts, and the rights and obligations of the Company and
of the holders of the Units under the Purchase Contracts (including the right to
receive Contract Payments or deferred Contract Payments and the right and
obligation of the holders to purchase and the Company to sell Common Stock),
will automatically terminate if the Company becomes subject to certain events of
bankruptcy, insolvency or reorganization. Upon any termination of the Purchase
Contracts, the Call Options will terminate and the Pledged Securities will be
distributed in the manner described under "--Pledged Securities and Pledge
Agreement--Termination of Purchase Contracts."
DESCRIPTION OF THE CALL OPTIONS
At the closing of the offering of the Units, the Call Option Holder will
purchase the Call Options from the Underwriters (acting on behalf of the
holders) at a price equal to $ per Call Option. The Call Option Agreement
will govern the Call Options.
Each Call Option underlying a Normal Unit (unless earlier terminated), when
combined with the Call Options underlying all other Normal Units, will entitle
the Call Option Holder to acquire the Trust Preferred Securities underlying the
Normal Units, on or before the Call Option Expiration Date, in exchange for the
Aggregate Call Option Exercise Consideration. The Aggregate Call Option Exercise
Consideration will consist of:
(1) Treasury Securities that will generate, by each Quarterly Payment Date
falling after the settlement date for the Call Options (the "CALL
SETTLEMENT DATE") and on or before the Stock Purchase Date, an amount
of cash equal to the aggregate distributions that are scheduled to be
payable on the Trust Preferred Securities underlying the Normal Units
(or interest payments on the Junior Subordinated Debentures substituted
therefor) on such Quarterly Payment Date (assuming for this purpose,
even if not true, that (a) no distributions or interest payments will
then have been deferred and (b) the distribution or interest rate
thereon remains at the initial Trust Preferred Security Rate and Junior
Subordinated Debenture Rate);
(2) Treasury Securities that will generate, by the Stock Purchase Date, an
amount of cash equal to the aggregate Stated Amount of the Normal
Units; and
(3) if the Company is, at the Call Settlement Date, deferring distributions
on the Trust Preferred Securities or interest payments on the Junior
Subordinated Debentures (see "--Description of the Trust Preferred
Securities-Distribution" and "--Description of the Junior Subordinated
Debentures--Option to Extend Interest Payment Date"), an amount in cash
equal to (a) the aggregate unpaid distributions on the Trust Preferred
Securities or interest payments on the Junior Subordinated Debentures
underlying the Normal Units accrued to the Call
S-39
<PAGE> 42
Settlement Date, if the Call Settlement Date is a Quarterly Payment
Date, and (b) the aggregate unpaid distributions on the Trust Preferred
Securities or the interest payments on the Junior Subordinated
Debentures underlying the Normal Units accrued to the Quarterly Payment
Date immediately before the Call Settlement Date plus interest thereon
at the Deferral Rate for the period from and including such Quarterly
Payment Date to but excluding such Call Settlement Date, if the Call
Settlement Date is not a Quarterly Payment Date.
The Call Option Holder may exercise all of its Call Options (but not less
than all) by (1) delivering to the Unit Agent and the Collateral Agent, on or
prior to the Call Settlement Date, a notice stating that the Call Option Holder
is exercising its Call Options and specifying the Call Settlement Date (which
may not be after the Call Option Expiration Date) and (2) delivering to the
Collateral Agent, by noon, New York City time, on the Call Settlement Date, the
Aggregate Call Option Exercise Consideration. Pursuant to the Pledge Agreement,
when the Collateral Agent receives the Aggregate Call Option Exercise
Consideration, the Collateral Agent will transfer the Trust Preferred Securities
(or Junior Subordinated Debentures which have been substituted therefor)
underlying the Normal Units to the Call Option Holder or its designee free and
clear of the pledge and security interest created by the Pledge Agreement. In
addition, the Treasury Securities included in the Aggregate Call Option Exercise
Consideration will automatically be substituted for the Trust Preferred
Securities (or Junior Subordinated Debentures) as Pledged Securities, and the
Call Option Holder will cease to have a security interest in the Pledged
Securities.
If the Call Options are exercised, the Unit Agent will, not later than
three Business Days after the Call Settlement Date, mail notice of such exercise
to the holders of the Normal Units.
The Call Options, and the rights and obligations of the Call Option Holder
and of the holders of the Units under the Call Options, will automatically
terminate upon termination of the Purchase Contracts. See "--Description of the
Purchase Contracts--Termination" and "--Pledged Securities and Pledge
Agreement--Termination of Purchase Contracts."
PLEDGED SECURITIES AND PLEDGE AGREEMENT
GENERAL
Under the Pledge Agreement, the Pledged Securities will be pledged to the
Collateral Agent, for the benefit of the Company and the Call Option Holder, to
secure (1) the obligations of holders of Units to purchase Common Stock under
the Purchase Contracts and (2) the obligations of holders of Normal Units to
deliver the underlying Trust Preferred Securities (or Junior Subordinated
Debentures) to the Call Option Holder if the Call Options are exercised. The
Pledged Securities will initially consist of the Trust Preferred Securities. If
Treasury Securities are exchanged for Pledged Securities upon exercise of the
Call Options or in connection with the creation of Stripped Units or Junior
Subordinated Debentures are distributed in respect of Pledged Securities upon
dissolution of the Trust, the Treasury Securities so exchanged or the Junior
Subordinated Debentures so distributed will automatically be substituted as
Pledged Securities and the former Pledged Securities will automatically be
released from the pledge and security interest created by the Pledge Agreement.
S-40
<PAGE> 43
The rights of the holders of the Units to the underlying Pledged Securities
will be subject to the pledge and security interest created by the Pledge
Agreement. No holder of Units will be permitted to withdraw the Pledged
Securities underlying such Units from the pledged arrangement except upon the
settlement or termination of the Purchase Contracts or as described under
"-- Formation of the Units" above. Subject to such pledge and security interest,
however, each holder of Units will have full beneficial ownership of the
underlying Pledged Securities and will be entitled (directly or through the
Collateral Agent) to all of the rights provided by such Pledged Securities, and
the Company and Call Option Holder will have no rights in Pledged Securities
other than their respective security interests.
QUARTERLY PAYMENTS ON PLEDGED SECURITIES
The Unit Agent, upon receipt of any payments of interest on the Pledged
Securities, will distribute that amount together with the Contract Payments to
the holders of Units on the Record Date. The Record Date for any payment will be
one Business Day before such payment date.
SUBSTITUTION OF PLEDGED SECURITIES
For a description of the right of a holder of Units to substitute Treasury
Securities for Pledged Securities, see "--Formation of the Units" above.
SETTLEMENT OF PURCHASE CONTRACTS
On the Stock Purchase Date, the Pledged Securities (or, if Treasury
Securities have been exchanged for the Pledged Securities, the amount paid on
such Treasury Securities at maturity) will be released from the pledge and
security interest created by the Pledge Agreement and distributed or delivered
as specified under "--Description of the Purchase Contracts--Settlement."
TERMINATION OF PURCHASE CONTRACTS
Upon termination of the Purchase Contacts (see "--Description of the
Purchase Contracts--Termination"), the Collateral Agent will release the Pledged
Securities underlying the Units to the Unit Agent for distribution to the
holders of such Units, upon presentation and surrender of the certificates
evidencing such Units. If upon such termination any holder would otherwise be
entitled to receive a principal amount of Treasury Securities of any series that
is not an integral multiple of $1,000, the Unit Agent will distribute to such
holder Treasury Securities of such series in a principal amount equal to the
next lower integral multiple of $1,000. The Unit Agent will sell the Treasury
Securities of such series not otherwise distributed to such holder (together
with the Treasury Securities of such series not otherwise distributed to other
holders) and will distribute the net proceeds to all such holders (in accordance
with their respective interests therein). Upon such termination, however, such
release and distribution may be subject to a delay. In the event that the
Company becomes the subject of a case under the Bankruptcy Code, such delay may
occur as a result of the automatic stay under the Bankruptcy Code and continue
until such automatic stay has been lifted. The Company expects any such delay to
be limited.
S-41
<PAGE> 44
BOOK-ENTRY SYSTEM
The Depository Trust Company (the "DEPOSITARY") will act as securities
depositary for the Units. The Units will be issued only as fully-registered
securities registered in the name of Cede & Co. or another nominee of the
Depositary. Fully-registered global security certificates ("GLOBAL SECURITY
CERTIFICATES"), representing the total aggregate number of Units, will be
issued, will be deposited with the Depositary and will bear a legend regarding
restrictions on their exchanges and registration of transfer as described below.
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of securities in definitive form. Such laws
may impair the ability to transfer beneficial interests in the Units so long as
such Units are represented by Global Security Certificates.
The Depositary is a limited-purpose trust company organized under the New
York Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended (the "EXCHANGE ACT"). The Depositary holds
securities that its participants ("PARTICIPANTS") deposit with it. The
Depositary also facilitates the settlement among Participants of securities
transactions, such as transfers and pledges, in deposited securities through
electronic computerized book-entry changes in Participants' accounts, thereby
eliminating the need for physical movement of securities certificates. Direct
Participants include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations ("DIRECT PARTICIPANTS").
The Depositary is owned by a number of its Direct Participants and by the NYSE,
the American Stock Exchange, Inc., and the National Association of Securities
Dealers, Inc. Access to the Depositary system is also available to others, such
as securities brokers and dealers, banks and trust companies that clear
transactions through or maintain a direct or indirect custodial relationship
with a Direct Participant either directly or indirectly ("INDIRECT
PARTICIPANTS"). The rules applicable to the Depositary and its Participants are
on file with the Commission.
Generally, Units represented by Global Security Certificates may not be
exchanged in whole or in part for Units registered. No transfer of Global
Security Certificates in whole or in part may be registered, in the name of any
person other than the Depositary or a nominee of the Depositary unless the
Depositary has notified the Company that it is unwilling or unable to continue
as depositary for such Global Security Certificates or has ceased to be
qualified to act as Depositary under the Master Unit Agreement or if there
occurs and continues a default by the Company under one or more Principal
Agreements. All Units and portions of Units represented by Global Security
Certificates will be registered in such names as the Depositary may direct.
As long as the Depositary or its nominee is the registered owner of the
Global Security Certificates, such Depositary or such nominee, as the case may
be, will be considered the sole owner and holder of the Global Security
Certificates and all Units represented thereby for all purposes under the Units,
Purchase Contracts, Call Options and Principal Agreements. Except in the limited
circumstances referred to in the paragraph above, owners of beneficial interests
in Global Security Certificates will not be entitled to have such Global
Security Certificates or the underlying Units registered in their names, will
not receive or be entitled to receive physical delivery of certificates and will
not be considered to be owners or holders of such Global Security Certificates
or any underlying
S-42
<PAGE> 45
Units for any purpose under the Units, Purchase Contracts, Call Options and
Principal Agreements. All payments on the Units represented by the Global
Security Certificates and all deliveries of Pledged Securities or Common Stock
to the holders thereof will be made to the Depositary or its nominee, as the
case may be, as the holder thereof.
Ownership of beneficial interests in the Global Security Certificates will
be limited to Participants or persons that may hold beneficial interests through
institutions that have accounts with the Depositary. Ownership of beneficial
interests in Global Security Certificates will be shown only on, and the
transfer of those ownership interests will be effected only through, records
maintained by the Depositary or its nominee (with respect to Participants'
interests) or any such Participant (with respect to interests of persons held by
such Participants on their behalf). Procedures for settlement of Purchase
Contracts on the Stock Purchase Date will be governed by arrangements among the
Depositary, Participants and persons that may hold beneficial interests through
Participants designed to permit such settlement without the physical movement of
certificates. Payments, transfers, deliveries, exchanges and other matters
relating to beneficial interests in Global Security Certificates may be subject
to various policies and procedures adopted by the Depositary from time to time.
The Depositary has advised the Company that it will not take any action
permitted to be taken by a holder of Units unless directed to do so by one or
more Participants to whose account the Depositary interests in the Global
Security Certificates are credited and only for the number of Units as to which
such Participant or Participants has or have given such direction. None of the
Company, the Unit Agent nor any of their agents will have any responsibility or
liability for any aspect of the Depositary's or any Participant's records
relating to, or for payments made on account of, beneficial interests in Global
Security Certificates, or for maintaining, supervising or reviewing any of the
Depositary's records or any Participant's records relating to such beneficial
ownership interests.
The information in this section concerning the Depositary and its
book-entry system has been obtained from sources that the Company believes to be
reliable, but the Company does not take responsibility for its accuracy.
CERTAIN PROVISIONS OF THE PRINCIPAL AGREEMENTS
GENERAL
Distributions on the Units will be payable, Purchase Contracts (and related
documents) will be settled and transfers of the Units will be registrable at the
office of the Unit Agent in the Borough of Manhattan, The City of New York. In
addition, in the event that the Units do not remain in book-entry form, payment
of distributions on the Units may be made, at the option of the Company, by
check mailed to the address of the persons shown on the Unit Register.
In the event that any Quarterly Payment Date, the Stock Purchase Date or
any Put Date is not a Business Day, then any payment required to be made on such
date must be made on the next Business Day (and so long as such payment is made
on the next Business Day, without any interest or other payment on account of
any such delay), except that if the next Business Day is in the next calendar
year, such payment or settlement will be made on the prior Business Day with the
same force and effect as if made on such payment date. "BUSINESS DAY" means any
day other than Saturday, Sunday or any other
S-43
<PAGE> 46
day on which banking institutions in The City of New York are authorized or
obligated by law or executive order to be closed.
If a holder of Units fails to present and surrender the certificate
evidencing its Units to the Unit Agent on the Stock Purchase Date, the shares of
Common Stock issuable in settlement of the related Purchase Contracts will be
registered in the name of the Unit Agent. These shares of Common Stock, together
with any distributions thereon, will be held by the Unit Agent as agent for the
benefit of such holder, until such certificate is presented and surrendered or
the holder provides satisfactory evidence that such certificate has been
destroyed, lost or stolen, together with any indemnity that may be required by
the Unit Agent and the Company.
If the Purchase Contracts have terminated prior to the Stock Purchase Date,
the related Pledged Securities have been transferred to the Unit Agent for
distribution to the holders and a holder of Units fails to present and surrender
the certificate evidencing its Units to the Unit Agent, the Pledged Securities
that would otherwise be delivered to such holder and any related payments will
be held by the Unit Agent as agent for the benefit of such holder, until the
holder presents and surrenders its certificate or provides the evidence and
indemnity described above.
The Unit Agent will not be required to invest or to pay interest on any
amounts held by it before distribution.
No service charge will be made for any registration of transfer or exchange
of the Units, except for any applicable tax or other governmental charge.
MODIFICATION
The Principal Agreements will contain provisions permitting the relevant
parties to modify the terms of the Principal Agreements, the Purchase Contracts
and the Call Options with the consent of the holders of a majority of the Units
at the time outstanding (or, in the case of modifications affecting only holders
of Normal Units or Stripped Units, the consent of the holders of a majority of
the Normal Units or Stripped Units, as the case may be). However, no
modification may, without the consent of the holder of each outstanding Unit
affected by the modification, (1) change any payment date, (2) change the amount
or type of Pledged Securities required to be pledged to secure obligations under
the Units, impair the right of the holder of any Units to receive distributions
on the Pledged Securities underlying such Units or otherwise adversely affect
the holder's rights in or to Pledged Securities, (3) change the place or
currency of payment for any amounts payable in respect of the Units, increase
any amounts payable by holders in respect of Units or decrease any other amounts
receivable by holders in respect of Units, (4) impair the right to institute
suit for the enforcement of any Purchase Contract, (5) reduce the amount of
Common Stock purchasable under any Purchase Contract, increase the price to
purchase Common Stock on settlement of any Purchase Contract, change the Stock
Purchase Date or otherwise adversely affect the holder's rights under any
Purchase Contract, (6) reduce the amount payable on exercise of any Call Option,
extend the Call Option Expiration Date or otherwise adversely affect the
holder's rights under any Call Option or (7) reduce the above-stated percentage
of outstanding Units the consent of whose holders is required for the
modification or amendment of the provisions of the Principal Agreements, the
Purchase Contracts or the Call Options.
S-44
<PAGE> 47
CONSOLIDATION, MERGER, SALE OR CONVEYANCE
The Company will agree in the Master Unit Agreement that it will not merge
with or into or consolidate with any other entity or sell, assign, transfer,
lease or convey all or substantially all of its properties and assets to any
person, firm or corporation unless (1) the Company is the continuing corporation
or the successor corporation is a corporation organized under the laws of the
United States of America or a state thereof; (2) such corporation expressly
assumes the obligations of the Company under the Principal Agreements and the
Purchase Contracts; and (3) the Company or such successor corporation is not,
immediately after such merger, consolidation, sale, assignment, transfer, lease
or conveyance, in default in the performance of any of its obligations under the
Purchase Contracts and the Principal Agreements.
TITLE
The Company, the Unit Agent, the Collateral Agent and the Call Option
Holder may treat the registered holder of any Units as the absolute owner of
those Units for the purpose of making payment and settling the related Purchase
Contracts or Call Options and for all other purposes.
REPLACEMENT OF UNITS CERTIFICATES
In the event that physical certificates are issued, any mutilated
certificate will be replaced by the Company at the expense of the holder upon
surrender of such certificate to the Unit Agent. Certificates that become
destroyed, lost or stolen will be replaced by the Company at the expense of the
holder upon delivery to the Company and the Unit Agent of satisfactory evidence
that such certificate has been destroyed, lost or stolen, together with any
indemnity that may be required by the Unit Agent and the Company.
The Company, however, is not required to issue any certificates
representing Units on or after the Stock Purchase Date or after the Purchase
Contracts have terminated. In place of the delivery of a replacement certificate
following the Stock Purchase Date, the Unit Agent, upon delivery of the evidence
and indemnity described above, will deliver the Common Stock issuable pursuant
to the Purchase Contracts included in the Units evidenced by such certificate,
or, if the Purchase Contracts have terminated prior to the Stock Purchase Date,
transfer the Pledged Securities related to the Units evidenced by such
certificate.
GOVERNING LAW
The Principal Agreements, the Purchase Contracts and the Call Options will
be governed by, and construed in accordance with, the laws of the State of New
York.
INFORMATION CONCERNING THE UNIT AGENT
The Bank of New York will initially act as Unit Agent. The Unit Agent will
act as the agent for the holders of Units from time to time. The Master Unit
Agreement will not obligate the Unit Agent to exercise any discretionary actions
in connection with a default under the terms of the Principal Agreements, the
Purchase Contracts, the Call Options or the Pledged Securities.
S-45
<PAGE> 48
The Master Unit Agreement will contain provisions limiting the liability of
the Unit Agent. The Master Unit Agreement will contain provisions under which
the Unit Agent may resign or be replaced. Resignation or replacement of the Unit
Agent will be effective upon appointment of a successor.
The Unit Agent is one of a number of banks with which the Company and its
subsidiaries maintain ordinary banking and trust relationships.
INFORMATION CONCERNING THE COLLATERAL AGENT
The Chase Manhattan Bank will initially act as Collateral Agent. The
Collateral Agent will act solely as the agent of the Company or the Call Option
Holder and will not assume any obligation or relationship of agency or trust for
or with any of the holders of the Units except for the obligations owed by a
pledgee of property to the owner thereof under the Pledge Agreement and
applicable law.
The Pledge Agreement will contain provisions limiting the liability of the
Collateral Agent. The Pledge Agreement will contain provisions under which the
Collateral Agent may resign or be replaced. Such resignation or replacement
would be effective upon the appointment of a successor.
The Collateral Agent is one of a number of banks with which the Company and
its subsidiaries maintain ordinary banking and trust relationships.
DESCRIPTION OF THE TRUST PREFERRED SECURITIES
GENERAL
The Trust Preferred Securities will be issued by the Trust, a statutory
business trust created under Delaware law pursuant to the Declaration. The
Trust's affairs are conducted by the issuer trustees (the "ISSUER TRUSTEES"),
which are currently The Bank of New York, as the Property Trustee (the "PROPERTY
TRUSTEE"), and The Bank of New York (Delaware), as the Delaware Trustee (the
"DELAWARE TRUSTEE"), and the two administrators, who are employees of the
Company (the "ADMINISTRATORS"). The Trust exists for the exclusive purposes of
(a) issuing and selling the Trust Securities consisting of the Trust Preferred
Securities and the Trust Common Securities (together, the "TRUST SECURITIES"),
(b) using the proceeds from the sale of the Trust Securities to acquire the
Junior Subordinated Debentures issued by the Company and (c) engaging in only
those other activities necessary or incidental thereto. Accordingly, the Junior
Subordinated Debentures will be the sole assets of the Trust, and payments under
the Junior Subordinated Debentures will be the sole revenue of the Trust. All of
the Trust Common Securities will be owned by the Company.
The Trust Preferred Securities will represent preferred undivided
beneficial ownership interests in the assets of the Trust and the holders
thereof will be entitled to a preference over the Trust Common Securities in
certain circumstances with respect to distributions and amounts payable on
redemption of the Trust Securities or liquidation of the Trust. See
"--Subordination of Trust Common Securities" below. The Trust Preferred
Securities will be issued pursuant to, and be governed by, the Declaration. The
Declaration will be qualified under the Trust Indenture Act.
S-46
<PAGE> 49
Each Trust Preferred Security will have a Liquidation Amount that is equal
to the Stated Amount. The Trust Preferred Securities will rank pari passu, and
payments will be made thereon pro rata, with the Trust Common Securities except
as described under "--Subordination of Trust Common Securities" below. Legal
title to the Junior Subordinated Debentures will be held by the Property Trustee
in trust for the benefit of the holders of the Trust Preferred Securities and
the Trust Common Securities.
The Trust Preferred Securities will be subject to mandatory redemption on
the Trust Preferred Securities Redemption Date and Junior Subordinated Debenture
Maturity Date at a redemption price equal to the aggregate Liquidation Amount
thereof plus unpaid distributions accrued thereon to but excluding such date,
out of the proceeds of the repayment of the Junior Subordinated Debentures at
maturity. The Junior Subordinated Debentures are not redeemable at the option of
the Company prior to the Trust Preferred Securities Redemption Date and Junior
Subordinated Debenture Maturity Date.
DISTRIBUTIONS
Distributions on the Trust Preferred Securities will be cumulative, will
accumulate from the first date of issuance of the Trust Preferred Securities at
an initial rate of % per annum (i.e., the initial Trust Preferred
Securities and Junior Subordinated Debenture Rate, which rate is subject to
reset in the manner described under "--Description of the Junior Subordinated
Debentures--Market Rate Reset" below) as applied to the Liquidation Amount
thereof and will be payable quarterly in arrears on each Quarterly Payment Date
(subject to the deferral provisions described below), to the holders of record
on the relevant record dates. The record date for any payment of Distributions
will be one Business Day prior to such payment date. The amount of Distributions
payable for any period will be computed on the basis of a 360-day year of twelve
30-day months. In the event that any date on which Distributions are payable on
the Trust Preferred Securities is not a Business Day, payment of the
Distributions payable on such date will be made on the next succeeding day that
is a Business Day (and without any interest or other payment in respect of any
such delay), except that if such Business Day is in the next succeeding calendar
year, such payment will be made on the immediately preceding Business Day, in
each case with the same force and effect as if made on the date such payment was
originally payable (each date on which Distributions are payable in accordance
with the foregoing, a "DISTRIBUTION DATE").
So long as no Junior Subordinated Debenture Event of Default shall have
occurred and be continuing, the Company will have the right under the Indenture
to elect to defer the payment of interest on the Junior Subordinated Debentures
at any time and from time to time for a period not extending beyond the Trust
Preferred Securities Redemption Date and Junior Subordinated Debenture Maturity
Date (each such period of deferral, an "EXTENSION PERIOD"). See "--Description
of the Junior Subordinated Debentures--Option to Extend Interest Payment Date"
and "Certain Federal Income Tax Consequences." Upon any such election, quarterly
Distributions on the Trust Preferred Securities will be deferred by the Trust
during such Extension Period. Distributions to which holders of the Trust
Preferred Securities are entitled during any such Extension Period will
accumulate additional Distributions thereon at the Deferral Rate, compounded on
each succeeding Distribution Date. The term "DISTRIBUTIONS", as used in this
Description of the Trust Preferred Securities, shall include any such additional
Distributions and any Additional Sums (as defined herein) paid on the Junior
Subordinated Debentures.
S-47
<PAGE> 50
During any Extension Period, the Company may not take any of the prohibited
actions described under "--Description of the Junior Subordinated
Debentures--Certain Covenants of the Company."
Although the Company may in the future exercise its option to defer
payments of interest on the Junior Subordinated Debentures, the Company has no
such current intention.
The revenue of the Trust available for distribution to holders of the Trust
Preferred Securities will be limited to payments under the Junior Subordinated
Debentures. If the Company does not make interest payments on the Junior
Subordinated Debentures, the Property Trustee will not have funds available to
pay Distributions on the Trust Preferred Securities. The payment of
Distributions (if and to the extent the Trust has funds on hand legally
available for the payment of such Distributions) will be guaranteed by the
Company on a limited basis as set forth herein under "--Description of the
Guarantee."
MANDATORY REDEMPTION
Upon the repayment of the Junior Subordinated Debentures, the proceeds from
such repayment shall be applied by the Property Trustee to redeem a Like Amount
(as defined herein) of the Trust Securities, at a redemption price (the "FINAL
REDEMPTION PRICE") which shall be equal to the principal of, and accrued and
unpaid interest on, the Junior Subordinated Debentures.
"LIKE AMOUNT" means (i) with respect to the redemption of the Trust
Securities, Trust Securities having an aggregate Liquidation Amount equal to the
principal amount of Junior Subordinated Debentures to be paid in accordance with
their terms and (ii) with respect to a distribution of Junior Subordinated
Debentures upon the liquidation of the Trust, Junior Subordinated Debentures
having a principal amount equal to the aggregate Liquidation Amount of the Trust
Securities of the holder to whom such Junior Subordinated Debentures are
distributed.
RIGHT TO EXERCISE JUNIOR SUBORDINATED DEBENTURE PUT OPTION
Each holder of Trust Preferred Securities will have the right to require
the Trust to distribute Junior Subordinated Debentures having an aggregate
principal amount equal to the aggregate Liquidation Amount of such Trust
Preferred Securities to the Put Agent, on the Stock Purchase Date, in exchange
for such Trust Preferred Securities, in connection with the concurrent exercise
by the Put Agent on behalf of each such holder of the Junior Subordinated
Debenture Put Option related thereto, but only if the cash received on the
exercise of such option is used to settle the Purchase Contracts secured
thereby.
In the event the Call Option is not exercised by the Call Option Holder, a
holder of Trust Preferred Securities may exercise the right referred to above by
presenting and surrendering the certificate evidencing such Trust Preferred
Securities, at the offices of the Property Trustee, with the form of "Notice to
Require Exercise of Junior Subordinated Debenture Put Option" on the reverse
side of the certificate completed and executed as indicated, by 10:00 a.m., New
York City time, on the Stock Purchase Date. If such right is properly exercised,
the applicable Junior Subordinated Debentures will be distributed to an agent
for the holder appointed by the Company for such purpose (the "PUT AGENT", who
shall be the Collateral Agent), and the Put Agent will then exercise the Junior
Subordinated Debenture Put Option related thereto on behalf of the holder.
S-48
<PAGE> 51
LIQUIDATION OF THE TRUST AND DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES
The Company will have the right at any time to dissolve the Trust and,
after satisfaction of liabilities to creditors of the Trust as required by
applicable law, cause the Junior Subordinated Debentures to be distributed to
the holders of the Trust Securities in liquidation of the Trust.
The Trust shall automatically dissolve upon the first to occur of: (a)
certain events of bankruptcy, dissolution or liquidation of the Company or the
Trust; (b) the distribution of a Like Amount of the Junior Subordinated
Debentures to the holders of the Trust Securities, if the Company, as Sponsor,
has given written direction to the Property Trustee to dissolve the Trust (which
direction is optional and wholly within the discretion of the Company, as
Sponsor); (c) redemption of all of the Trust Securities as described under
"--Mandatory Redemption"; (d) expiration of the term of the Trust; (e) repayment
of the Junior Subordinated Debentures or at such time as no Junior Subordinated
Debentures are outstanding; and (f) the entry of an order for the dissolution of
the Trust by a court of competent jurisdiction.
If a dissolution occurs as described in clauses (a), (b), (d) or (e) of the
preceding paragraph, the Trust shall be liquidated by the Administrators as
expeditiously as practicable by distributing, after satisfaction of liabilities
to creditors of the Trust as provided by applicable law, to the holders of the
Trust Securities a Like Amount of the Junior Subordinated Debentures (such
amount being the "LIQUIDATION DISTRIBUTION"). If the Liquidation Distribution
can be paid only in part because the Trust has insufficient assets on hand
legally available to pay in full the aggregate Liquidation Distribution, then
the amounts payable directly by the Trust on the Trust Preferred Securities and
the Trust Common Securities shall be paid on a pro rata basis, except that if a
Junior Subordinated Debenture Event of Default has occurred and is continuing,
the Trust Preferred Securities shall have a priority over the Trust Common
Securities. See "--Subordination of Trust Common Securities" below.
After the liquidation date is fixed for any distribution of Junior
Subordinated Debentures to holders of the Trust Securities, (a) the Trust
Securities will no longer be deemed to be outstanding, (b) the Depositary or its
nominee will receive a registered global certificate or certificates
representing the Junior Subordinated Debentures to be delivered upon such
distribution and (c) any certificates representing Trust Securities not held by
the Depositary or its nominee will be deemed to represent Junior Subordinated
Debentures having a principal amount equal to the aggregate Liquidation Amount
of such Trust Securities, and bearing accrued and unpaid interest in an amount
equal to the accumulated and unpaid Distributions on such Trust Securities until
such certificates are presented to the Administrators or their agent for
cancellation, whereupon the Company will issue to such holder, and the Debenture
Trustee will authenticate, a certificate representing such Junior Subordinated
Debentures.
REDEMPTION PROCEDURES
The Trust Preferred Securities shall be redeemed at the Final Redemption
Price with the proceeds from the contemporaneous repayment of the Junior
Subordinated Debentures. The redemption of Trust Preferred Securities shall be
made and the Final Redemption Price shall be payable on the Trust Preferred
Securities Redemption Date and Junior Subordinated Debenture Maturity Date only
to the extent that the Trust has funds legally available for the payment of such
Redemption Price.
S-49
<PAGE> 52
If the Trust gives a notice of redemption in respect of the Trust Preferred
Securities, then, by noon, New York City time, on the Trust Preferred Securities
Redemption Date and Junior Subordinated Debenture Maturity Date, to the extent
funds are legally available, with respect to the Trust Preferred Securities held
by the Depositary or its nominees, the Property Trustee will give irrevocable
instructions and authority to the Depositary and will irrevocably deposit with
the Depositary for the Trust Preferred Securities funds sufficient to pay the
Final Redemption Price to the holders thereof. With respect to the Trust
Preferred Securities held in certificated form, the Property Trustee, to the
extent funds are legally available, will give irrevocable instructions and
authority to the Paying Agent and will irrevocably deposit with the Paying Agent
funds sufficient to pay the Final Redemption Price to the holders of the Trust
Preferred Securities. If a notice of redemption shall have been given and funds
deposited as required to pay the Final Redemption Price, then all rights of the
holders of the Trust Preferred Securities will cease, except the right of the
holders of Trust Preferred Securities to receive the Final Redemption Price, but
without interest on the Final Redemption Price, and the Trust Preferred
Securities will cease to be outstanding. In the event that the Trust Preferred
Securities Redemption Date and Junior Subordinated Debenture Maturity Date is
not a Business Day, then the Final Redemption Price payable on such date will be
paid on the next succeeding day that is a Business Day (and so long as such
payment is made on the next succeeding Business Day without any interest or
other payment in respect of any such delay). In the event that payment of the
Final Redemption Price is improperly withheld or refused and not paid either by
the Trust or by the Company pursuant to the Guarantee as described under
"--Description of the Guarantee", distributions on the Trust Preferred
Securities will accumulate on the Final Redemption Price at the Trust Preferred
Securities and Junior Subordinated Debenture Rate from the Trust Preferred
Securities and Junior Subordinated Debenture Maturity Date to the date the Final
Redemption Price is actually paid.
SUBORDINATION OF TRUST COMMON SECURITIES
Payment of Distributions on, and the Final Redemption Price of, the Trust
Preferred Securities and the Trust Common Securities, as applicable, shall be
made pro rata based on the Liquidation Amount of the Trust Preferred Securities
and Trust Common Securities; provided, however, that if on any Distribution Date
or Trust Preferred Securities Redemption Date and Junior Subordinated Debenture
Maturity Date, a Junior Subordinated Debenture Event of Default (solely as the
result of an event described in clauses (1), (2) or (3) thereto) shall have
occurred and be continuing, no payment of any Distribution on, or Final
Redemption Price of, any of the Trust Common Securities, and no other payment on
account of the redemption, liquidation or other acquisition of the Trust Common
Securities, shall be made unless payment in full in cash of all accumulated and
unpaid Distributions on all of the outstanding Trust Preferred Securities for
all Distribution periods terminating on or prior thereto or, in the case of the
Trust Preferred Securities Redemption Date and Junior Subordinated Debenture
Maturity Date, the full amount of the Final Redemption Price therefor, shall
have been made or provided for, and all funds available to the Property Trustee
shall first be applied to the payment in full in cash of all Distributions on,
or Final Redemption Price of, the Trust Preferred Securities then due and
payable.
In the case of any Event of Default, the Company as holder of the Trust
Common Securities will be deemed to have waived any right to act with respect to
such Event of Default until the effect of such Event of Default shall have been
cured, waived or
S-50
<PAGE> 53
otherwise eliminated. Until any such Event of Default has been so cured, waived
or otherwise eliminated, the Property Trustee shall act solely on behalf of the
holders of the Trust Preferred Securities, and only the holders of the Trust
Preferred Securities will have the right to direct the Property Trustee to act
on their behalf.
EVENTS OF DEFAULT; NOTICE
The occurrence of a Junior Subordinated Debenture Event of Default (see
"--Description of the Junior Subordinated Debentures--Events of Default")
constitutes an "Event of Default" under the Declaration; provided that pursuant
to the Declaration, the holder of the Trust Common Securities will be deemed to
have waived any Event of Default with respect to such Trust Common Securities
until all Events of Default with respect to the Trust Preferred Securities have
been cured, waived or otherwise eliminated. Until such Events of Default have
been so cured, waived or otherwise eliminated, the Property Trustee will be
deemed to be acting solely on behalf of the holders of the Trust Preferred
Securities and only the holders of such Trust Preferred Securities will have the
right to direct the Property Trustee with respect to certain matters under the
Declaration, and therefore the Indenture. The holders of a majority in
Liquidation Amount of the Trust Preferred Securities will have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Property Trustee or to direct the exercise of any trust or
power conferred upon the Property Trustee under the Declaration, including the
right to direct the Property Trustee to exercise the remedies available to it as
holder of the Junior Subordinated Debentures. If the Property Trustee fails to
enforce its rights under the Junior Subordinated Debentures after the holders of
a majority in Liquidation Amount of Trust Preferred Securities have so directed
the Property Trustee, a holder of record of such Trust Preferred Securities (or,
for so long as Trust Preferred Securities underlie Normal Units, a holder of
record of Normal Units) may, to the fullest extent permitted by law, institute a
legal proceeding against the Company to enforce the Property Trustee's rights
under the Junior Subordinated Debentures without first instituting any legal
proceeding against the Property Trustee or any other person or entity.
Notwithstanding the foregoing, if an Event of Default has occurred and is
continuing, and such event is attributable to the failure of the Company to pay
interest or principal on the Junior Subordinated Debentures on the respective
dates such interest or principal is payable (after giving effect to any
Extension Period), then a holder of record of Trust Preferred Securities (or,
for so long as Trust Preferred Securities underlie Normal Units, a holder of
record of Normal Units) may institute a Direct Action against the Company for
payment to such holder of the portion of such principal or interest attributable
to Junior Subordinated Debentures having a principal amount equal to the
aggregate Liquidation Amount of the Trust Preferred Securities held by such
holder (or underlying such holder's Normal Units). In connection with such
Direct Action, the Company will be subrogated to the rights of such holder of
Trust Preferred Securities (or Normal Units) under the Declaration to the extent
of any payment made by the Company to such holder of Trust Preferred Securities
(or Normal Units) in such Direct Action; provided, however, that no such
subrogation right may be exercised so long as an Event of Default has occurred
and is continuing. The holders of Trust Preferred Securities will not be able to
exercise directly any other remedy available to the holders of the Junior
Subordinated Debentures.
Upon occurrence of an Event of Default, the Property Trustee, so long as it
is the sole holder of Junior Subordinated Debentures, will have the right under
the Indenture to declare the principal of (or premium, if any) and interest on
the Junior Subordinated Debentures to be immediately due and payable.
S-51
<PAGE> 54
Within ten Business Days after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee shall transmit
notice of such Event of Default to the holders of the Trust Preferred
Securities, the Administrators and the Company, as Sponsor, unless such Event of
Default shall have been cured or waived. The Company, as Sponsor, and the
Administrators are required to file annually with the Property Trustee a
certificate as to whether or not they are in compliance with all the conditions
and covenants applicable to them under the Declaration.
If a Junior Subordinated Debenture Event of Default has occurred and is
continuing, the Trust Preferred Securities shall have a preference over the
Trust Common Securities as described under "--Liquidation of the Trust and
Distribution of Junior Subordinated Debentures" and "--Subordination of Trust
Common Securities."
REMOVAL OF ISSUER TRUSTEES AND ADMINISTRATORS
Unless a Junior Subordinated Debenture Event of Default shall have occurred
and be continuing, any Issuer Trustee may be removed at any time by the holder
of the Trust Common Securities. If a Junior Subordinated Debenture Event of
Default has occurred and is continuing, the Property Trustee and the Delaware
Trustee may be removed at such time by the holders of a majority in Liquidation
Amount of the outstanding Trust Preferred Securities. In no event will the
holders of the Trust Preferred Securities have the right to vote to appoint,
remove or replace the Administrators, which voting rights are vested exclusively
in the Company as the holder of the Trust Common Securities. No resignation or
removal of an Issuer Trustee and no appointment of a successor trustee shall be
effective until the acceptance of appointment by the successor Trustee in
accordance with the provisions of the Declaration.
MERGER OR CONSOLIDATION OF ISSUER TRUSTEES
Any Person into which the Property Trustee or the Delaware Trustee that is
not a natural person may be merged or converted or with which it may be
consolidated, or any Person resulting from any merger, conversion or
consolidation to which such Issuer Trustee shall be a party, or any Person
succeeding to all or substantially all the corporate trust business of such
Issuer Trustee, shall be the successor of such Issuer Trustee under the
Declaration, provided such Person shall be otherwise qualified and eligible.
MERGERS, CONVERSIONS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE TRUST
The Trust may not merge or convert with or into, consolidate, amalgamate,
or be replaced by, or convey, transfer or lease its properties and assets as an
entirety or substantially as an entirety to any Person, except as described
below or as otherwise described under "--Liquidation of the Trust and
Distribution of Junior Subordinated Debentures." The Trust may, at the request
of the Company, as Sponsor and holder of the Trust Common Securities, but
without the consent of the holders of the Trust Preferred Securities, merge or
convert with or into, consolidate, amalgamate, or be replaced by or convey,
transfer or lease its properties and assets as an entirety or substantially as
an entirety to a trust organized as such under the laws of any State; provided,
that (a) such successor entity either (i) expressly assumes all of the
obligations of the Trust with respect to the Trust Preferred Securities or (ii)
substitutes for the Trust Preferred Securities other securities having
substantially the same terms as the Trust Preferred Securities (the "Successor
Securities") so long as the Successor Securities rank the same as the Trust
S-52
<PAGE> 55
Preferred Securities rank in priority with respect to distributions and payments
upon liquidation, redemption and otherwise, (b) the Company expressly appoints a
trustee of such successor entity possessing the same powers and duties as the
Property Trustee with respect to the Junior Subordinated Debentures, (c) the
Successor Securities are listed, or any Successor Securities will be listed upon
notification of issuance, on any national securities exchange or other
organization on which the Trust Preferred Securities are then listed or quoted,
if any, (d) such merger, conversion, consolidation, amalgamation, replacement,
conveyance, transfer or lease does not cause the Trust Preferred Securities
(including any Successor Securities) or Units to be downgraded by any nationally
recognized statistical rating organization, if then so rated,(e) such merger,
conversion, consolidation, amalgamation, replacement, conveyance, transfer or
lease does not adversely affect the rights, preferences and privileges of the
holders of the Trust Preferred Securities (including any Successor Securities)
in any material respect, (f) such successor entity has a purpose substantially
identical to that of the Trust, (g) prior to such merger, conversion,
consolidation, amalgamation, replacement, conveyance, transfer or lease, the
Company has received an opinion from independent counsel to the Trust
experienced in such matters to the effect that (i) such merger, conversion,
consolidation, amalgamation, replacement, conveyance, transfer or lease does not
adversely affect the rights, preferences and privileges of the holders of the
Trust Preferred Securities (including any Successor Securities) in any material
respect, (ii) following such merger, conversion, consolidation, amalgamation,
replacement, conveyance, transfer or lease, neither the Trust nor such successor
entity will be required to register as an investment company under the
Investment Company Act of 1940, as amended (the "INVESTMENT COMPANY ACT") and
(iii) following such merger, conversion, consolidation, amalgamation,
replacement, conveyance, transfer or lease, the Trust or the successor entity
will continue to be classified as a grantor trust for United States federal
income tax purposes and (h) the Company or any permitted successor or assignee
owns all of the Trust Common Securities of such successor entity and guarantees
the obligations of such successor entity under the Successor Securities at least
to the extent provided by the Guarantee. Notwithstanding the foregoing, the
Trust shall not, except with the consent of holders of 100% in Liquidation
Amount of the Trust Securities, consolidate, amalgamate, merge or convert with
or into, or be replaced by or convey, transfer or lease its properties and
assets as an entirety or substantially as an entirety to any other entity or
permit any other entity to consolidate, amalgamate, merge or convert with or
into, or replace it if such consolidation, amalgamation, merger, conversion,
replacement, conveyance, transfer or lease would cause the Trust or the
successor entity to be classified as an association taxable as a corporation or
as other than a grantor trust for United States federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF THE DECLARATION
Except as provided below and under "--Mergers, Conversions, Consolidations,
Amalgamations or Replacements of the Trust" above and "--Description of the
Guarantee--Amendments and Assignment" and as otherwise required by law and the
Declaration, the holders of the Trust Preferred Securities will have no voting
rights.
The Declaration may be amended from time to time by the Company and the
Property Trustee, without the consent of the holders of the Trust Preferred
Securities, (a) to cure any ambiguity, correct or supplement any provisions in
the Declaration that may be inconsistent with any other provision, or make any
other provisions with respect to matters or questions arising under the
Declaration, which shall not be inconsistent with the other provisions of the
Declaration, or (b) to modify, eliminate or add to any provisions of
S-53
<PAGE> 56
the Declaration to such extent as shall be necessary to ensure that the Trust
will be classified for United States federal income tax purposes as a grantor
trust or as other than an association taxable as a corporation at all times that
any Trust Securities are outstanding or to ensure that the Trust will not be
required to register as an "investment company" under the Investment Company
Act; provided, however, that in each case, such action shall not adversely
affect in any material respect the interests of the holders of the Trust
Securities. Any amendments of the Declaration pursuant to the foregoing shall
become effective when notice thereof is given to the holders of the Trust
Securities. The Declaration may be amended by the Issuer Trustees and the
Company (x) with the consent of holders of Trust Preferred Securities (or Normal
Units) representing a majority (based upon Liquidation Amount) of the
outstanding Trust Preferred Securities, (y) upon receipt by the Property Trustee
of an opinion of counsel to the effect that such amendment or the exercise of
any power granted to the Issuer Trustees in accordance with such amendment will
not cause the Trust to be classified as an association taxable as a corporation
or affect the Trust's status as a grantor trust for United States federal income
tax purposes or the Trust's exemption from status as an "investment company"
under the Investment Company Act, and (z) upon receipt by the Property Trustee
and/or Delaware Trustee of Officer's Certificates of Opinions and Consents that
such amendment is permitted by and conforms to the Declaration, provided that,
without the consent of each holder of Trust Securities, the Declaration may not
be amended to (i) change the amount or timing of any Distribution or other
payment on the Trust Securities (including payment of the Put Price) or
otherwise adversely affect the amount of any Distribution or other payment
(including payment of the Put Price) required to be made in respect of the Trust
Securities as of a specified date or (ii) restrict the right of a holder of
Trust Securities to institute suit for the enforcement of any such payment on or
after such date. So long as any Junior Subordinated Debentures are held by the
Property Trustee, the Issuer Trustees shall not (a) direct the time, method and
place of conducting any proceeding for any remedy available to the Debenture
Trustee, or executing any trust or power conferred on the Property Trustee with
respect to the Junior Subordinated Debentures, (b) waive certain past defaults
under the Indenture, (c) exercise any right to rescind or annul a declaration of
acceleration of the maturity of the principal of the Junior Subordinated
Debentures or (d) consent to any amendment, modification or termination of the
Indenture or the Junior Subordinated Debentures, where such consent shall be
required, without, in each case, obtaining the prior approval of the holders of
Trust Preferred Securities (or Normal Units) representing a majority in
Liquidation Amount of all outstanding Trust Preferred Securities; provided,
however, that where a consent under the Indenture would require the consent of
each holder of Junior Subordinated Debentures affected thereby, no such consent
shall be given by the Property Trustee without the prior approval of each holder
of the Trust Preferred Securities (or Normal Units). The Issuer Trustees shall
not revoke any action previously authorized or approved by a vote of the holders
of the Trust Preferred Securities (or Normal Units) except by subsequent vote of
such holders. The Property Trustee shall notify each holder of Trust Securities
(or Normal Units) of any notice of default with respect to the Junior
Subordinated Debentures. In addition to obtaining the foregoing approvals of
such holders, prior to taking any of the foregoing actions, the Issuer Trustees
shall obtain an opinion of counsel experienced in such matters to the effect
that the Trust will not be classified as an association taxable as a corporation
or as other than a grantor trust for United States federal income tax purposes
on account of such action.
Any required approval of holders of Trust Preferred Securities (or Normal
Units) may be given at a meeting of such holders convened for such purpose or
pursuant to
S-54
<PAGE> 57
written consent. The Property Trustee will cause a notice of any meeting at
which holders of Trust Preferred Securities (or Normal Units) are entitled to
vote, or of any matter upon which action by written consent of such holders is
to be taken, to be given to each holder of record of Trust Preferred Securities
(or Normal Units) in the manner set forth in the Declaration.
No vote or consent of the holders of Trust Preferred Securities (or Normal
Units) will be required for the Trust to redeem and cancel the Trust Preferred
Securities in accordance with the Declaration.
Notwithstanding that holders of the Trust Preferred Securities (or Normal
Units) are entitled to vote or consent under any of the circumstances described
above, any of the Trust Preferred Securities (or Normal Units) that are owned by
the Company or any affiliate of the Company shall, for purposes of such vote or
consent, be treated as if they were not outstanding.
FORM AND BOOK-ENTRY PROCEDURES
As long as the Trust Preferred Securities constitute Pledged Securities,
the Trust Preferred Securities will be represented by a single certificate and
held for the benefit of the holders of the Normal Units. If the Trust Preferred
Securities cease to constitute Pledged Securities, the Trust Preferred
Securities may be represented by one or more Trust Preferred Securities in
registered, global form registered in the name of the Depositary or its nominee.
The depositary arrangements for the Trust Preferred Securities are expected to
be substantially similar to those in effect for the Units. For a description of
the Depositary and the terms of the depositary arrangements, see "--Book-Entry
System."
PAYMENT AND PAYING AGENT
If the Trust Preferred Securities cease to constitute Pledged Securities,
payments in respect of the Trust Preferred Securities held in global form shall
be made to the Depositary, which shall credit the relevant accounts at the
Depositary on the applicable Distribution Dates or in respect of the Trust
Preferred Securities that are not held by the Depositary, such payments shall be
made by check mailed to the address of the holder entitled thereto as such
address shall appear on the register. The paying agent (the "PAYING AGENT")
shall initially be the Property Trustee and any additional paying agent chosen
by the Property Trustee and acceptable to the Company. The Paying Agent shall be
permitted to resign as Paying Agent upon 30 days' written notice to the Property
Trustee (if not the Paying Agent) and the Administrators. In the event that the
Property Trustee shall no longer be the Paying Agent, the Administrators shall
appoint a successor to act as Paying Agent.
REGISTRAR AND TRANSFER AGENT
The Property Trustee will initially act as registrar and transfer agent for
the Trust Preferred Securities.
Registration of transfers of the Trust Preferred Securities will be
effected without charge by or on behalf of the Trust but upon payment of any tax
or other governmental charges that may be imposed in connection with any
transfer or exchange. The Trust will not be required to register or cause to be
registered the transfer of any Trust Preferred Securities after they have been
called for redemption.
S-55
<PAGE> 58
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, other than during the occurrence and continuance of
an Event of Default, undertakes to perform only such duties as are specifically
set forth in the Declaration and, after such Event of Default, must exercise the
same degree of care and skill as a prudent person would exercise or use in the
conduct of his or her affairs. Subject to this provision, the Property Trustee
is under no obligation to exercise any of the powers vested in it by the
Declaration at the request of any holder of Trust Securities unless it is
offered reasonable indemnity against the costs, expenses and liabilities that
might be incurred thereby. The Property Trustee is not required to expend or
risk its own funds or otherwise incur personal financial liability in the
performance of its duties if repayment or adequate indemnity is not reasonably
assured to the Property Trustee.
MISCELLANEOUS
The Administrators are authorized and directed to conduct the affairs of
and to operate the Trust in such a way that the Trust will not be deemed to be
an "investment company" required to be registered under the Investment Company
Act or classified as an association taxable as a corporation or as other than a
grantor trust for United States federal income tax purposes and so that the
Junior Subordinated Debentures will be treated as indebtedness of the Company
for United States federal income tax purposes. In this connection, the Company
and the Administrators are authorized to take any action, not inconsistent with
applicable law, the certificate of trust of the Trust or the Declaration, that
the Company and the Administrators determine in their discretion to be necessary
or desirable for such purposes, as long as such action does not materially
adversely affect the interests of the holders of the Trust Securities.
Holders of the Trust Securities have no preemptive or similar rights.
The Trust may not borrow money, issue debt, execute mortgages or pledge any
of its assets.
DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES
GENERAL
The Junior Subordinated Debentures are to be issued under the Indenture.
The Bank of New York will initially act as Trustee under the Indenture. The
Indenture will be qualified under the Trust Indenture Act.
The Junior Subordinated Debentures will be unsecured and subordinate and
rank junior in right of payment to the extent and in the manner set forth in the
Indenture to all Senior Indebtedness of the Company.
The Junior Subordinated Debentures will mature on the Maturity Date of July
1, 2004. The Junior Subordinated Debentures will not be redeemable at the option
of the Company prior to the Trust Preferred Securities and Junior Subordinated
Debenture Maturity Date.
S-56
<PAGE> 59
INTEREST
Interest on the Junior Subordinated Debentures will accrue from the first
date of issuance of the Junior Subordinated Debentures at an initial rate of
% per year (the "DEBENTURE RATE") and will be payable quarterly in arrears
on each Quarterly Payment Date (each, an "INTEREST PAYMENT DATE"), subject to
the deferral provisions described below. Interest will be payable to the holders
of the Junior Subordinated Debentures on the relevant record dates, which will
be one Business Day before the relevant Interest Payment Date. The amount of
interest payable for any period will be computed on the basis of a 360-day year
consisting of twelve 30-day months. If any date on which interest is payable on
the Junior Subordinated Debentures is not a Business Day, then payment of the
interest payable on such date will be on the next Business Day (and if payment
is made on the next Business Day without any interest or other payment as a
result of such delay), except that if such Business Day is in the next
succeeding calendar year, the payment will be made on the prior Business Day, in
each case with the same force and effect as if made on the date such payment was
originally payable. The term "interest", as used in this Description of the
Junior Subordinated Debentures, includes any Additional Sums payable on the
Junior Subordinated Debentures.
MARKET RATE RESET
By 9:30 a.m., New York City time, on the Call Option Expiration Date, the
Rate Reset Agent will reset the interest rate to select a rate equal to the rate
that it determines is sufficient to cause the then current aggregate market
value of such Trust Preferred Securities (or, if the Trust Preferred Securities
are no longer outstanding, such Junior Subordinated Debentures) to be
approximately equal to 100.75% of the Cash Equivalent of the Aggregate Call
Option Exercise Consideration; provided, that the Company may limit such rate to
the Maximum Trust Preferred Securities and Debenture Rate, and provided, further
that such rate shall in no event exceed the maximum rate permitted by applicable
law. If there is an adjustment to the Trust Preferred Securities and Debenture
Rate, the Rate Reset Agent will notify the Company and the Call Option Holder of
such new rate and the Trust Preferred Securities and Debenture Rate will then
become such adjusted rate.
"CASH EQUIVALENT OF THE AGGREGATE CALL OPTION EXERCISE CONSIDERATION" means
the cash value on the Call Option Expiration Date of the Aggregate Call Option
Exercise Consideration, assuming for this purpose, even if not true, that the
Call Options are exercised on the Call Option Expiration Date, and further
assuming that (1) the Treasury Securities included in the Aggregate Call Option
Exercise Consideration are highly liquid Treasury Securities maturing on or
within 35 days prior to the Stock Purchase Date (as designated in good faith by
the Call Option Holder in a notice delivered to the Rate Reset Agent by 8:30
a.m., New York City time, on the Call Option Expiration Date or, if the Call
Option Holder fails to so designate such Treasury Securities, as designated in
good faith by the Rate Reset Agent, in either case in a manner intended to
minimize the Cash Equivalent of the Aggregate Call Option Exercise
Consideration) and (2) such Treasury Securities are valued based on the ask-side
price of the Treasury Securities at 9:00 a.m., New York City time, on the Call
Option Expiration Date (as determined on a same day settlement basis by a
reasonable and customary means selected in good faith by the Rate Reset Agent
and notified to the Call Option Holder prior thereto) plus accrued interest to
such date.
S-57
<PAGE> 60
"MAXIMUM TRUST PREFERRED SECURITIES AND DEBENTURE RATE" means (1) the yield
to maturity (calculated in accordance with standard market practice)
corresponding to the bid-side price at 9:00 a.m., New York City time, on the
Call Option Expiration Date (as determined by a reasonable and customary means
selected in good faith by the Rate Reset Agent and notified to the Call Option
Holder prior thereto) of highly liquid Treasury Securities maturing on or around
the Trust Preferred Securities Redemption Date and Junior Subordinated Debenture
Maturity Date as selected in good faith by the Rate Reset Agent plus (2) 500
basis points (5.00%).
OPTION TO EXTEND INTEREST PAYMENT DATE
So long as no Event of Default has occurred and is continuing, the Company
will have the right under the Indenture at any time during the term of the
Junior Subordinated Debentures to defer the payment of interest at any time or
from time to time for a period not extending beyond the Trust Preferred
Securities Redemption Date and Junior Subordinated Debentures Maturity Date
(each such period of deferral, an "Extension Period"). At the end of an
Extension Period, the Company must pay all interest then accrued and unpaid
(together with accrued interest at the Deferral Rate compounded on each
succeeding Interest Payment Date). During an Extension Period, (i) interest will
continue to accrue and (ii) holders of Trust Preferred Securities (including
holders of Normal Units of which Trust Preferred Securities are a part) or, if
the Junior Subordinated Debentures have been distributed to the holders of the
Trust Preferred Securities, holders of Junior Subordinated Debentures will be
required to accrue interest income for United States federal income tax purposes
prior to the receipt of cash attributable to such income. See "Certain Federal
Income Tax Consequences--Trust Preferred Securities--Interest Income and
Original Issue Discount."
During any Extension Period, the Company may not take any of the prohibited
actions described in the first paragraph under "--Certain Covenants of the
Company."
Prior to the expiration of any Extension Period, the Company may further
extend the Extension Period, provided that the extension does not cause the
Extension Period to extend beyond the Maturity Date. Upon the termination of any
Extension Period and the payment of all amounts then due on any Interest Payment
Date, the Company may elect to begin a new Extension Period, subject to the
above requirements. No interest will be due and payable during an Extension
Period. The Company must give the Trustee written notice of its election of any
Extension Period (or its further extension) at least five Business Days prior to
the earlier of (1) the date the Distributions on the Trust Securities would have
been payable except for the election to begin or extend the Extension Period,
(2) the date the Trustees are required to give notice to any securities exchange
or to holders of Trust Preferred Securities of the record date or the date the
interest is payable and (3) such record date. The Debenture Trustee must give
notice of the Company's election to begin or extend a new Extension Period to
the holders of the Trust Preferred Securities. There is no limitation on the
number of times that the Company may elect to begin an Extension Period.
ADDITIONAL SUMS
If the Trust is required to pay any additional taxes, duties or other
governmental charges, the Company will pay as additional amounts on the Trust
Preferred Securities the Additional Sums.
S-58
<PAGE> 61
"ADDITIONAL SUMS" means such additional amounts as may be necessary in
order that the amount of Distributions then due and payable by the Trust on the
outstanding Trust Securities shall not be reduced as a result of any additional
taxes, duties or other governmental charges to which the Trust has become
subject.
In lieu of paying Additional Sums that have not yet accrued on the Trust
Preferred Securities, the Company may dissolve the Trust and cause the Junior
Subordinated Debentures to be distributed to the holders of the Trust Preferred
Securities in liquidation of the Trust. See "--Description of the Trust
Preferred Securities--Liquidation of the Trust and Distribution of Junior
Subordinated Debentures."
JUNIOR SUBORDINATED DEBENTURE PUT OPTIONS
Each holder of Junior Subordinated Debentures will have the right (a
"JUNIOR SUBORDINATED DEBENTURE PUT OPTION") to require the Company to repurchase
its Junior Subordinated Debentures, on the Stock Purchase Date or, in the event
of a Cash Merger before the Stock Purchase Date, on or after the date of the
Cash Merger, for a purchase price (the "PUT PRICE") equal to the Principal
Amount plus unpaid interest accrued to but not including the Stock Purchase
Date, but only if the cash received on the exercise of such option is used to
settle the related Purchase Contracts.
Each holder of Junior Subordinated Debentures or the Put Agent on behalf of
the holder may exercise the Junior Subordinated Debenture Put Option related to
its securities by presenting and surrendering the certificate evidencing such
securities, at the offices of the Debenture Trustee, with the form of "Notice of
Exercise of Put Right" on the reverse side of the certificate completed and
executed as indicated, by 10:00 a.m., New York City time, on the Stock Purchase
Date.
EVENTS OF DEFAULT
In addition to the Events of Default specified under "Subordinated
Debentures-Events of Default" in the accompanying base prospectus, any failure
to pay the Put Price when due upon exercise of a Junior Subordinated Debenture
Put Option will also constitute an Event of Default.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF TRUST PREFERRED SECURITIES
If a Junior Subordinated Debenture Event of Default shall have occurred and
be continuing and shall be attributable to the failure of the Company to pay
interest or premium, if any, on or principal of the Junior Subordinated
Debentures on the due date (after giving effect to any Extension Period), a
holder of record of Trust Preferred Securities (or, for so long as Trust
Preferred Securities underlie Normal Units, a holder of record of Normal Units)
may institute a Direct Action. See "--Description of the Trust Preferred
Securities--Events of Default; Notice." The Company may not amend the Indenture
to remove the foregoing right to bring a Direct Action without the prior written
consent of the holders of all of the Trust Preferred Securities (or, for so long
as Trust Preferred Securities form a part of Normal Units, the holders of all
the Normal Units).
The holders of the Trust Preferred Securities will not be able to exercise
directly any remedies, other than those set forth in the preceding paragraph,
available to the holders of the Junior Subordinated Debentures.
S-59
<PAGE> 62
FORM AND BOOK-ENTRY PROCEDURES
If the Junior Subordinated Debentures do not constitute Pledged Securities
with respect to the Units and the Trust has been dissolved in accordance with
the terms set forth under "Description of the Trust Preferred
Securities-Liquidation of the Trust and Distribution of Junior Subordinated
Debentures," the Junior Subordinated Debentures may be represented by one or
more global certificates registered in the name of the Depositary or its
nominee. The depositary arrangements for such Junior Subordinated Debentures are
expected to be substantially similar to those for the Units. For a description
of the Depositary and the terms of the depositary arrangements, see
"--Book-Entry System."
GOVERNING LAW
The Indenture and the Junior Subordinated Debentures will be governed by
and construed in accordance with the laws of the State of Michigan.
INFORMATION CONCERNING THE TRUSTEE
Except as described above, the Trustee is not required to exercise any of
the powers vested in it by the Indenture at the request of any holder of Junior
Subordinated Debentures, unless the holder offers reasonable indemnity against
any costs, expenses and liabilities. The Trustee is not required to expend or
risk its own funds or otherwise incur personal financial liability in the
performance of its duties if the Trustee reasonably believes that repayment or
adequate indemnity is not reasonably assured to it.
The Trustee is one of a number of banks with which the Company and its
subsidiaries maintain ordinary banking and trust relationships. The Trustee
currently has commitments under two credit facilities with the Company for a
maximum aggregate amount of $170 million.
DESCRIPTION OF THE GUARANTEE
GENERAL
The Guarantee will be executed and delivered by the Company concurrently
with the issuance by the Trust of the Trust Preferred Securities for the benefit
of the holders from time to time of the Trust Preferred Securities. The Bank of
New York will initially act as Guarantee Trustee under the Guarantee. The
Guarantee will be qualified under the Trust Indenture Act. The Guarantee Trustee
will hold the Guarantee for the benefit of the holders of the Trust Preferred
Securities.
The Company will irrevocably and unconditionally agree to pay in full on a
subordinated basis, to the extent set forth herein, the Guarantee Payments (as
defined herein) to the holders of the Trust Preferred Securities, as and when
due, regardless of any defense, right of set-off or counterclaim that the Trust
may have or assert other than the defense of payment. The following payments
with respect to the Trust Preferred Securities, to the extent not paid by or on
behalf of the Trust (the "GUARANTEE PAYMENTS"), will be subject to the
Guarantee: (a) any accumulated and unpaid Distributions required to be paid on
Trust Preferred Securities, to the extent the Trust has funds on hand legally
S-60
<PAGE> 63
available therefor and (b) the Final Redemption Price with respect to the Trust
Preferred Securities, to the extent that the Trust has funds on hand legally
available therefor. The Company's obligation to make a Guarantee Payment may be
satisfied by direct payment of the required amounts by the Company to the
holders of the Trust Preferred Securities or by causing the Trust to pay such
amounts to such holders.
The Guarantee will be unsecured and subordinate and rank junior in right of
payment to the extent and in the manner provided therein to all Senior
Indebtedness. See "Risk Factors--Subordination of Company Obligations" "Risk
Factors--Leverage, Debt Service and Ability to Pay Dividends" and "--Status"
below.
The Guarantee, when taken together with the Company's obligations under the
Declaration, the Junior Subordinated Debentures and the Indenture, including its
obligations to pay costs, expenses, debt, taxes and other liabilities of the
Trust (other than with respect to the Trust Securities), will provide in the
aggregate, a full, irrevocable and unconditional guarantee of all of the Trust's
obligations of payments due under the Trust Preferred Securities. See
"--Relationship Among the Trust Preferred Securities, the Junior Subordinated
Debentures and the Guarantee."
The Company also has agreed separately to irrevocably and unconditionally
guarantee the obligations of the Trust with respect to Trust Common Securities
issued by the Trust to the same extent as the Guarantee, except that upon an
Event of Default under the Declaration, holders of Trust Preferred Securities
shall have priority over holders of Trust Common Securities with respect to
Distributions and payments on liquidation, redemption or otherwise.
STATUS
The Guarantee will be unsecured and subordinate and rank junior in right of
payment to all Senior Indebtedness to the extent and in the manner provided
therein, which is similar to extent and manner of subordination of the Junior
Subordinated Debentures as described under "--Description of the Junior
Subordinated Debentures--Subordination" above.
Because the Company is a holding company, the Guarantee is effectively
subordinated to all existing and future liabilities of the Company's
subsidiaries, except to the extent the Company is a creditor of the subsidiary
recognized as such. See "Risk Factors--Structural Subordination."
The Guarantee will constitute a guarantee of payment and not of collection
(i.e., the guaranteed party may institute a legal proceeding directly against
the Company to enforce its rights under the Guarantee without first instituting
a legal proceeding against any other person or entity). The Guarantee will be
held for the benefit of the holders of the Trust Preferred Securities. The
Guarantee will not be discharged except by payment of the Guarantee Payments in
full to the extent not paid by the Trust or upon distribution to the holders of
the Trust Preferred Securities of the Junior Subordinated Debentures. The
Guarantee does not place a limitation on the amount of Senior Indebtedness that
may be incurred by the Company. The Company expects from time to time to incur
indebtedness constituting Senior Indebtedness.
S-61
<PAGE> 64
EVENTS OF DEFAULT
An event of default under the Guarantee will occur upon the failure of the
Company to perform any of its payment or other obligations thereunder. The
holders of a majority in Liquidation Amount of the Trust Preferred Securities
will have the right to (a) waive any past event of default under the Guarantee
and its consequences, whereby such event of default shall cease to exist and any
event of default under the Guarantee arising therefrom shall be deemed to have
been cured for every purpose of the Guarantee and (b) direct the time, method
and place of conducting any proceeding for any remedy available to the Guarantee
Trustee in respect of the Guarantee or to direct the exercise of any trust or
power conferred upon the Guarantee Trustee under the Guarantee.
Any holder of the Trust Preferred Securities may institute a legal
proceeding directly against the Company to enforce its rights under the
Guarantee without first instituting a legal proceeding against the Trust, the
Guarantee Trustee or any other person or entity.
The Company, as guarantor, will be required to file annually with the
Guarantee Trustee a certificate as to whether or not the Company is in
compliance with all the conditions and covenants applicable to it under the
Guarantee.
CERTAIN COVENANTS OF THE COMPANY
In the Guarantee, the Company will covenant that, so long as any Trust
Preferred Securities remain outstanding, if there shall have occurred any event
that is or would constitute an event of default under the Guarantee, that is
continuing, or the Declaration, then the Company will not take any of the
prohibited actions described under "--Description of the Junior Subordinated
Debentures--Certain Covenants of the Company."
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes that do not materially adversely affect
the rights of holders of the Trust Preferred Securities in any material respect
(in which case no approval will be required), the Guarantee may not be amended
without the prior approval of the holders of a majority in Liquidation Amount of
such outstanding Trust Preferred Securities. The manner of obtaining any such
approval will be as set forth under "--Description of the Trust Preferred
Securities--Voting Rights; Amendment of the Declaration." All guarantees and
agreements contained in the Guarantee Agreement shall bind the successors,
assigns, receivers, trustees and representatives of the Company and shall inure
to the benefit of the holders of the Trust Preferred Securities then
outstanding.
TERMINATION
The Guarantee will terminate and be of no further force and effect upon
full payment of the Final Redemption Price of the Trust Preferred Securities,
upon full payment of the amounts payable upon liquidation of the Trust and
distribution of the Junior Subordinated Debentures to the holders of the Trust
Preferred Securities or at such other time when there are no longer any Trust
Preferred Securities outstanding. The Guarantee will continue to be effective or
will be reinstated, as the case may be, if at any time any holder of the Trust
Preferred Securities must restore payment of any sums paid under the Trust
Preferred Securities or the Guarantee.
S-62
<PAGE> 65
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee may be appointed or removed by the Guarantor without
cause at any time, except during an event of default under the Guarantee. The
Guarantee Trustee is under no obligation to exercise any of the powers vested in
it by the Guarantee at the request of any holder of Trust Preferred Securities,
unless offered reasonable indemnity against the costs, expenses and liabilities
which might be incurred thereby. The Guarantee Trustee is not required to expend
or risk its own funds or otherwise incur personal financial liability in the
performance of its duties if it reasonably believes that repayment or adequate
indemnity is not reasonably assured to it.
The Company or its affiliates maintain certain business relationships with
the Guarantee Trustee and its affiliates in the ordinary course of business.
GOVERNING LAW
The Guarantee will be governed by and construed in accordance with the laws
of the State of Michigan.
RELATIONSHIP AMONG THE TRUST PREFERRED SECURITIES,
THE JUNIOR SUBORDINATED DEBENTURES AND THE GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
Payments of Distributions and other amounts due on the Trust Preferred
Securities (to the extent the Trust has funds on hand legally available for the
payment of such Distributions) will be irrevocably guaranteed by the Company as
and to the extent set forth under "Description of the Guarantee." If and to the
extent that the Company does not make the required payments on the Junior
Subordinated Debentures, the Trust will not have sufficient funds to make the
related payments, including Distributions, on the Trust Preferred Securities.
The Guarantee will not cover any such payment unless and until the Trust has
sufficient funds for the payment therefor. The Guarantee, when taken together
with the Company's obligations under the Junior Subordinated Debentures, the
Indenture and the Declaration, including its obligations to pay costs, expenses,
debts, taxes and other liabilities of the Trust (other than with respect to the
Trust Securities), will provide, in the aggregate, a full, irrevocable and
unconditional guarantee of payments of Distributions and other amounts due on
the Trust Preferred Securities. The obligations of the Company under the
Guarantee will be unsecured and subordinate and rank junior in right of payment
to all Senior Indebtedness.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due on the
Junior Subordinated Debentures, such payments will be sufficient to cover
Distributions and other payments due on the Trust Preferred Securities,
primarily because: (a) the aggregate principal amount of the Junior Subordinated
Debentures will be equal to the aggregate Liquidation Amount of the Trust
Preferred Securities and Trust Common Securities; (b) the interest rate and
interest and other payment dates on the Junior Subordinated Debentures will
match the distribution rate and Distribution and other payment dates for the
Trust Securities; (c) the Company shall pay for all and any costs, expenses,
taxes and
S-63
<PAGE> 66
other liabilities of the Trust except the Trust's obligations to holders of
Trust Securities under such Trust Securities; and (d) the Declaration will
provide that the Trust is not authorized to engage in any activity that is not
consistent with the limited purposes thereof.
ENFORCEMENT OF RIGHTS OF HOLDERS OF TRUST PREFERRED SECURITIES
If the Company fails to make interest or other payments on the Junior
Subordinated Debentures when due (after giving effect to any Extension Period),
the Declaration provides a mechanism whereby the holders of the Trust Preferred
Securities (or, for so long as Trust Preferred Securities underlie Normal Units,
the holders of the Normal Units) may direct the Property Trustee to enforce its
rights under the Junior Subordinated Debentures. If the Property Trustee fails
to enforce its rights under the Junior Subordinated Debentures after a majority
in Liquidation Amount of Trust Preferred Securities have so directed the
Property Trustee, a holder of record of the Trust Preferred Securities (or, for
so long as Trust Preferred Securities underlie Normal Units, a holder of record
of Normal Units) may, to the fullest extent permitted by law, institute a legal
proceeding against the Company to enforce the Property Trustee's rights under
the Junior Subordinated Debentures without first instituting any legal
proceedings against the Property Trustee or any other person or entity.
Notwithstanding the foregoing, if an Event of Default has occurred and is
continuing and such event is attributable to the failure of the Company to pay
principal or interest on the Junior Subordinated Debentures on the respective
dates such principal or interest is payable, after giving effect to any
Extension Period, then a holder of record of Trust Preferred Securities (or, for
so long as Trust Preferred Securities form a part of Normal Units, a holder of
record of Normal Units) may institute a Direct Action for payment to such holder
of the portion of such principal or interest attributable to Junior Subordinated
Debentures having a principal amount equal to the aggregate Liquidation Amount
of the Trust Preferred Securities held by such holder (or underlying such
holder's Normal Units). In connection with such Direct Action, the Company will
be subrogated to the rights of such holder of Trust Preferred Securities (or
Normal Units) under the Declaration to the extent of any payment made by the
Company to such holder of Trust Preferred Securities in such Direct Action;
provided, however, that no such subrogation right may be exercised so long as an
Event of Default has occurred and is continuing.
In addition, a holder of Trust Preferred Securities may institute a legal
proceeding directly against the Company to enforce its rights under the
Guarantee without first instituting a legal proceeding against the Guarantee
Trustee, the Trust or any other person or entity.
A default or event of default under any Senior Indebtedness would not
constitute a default or Event of Default under the Declaration. However, in the
event of payment defaults under, or acceleration of, Senior Indebtedness, the
subordination provisions of the Indenture will provide that no payments may be
made in respect of the Junior Subordinated Debentures until such Senior
Indebtedness has been paid in full or any payment default thereunder has been
cured or waived. Failure to make required payments on Junior Subordinated
Debentures would constitute an Event of Default under the Declaration.
S-64
<PAGE> 67
LIMITED PURPOSE OF THE TRUST
The Trust Preferred Securities will represent preferred undivided
beneficial ownership interests in the assets of the Trust, and the Trust exists
for the sole purpose of issuing and selling the Trust Securities, using the
proceeds from the sale of the Trust Securities to acquire the Junior
Subordinated Debentures and engaging in only those other activities necessary or
incidental thereto.
RIGHTS UPON DISSOLUTION
Upon any voluntary or involuntary liquidation or bankruptcy of the Company,
the Property Trustee, as holder of the Junior Subordinated Debentures, would be
a subordinated creditor of the Company, subordinated in right of payment to all
Senior Indebtedness as set forth in the Indenture, but entitled to receive
payment in full of principal (and premium, if any) and interest, before any
stockholders of the Company receive payments or distributions. Since the Company
will be the guarantor under the Guarantee and will agree to pay for all costs,
expenses and liabilities of the Trust (other than the Trust's obligations to the
holders of its Trust Securities), the positions of a holder of Trust Preferred
Securities and a holder of Junior Subordinated Debentures relative to other
creditors and to stockholders of the Company in the event of liquidation or
bankruptcy of the Company are expected to be substantially the same.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain of the material United States federal
income tax consequences of the purchase, ownership and disposition of the Units,
Trust Preferred Securities and Common Stock to investors generally. Unless
otherwise stated, this summary deals only with Units, Trust Preferred Securities
and Common Stock held as capital assets (generally, assets held for investment)
by U.S. Holders who purchase Units upon original issuance. The tax treatment of
a U.S. Holder may vary depending on such U.S. Holder's particular situation.
This summary does not address all of the tax consequences that may be relevant
to holders who may be subject to special tax treatment such as, for example,
insurance companies, broker dealers, tax-exempt organization, or foreign
taxpayers. In addition this summary does not address any aspects of state,
local, or foreign tax laws. This summary is based on the United States federal
income tax law in effect as of the date hereof, which is subject to change,
possibly on a retroactive basis. Each investor is urged to consult its tax
advisor as to the particular tax consequences of purchasing, owning, and
disposing of the Units or Trust Preferred Securities, including the application
and effect of United States, federal, state, local, foreign and other tax laws.
No statutory, administrative or judicial authority directly addresses the
treatment of Units or instruments similar to Units for United States federal
income tax purposes. As a result, no assurance can be given that the Internal
Revenue Service (the "IRS") will agree with the tax consequences described
herein.
For purposes of this summary, the term "U.S. HOLDER" means (i) a person who
is a citizen or resident of the United States, (ii) a corporation or partnership
created or organized in or under the laws of the United States or any state
thereof or the District of Columbia, (iii) an estate the income of which is
subject to United States federal income taxation, regardless of its source, or
(iv) a trust if a court within the United States is able
S-65
<PAGE> 68
to exercise primary supervision over the administration of such trust and one or
more United States persons have the authority to control all substantial
decisions of such trust.
This discussion assumes that, in connection with the formation of the
Units, the Underwriters will be acting on behalf of the holders and will (a)
sell the Call Options to the Call Option Holder and apply the proceeds from such
sale (the "CALL PREMIUM") together with the amount paid directly by the holders
to the Underwriters (the "PURCHASE PRICE") to the purchase of the Units and (b)
enter in the Purchase Contracts with the Company, and that holders will assume
the rights and obligations arising from these actions undertaken on their
behalf.
NORMAL UNITS
Allocation of Purchase Price. A U.S. Holder's acquisition of Normal Units
will be treated as an acquisition of a unit consisting of two components--the
Trust Preferred Security and the Purchase Contract constituting such Normal
Unit. The amount paid by a U.S. Holder for a Normal Unit (which will equal the
sum of the Purchase Price plus the Call Premium treated as received by such U.S.
Holder) will be allocated between the two components in proportion to their
respective fair market values at the time of purchase. Such allocation will
establish the U.S. Holder's initial tax basis in the Trust Preferred Security
and the Purchase Contract. The Company will report the fair market value of each
Trust Preferred Security so that the entire amount paid for a Normal Unit will
be allocable to the Trust Preferred Security and no amount will be allocable to
the Purchase Contract. This position will be binding upon each U.S. Holder (but
not on the IRS) unless such U.S. Holder explicitly discloses a contrary position
on a statement attached to such U.S. Holder's timely filed United Sates federal
income tax return for the taxable year in which a Normal Unit is acquired. The
remainder of this discussion assumes that this allocation will be respected for
United States federal income tax purposes. A different allocation could affect
the timing and character of income to a U.S. Holder.
[The following paragraph assumes that the Purchase Price approximates par
plus the Call Premium]
A U.S. Holder's tax basis in the Trust Preferred Securities will exceed the
amount payable at maturity with respect to the Trust Preferred Securities by the
amount of the Call Premium. Such excess will be treated as amortizable bond
premium. See "Trust Preferred Securities--Interest Income and Original Issue
Discount."
Ownership of Trust Preferred Securities. A U.S. Holder will be treated as
owning the Trust Preferred Securities constituting a part of the Normal Units.
The Company and, by acquiring Normal Units, each U.S. Holder agree to treat such
U.S. Holder as the owner, for United States federal, state and local income and
franchise tax purposes, of the Trust Preferred Securities constituting a part of
the Normal Units beneficially owned by such U.S. Holder. Based upon such
agreement, the Company intends to take the position, and the remainder of this
summary assumes, that U.S. Holders of Normal Units will be treated as the owners
of the Trust Preferred Securities constituting a part of such Normal Units for
United States federal, state and local income and franchise tax purposes. The
United States federal income tax consequences of owning the Trust Preferred
Securities are discussed below. See "Trust Preferred Securities."
Sales, Exchanges or Other Taxable Dispositions of Units. Upon a sale,
exchange or other taxable disposition (collectively, a "DISPOSITION") of Units,
a U.S. Holder will be
S-66
<PAGE> 69
treated as having sold, exchanged or disposed of the Purchase Contract and the
Trust Preferred Securities (subject to the Call Option) or, in the case of
Stripped Units, the Treasury Securities, that constitute such Units. A U.S.
Holder should be treated as having received total consideration ("TOTAL
CONSIDERATION") equal to the sum of (i) the actual consideration received by the
U.S. Holder on the disposition (the "ACTUAL CONSIDERATION") and (ii) an
additional amount equal to the value of the Call Option on the date of the
disposition, which should be treated as received as additional consideration and
paid to the purchaser to be released from such U.S. Holder's obligation under
the Call Option (the "ADDITIONAL CONSIDERATION"). The Total Consideration will
be allocated between the Purchase Contract and the Trust Preferred Securities
or, in the case of Stripped Units, the Treasury Securities, based on their
relative fair market values on the date of such disposition. A U.S. Holder will
generally recognize gain or loss with respect to the Purchase Contract and the
Trust Preferred Securities or Treasury Securities, as the case may be, equal to
the difference between the amount of the Total Consideration allocated to such
Purchase Contract and the Trust Preferred Securities or Treasury Securities, as
the case may be, and such U.S. Holder's respective adjusted tax bases in such
Purchase Contract and the Trust Preferred Securities or Treasury Securities.
Gain or loss realized upon the disposition of a Unit will generally be
capital gain or loss, except to the extent that such U.S. Holder is treated as
receiving an amount with respect to accrued but unpaid interest on the Trust
Preferred Securities or Treasury Securities, which amount will be treated as
ordinary interest income, or to the extent such U.S. Holder is treated as
receiving an amount with respect to accrued Contract Payments or deferred
Contract Payments, which may be treated as ordinary income, in each case to the
extent not previously included income. Such capital gain or loss will generally
be long-term capital gain or loss if the U.S. Holder held such Units for more
than one year immediately prior to such disposition. Long-term capital gains of
individuals are eligible for reduced rates of taxation depending upon the
holding period of such capital assets. The deductibility of capital losses is
subject to limitations.
Upon a sale of Units, a U.S. Holder should also be treated as having paid
an amount equal to the Additional Consideration to the purchaser of the Units as
consideration for the purchaser's assumption of the Call Option. Such U.S.
Holder should recognize short-term capital gain or loss on the purchaser's
assumption of the Call Option equal to the difference between the Call Premium
received by such U.S. Holder and the Additional Consideration treated as paid to
the purchaser of the Units.
If the disposition of Units occurs when the Purchase Contract has negative
value, the U.S. Holder should be considered to have received additional
consideration for the Trust Preferred Securities, or Treasury Securities, as the
case may be, in an amount equal to such negative value and to have paid such
amount to be released from the U.S. Holder's obligation under the Purchase
Contract. U.S. Holders should consult their tax advisors regarding a disposition
of the Units at a time when the Purchase Contract has negative value.
In determining gain or loss, payments to a U.S. Holder of Contract Payments
or deferred Contract Payments that have not previously been included in the
income of such U.S. Holder should either reduce such U.S. Holders' adjusted tax
basis in the Purchase Contract or result in an increase in the amount realized
on the disposition of the Purchase Contract. Any Contract Payments or deferred
Contract Payments included in a U.S. Holder's income but not paid should
increase such U.S. Holder's adjusted tax basis in the Purchase Contract.
S-67
<PAGE> 70
TRUST PREFERRED SECURITIES
Classification of the Trust. In connection with the issuance of the Units,
Skadden Arps, Slate, Meagher & Flom LLP ("TAX COUNSEL"), will deliver an opinion
that, under current law and assuming compliance with the terms of the
Declaration, and based on certain facts and assumptions contained in such
opinion, the Trust will be classified as a grantor trust and not as an
association taxable as a corporation for United States federal income tax
purposes. As a result, each U.S. Holder of Trust Preferred Securities will be
treated as owning an undivided beneficial ownership interest in the Junior
Subordinated Debentures and, as further discussed below, each U.S. Holder of
Trust Preferred Securities will be required to include in its gross income its
pro rata share of the interest income that is paid or accrued on the Junior
Subordinated Debentures. See "--Interest Income and Original Issue Discount."
Classification of the Junior Subordinated Debentures. The Company intends
to take the position that the Junior Subordinated Debentures constitute
indebtedness for United States federal income tax purposes. The Company, the
Trust and, by acquiring Units, each U.S. Holder agree to treat the Junior
Subordinated Debentures as indebtedness of the Company for all United States tax
purposes.
Interest Income and Original Issue Discount. Under the applicable Treasury
regulations, the Junior Subordinated Debentures will not be considered to have
been issued with OID. Accordingly, except as set forth below, stated interest on
the Junior Subordinated Debentures will generally be included in income by a
U.S. Holder at the time such interest income is paid or accrued in accordance
with such U.S. Holder's regular method of tax accounting. If, however, the
Company exercises its right to defer payments of interest on the Junior
Subordinated Debentures, U.S. Holders will be required to accrue the stated
interest on the Junior Subordinated Debentures (as OID) on an economic accrual
basis regardless of the holder's method of accounting even though the Company
will not pay such interest during the deferral period, and even though some U.S.
Holders may use the cash method of tax accounting. Thereafter, the Junior
Subordinated Debentures will be subject to tax as OID instruments for as long as
they remain outstanding, which will require U.S. Holders to include accrued OID
in gross income in advance of the receipt of cash attributable to such accrued
OID. Under the OID economic accrual rules, a U.S. Holder would accrue an amount
of interest income each year that approximates the stated interest payments
called for under the terms of the Junior Subordinated Debentures, and actual
cash payments of interest on the Junior Subordinated Debentures would not be
reported separately as taxable income. Any amount of OID included in a U.S.
Holder's gross income will increase such U.S. Holder's adjusted tax basis in its
Trust Preferred Securities, and the amount of a distribution received by a U.S.
Holder with respect to such Trust Preferred Securities will reduce the adjusted
tax basis of such Trust Preferred Securities.
The Treasury regulations described above have not yet been addressed in any
rulings or other interpretations by the IRS, and it is possible that the IRS
could take a contrary position. If the IRS were to assert successfully that the
stated interest on the Junior Subordinated Debentures was OID regardless of
whether the Company exercises its right to defer payments of interest on such
Junior Subordinated Debentures, all U.S. Holders would be required to include
such stated interest in income on a daily economic accrual basis as described
above.
S-68
<PAGE> 71
Because a U.S. Holder's tax basis in the Trust Preferred Securities will
exceed the amount payable at maturity with respect to such Trust Preferred
Securities by the amount of the Call Premium, the Junior Subordinated Debentures
will be treated as having amortizable bond premium. If a U.S. Holder elects to
amortize such bond premium, the amount of such premium will be allocated on an
economic accrual basis among the interest payments on the Junior Subordinated
Debentures and the amount so allocated with be treated as a reduction to such
interest payments.
U.S. Holders that are corporations will not be entitled to a dividends
received deduction with respect to any income recognized with respect to the
Trust Preferred Securities.
Distribution of Junior Subordinated Debentures to U.S. Holders of Trust
Preferred Securities. A U.S. Holder will not be subject to tax upon a
distribution by the Trust of the Junior Subordinated Debentures upon
liquidation. In such event, a U.S. Holder would have an aggregate adjusted tax
basis in the Junior Subordinated Debentures received in the liquidation equal to
the aggregate adjusted tax basis such U.S. Holder had in its Trust Preferred
Securities surrendered therefor, and the holding period of such Junior
Subordinated Debentures would include the period during which such U.S. Holder
had held such Trust Preferred Securities. In addition, a U.S. Holder would
continue to include interest in respect of Junior Subordinated Debentures
received from the Trust in the manner described under "--Interest Income and
Original Issue Discount."
Sales, Exchanges or Other Taxable Dispositions of Trust Preferred
Securities. Gain or loss will be recognized by a U.S. Holder on a disposition of
a Trust Preferred Security (including a redemption for cash or the exercise of
the Call Option) in an amount equal to the difference between the amount
realized by the U.S. Holder on the disposition of the Trust Preferred Security
(except to the extent that such amount realized is characterized as a payment in
respect of accrued but unpaid interest on such U.S. Holder's allocable share of
the Junior Subordinated Debentures that such U.S. Holder has not previously
included in gross income, which amount will be subject to tax as ordinary
interest income) and the U.S. Holder's adjusted tax basis in such Trust
Preferred Security. Selling expenses incurred by a U.S. Holder will reduce the
amount of gain or increase the amount of loss recognized by such U.S. Holder
upon a disposition of a Trust Preferred Security. Gain or loss realized by a
U.S. Holder on a disposition of a Trust Preferred Security will generally be
capital gain or loss and will generally be long-term capital gain or loss if the
U.S. Holder held such Trust Preferred Security for more than one year
immediately prior to such disposition. Long-term capital gains of individuals
are eligible for reduced rates of taxation depending upon the holding period of
such capital assets. The deductibility of capital losses is subject to
limitations.
TREATMENT OF THE CALL OPTION AND TREASURY SECURITIES
Treatment of the Call Option. A U.S. Holder will not recognize income, gain
or loss upon the receipt of the Call Premium at the time the Call Premium is
received. If the Call Option expires or is otherwise terminated, a U.S. Holder
will recognize short-term capital gain equal to the Call Premium. If the Call
Option is exercised, each U.S. Holder will recognize gain or loss equal to the
difference between the amount realized from the exercise of the Call Option
(which will equal the sum of the amount of the Call Premium and the fair market
value of the U.S. Holder's allocable portion of the Aggregate Call Option
Exercise Consideration, determined as of the Call Settlement Date), over the
S-69
<PAGE> 72
U.S. Holder's adjusted tax basis in the Trust Preferred Securities. Such gain or
loss will be subject to tax in the manner described under "Trust Preferred
Securities--Sales, Exchanges and Other Taxable Dispositions of Trust Preferred
Securities."
Treatment of the Treasury Securities. A U.S. Holder's initial tax basis in
the Treasury Securities received as a result of the exercise of the Call Option
will equal the fair market value of such Treasury Security, determined as of the
Call Settlement Date. Except to the extent the Treasury Securities are
zero-coupon Treasury Securities ("STRIPPED TREASURY SECURITIES"), (a) interest
with respect to the Treasury Securities will be subject to tax as ordinary
interest income at the time accrued or received, in accordance with such U.S.
Holder's method of accounting for United States federal income tax purposes, (b)
if the U.S. Holder's tax basis in the Treasury Securities exceeds the amount
payable at maturity, such U.S. Holder may elect to amortize such excess on an
economic accrual basis over the remaining term as an offset to interest income
on the Treasury Securities and (c) any gain recognized by a U.S. Holder at
maturity will generally be treated as capital gain, unless the Treasury
Securities are considered to have more than a "de minimis" amount of market
discount (generally, less that 1/4 of 1% of the stated redemption price
multiplied by the number of complete years to maturity). If the Treasury
Securities have more than a "de minimis" amount of market discount, any gain
recognized at maturity will be treated as ordinary income to the extent of such
market discount.
A U.S. Holder will be required to treat a Stripped Treasury Security as a
bond that was originally issued on the date such Stripped Treasury Security was
received by such U.S. Holder and that has OID equal to the excess of the amount
payable on such Stripped Treasury Security over the U.S. Holder's initial tax
basis in such Stripped Treasury Security. A U.S. Holder will be required to
include such OID in income (other than OID on a short-term Stripped Treasury
Security, as defined below) on an economic accrual basis over the life of the
Stripped Treasury Security, regardless of such U.S. Holder's method of tax
accounting and in advance of the receipt of cash attributable to such OID.
Amounts of OID included in a U.S. Holder's gross income will increase such U.S.
Holder's adjusted tax basis in its interest in the Stripped Treasury Securities
(including any OID accrued on a short-term Stripped Treasury Security,
determined as described below).
Stripped Treasury Securities with a remaining term of one year or less (a
"short-term Stripped Treasury Securities") will generally be considered to have
"acquisition discount" equal to the difference between the principal amount of
the short-term Stripped Treasury Securities over the taxpayer's tax basis in the
short-term Stripped Treasury Securities. Accrual basis taxpayers will be
required to accrue acquisition discount in income on a straight-line basis
unless such an accrual basis taxpayer elects to accrue such acquisition discount
on a daily economic accrual basis. Cash basis taxpayers who have not elected to
accrue acquisition discount will recognize ordinary income upon maturity of the
short-term Stripped Treasury Security equal to the amount of acquisition
discount.
PURCHASE CONTRACTS
Contract Payments and Deferred Contract Payments. There is no direct
authority addressing the treatment, under current law, of the Contract Payments
and deferred Contract Payments, and such treatment is, therefore, unclear.
Contract Payments and deferred Contract Payments may constitute taxable income
to a U.S. Holder of Units when received or accrued, in accordance with the U.S.
Holder's regular method of tax accounting. To the extent the Company is required
to file information returns with respect
S-70
<PAGE> 73
to Contract Payments or deferred Contract Payments, it intends to report such
payments as taxable income to each U.S. Holder. U.S. Holders should consult
their tax advisors concerning the treatment of Contract Payments and deferred
Contract Payments, including the possibility that any Contract Payment or
deferred Contract Payment may be treated as a loan, purchase price adjustment,
rebate or payment analogous to an option premium, rather than being includible
in income on a current basis. The treatment of Contract Payments and deferred
Contract Payments could affect a U.S. Holder's adjusted tax basis in a Purchase
Contract or Common Stock received under a Purchase Contract or the amount
realized by a U.S. Holder upon the sale or disposition of a Unit or the
termination of a Purchase Contract. See "--Acquisition of Common Stock Under a
Purchase Contract," "Normal Units--Sales, Exchanges or Other Taxable
Dispositions of Units" and "--Termination of Purchase Contract."
Acquisition of Common Stock Under a Purchase Contract. A U.S. Holder of
Units will generally not recognize gain or loss on the purchase of Common Stock
under a Purchase Contract, except with respect to any cash paid in lieu of a
fractional share of Common Stock. Subject to the following discussion, a U.S.
Holder's aggregate initial tax basis in the Common Stock received under a
Purchase Contract should generally equal the purchase price paid for such Common
Stock plus such U.S. Holder's adjusted tax basis in the Purchase Contract (if
any), less the portion of such purchase price and adjusted tax basis allocable
to the fractional share. Payments of Contract Payments or deferred Contract
Payments that have been received in cash by a U.S. Holder but not included in
income by such U.S. Holder should reduce such U.S. Holder's adjusted tax basis
in the Purchase Contract or the Common Stock to be received thereunder. See
"--Contract Payments and Deferred Contract Payments." A U.S. Holder will
recognize capital gain or loss upon receipt of cash in lieu of a fractional
share of Common Stock equal to the difference between the amount of cash
received and the holder's adjusted basis in such fractional share. Such capital
gain or loss will be subject to tax in the manner described under "--Ownership
of Common Stock Acquired Under the Purchase Contract." The holding period for
Common Stock received under a Purchase Contract will commence on the day
following the acquisition of such Common Stock.
Ownership of Common Stock Acquired Under the Purchase Contract. Any
distribution on Common Stock paid by the Company out of its current or
accumulated earnings and profits (as determined for United States federal income
tax purposes) will constitute a dividend and will be includible in income by a
U.S. Holder when received. Any such dividend will be eligible for the dividends
received deduction if received by an otherwise qualifying corporate U.S. Holder
that meets the holding period and other requirements for the dividends received
deduction.
Upon a disposition of Common Stock, a U.S. Holder will generally recognize
capital gain or loss equal to the difference between the amount realized and
such U.S. Holder's adjusted tax basis in the Common Stock. Such capital gain or
loss will generally be long-term capital gain or loss if the U.S. Holder held
such Common Stock for more than one year immediately prior to such disposition.
Long-term capital gains of individuals are eligible for reduced rates of
taxation depending upon the holding period of such capital assets. The
deductibility of capital losses is subject to limitations.
Termination of Purchase Contract. If a Purchase Contract terminates, a U.S.
Holder of Units will recognize gain or loss equal to the difference between the
amount realized (if any) upon such termination and such U.S. Holder's adjusted
tax basis (if any) in the Purchase Contract at the time of such termination.
Payments of Contract Payments or
S-71
<PAGE> 74
deferred Contract Payments received by a U.S. Holder but not included in income
by such U.S. Holder should either reduce such U.S. Holder's tax adjusted basis
in the Purchase Contract or increase the amount realized on the termination of
the Purchase Contract. Any Contract Payments or deferred Contract Payments
included in a U.S. Holder's income but not paid should increase such U.S.
Holder's adjusted tax basis in the Purchase Contract. See "Contract Payments and
Deferred Contract Payments." Such gain or loss will generally be capital gain or
loss and will generally be long-term capital gain or loss if the U.S. Holder
held such Purchase Contract for more than one year immediately prior to such
termination. Long-term capital gains of individuals are eligible for reduced
rates of taxation depending upon the holder period of such capital assets. The
deductibility of capital losses is subject to limitations. A U.S. Holder will
not recognize gain or loss on the receipt of such U.S. Holder's proportionate
share of the Trust Preferred Securities or Treasury Securities upon termination
of the Purchase Contract and will have the same adjusted tax basis and holding
period in such Trust Preferred Securities or Treasury Securities as before such
distribution.
SUBSTITUTION OF TREASURY SECURITIES TO CREATE STRIPPED UNITS
A U.S. Holder of Normal Units that delivers Treasury Securities to the
Collateral Agent in substitution for Trust Preferred Securities will generally
not recognize gain or loss upon the delivery of such Treasury Securities or the
release of the Trust Preferred Securities to such U.S. Holder. Such U.S. Holder
will continue to take into account items of income or deduction otherwise
includible or deductible, respectively, by such U.S. Holder with respect to such
Treasury Securities and Trust Preferred Securities, and such U.S. Holder's
adjusted tax bases and holding period in the Treasury Securities, the Trust
Preferred Securities and the Purchase Contract will not be affected by such
delivery and release.
A U.S. Holder that makes a payment to the Call Option Holder to be released
for such U.S. Holder's obligation under the Call Option should recognize
short-term capital gain or loss on settling the Call Option equal to the
difference between the Call Premium received by such U.S. Holder and the amount
paid to settle the Call Option.
ERISA CONSIDERATIONS
Each of the Company (the obligor with respect to the Junior Subordinated
Debentures held by the Trust) and its affiliates and the Property Trustee may be
considered a "party in interest" (within the meaning of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")) or a "disqualified person"
(within the meaning of Section 4975 of the Code) with respect to many employee
benefit plans ("PLANS") that are subject to ERISA. The purchase and/or holding
of Units by a Plan that is subject to the fiduciary responsibility provisions of
ERISA or the prohibited transaction provisions of Section 4975 of the Code
(including individual retirement arrangements and other plans described in
Section 4975(e)(1) of the Code) and with respect to which the Company, the
Property Trustee or any affiliate is a service provider (or otherwise is a party
in interest or a disqualified person) may constitute or result in a prohibited
transaction under ERISA or Section 4975 of the Code, unless such Units are
acquired pursuant to and in accordance with an applicable exemption, such as
Prohibited Transaction Class Exemption ("PTCE") 84-14 (an exemption for certain
transactions determined by an independent qualified professional asset manager),
PTCE 91-38 (an
S-72
<PAGE> 75
exemption for certain transactions involving bank collective investment funds),
PTCE 90-1 (an exemption for certain transactions involving insurance company
pooled separate accounts), PTCE 95-60 (an exemption for transactions involving
certain insurance company general accounts) or PTCE 96-23 (an exemption for
certain transactions determined by an in-house asset manager).
In addition, a Plan fiduciary considering the purchase of Units should be
aware that the assets of the Trust may be considered "plan assets" for ERISA
purposes unless the Units meet the conditions for the "publicly offered
securities" exception from the "plan asset" rules under ERISA. These conditions
include, but are not limited to, investment in the Units by more than 100
investors independent of the Company and each other. Although no assurances can
be given, the Company expects that the Units will be held by less than 100
independent investors at the conclusion of the offering.
In the event that the "publicly offered securities" exception is not
available and the assets of the Trust are, accordingly, deemed to be "plan
assets" of Plans that are holders of the Units, the Property Trustee, as well as
any other persons exercising discretion with respect to the Junior Subordinated
Debentures, would be fiduciaries and parties in interest with respect to the
investing Plans. Accordingly, each investing Plan, by purchasing the Units, will
be deemed to have directed the Trust to invest in the Junior Subordinated
Debentures and to have appointed the Property Trustee. In this regard, it should
be noted that, in the event of a Default, the Company may not remove the
Property Trustee without the approval of a majority of the holders of the Units.
ANY PURCHASER PROPOSING TO ACQUIRE UNITS WITH ASSETS OF ANY PLAN SHOULD
CONSULT WITH ITS COUNSEL.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, (a) the
Company has agreed to enter into the Purchase Contracts with each of the
Underwriters named below (the "UNDERWRITERS") underlying the respective number
of Units set forth opposite its name below, (b) the Trust has agreed to sell to
each of the Underwriters the Trust Preferred Securities underlying the
respective number of Units set forth opposite its name below, and (c) each of
such Underwriters has severally agreed to enter into such Purchase Contracts
with the Company, purchase such Trust Preferred Securities from the Trust,
pledge under the Pledge Agreement such Trust Preferred Securities and sell (on
behalf of the initial investors in the Units) to the Call Option Holder the Call
Options with respect to such Units:
<TABLE>
<CAPTION>
UNDERWRITERS: NUMBER OF UNITS
<S> <C>
Salomon Smith Barney Inc. ............................
Donaldson, Lufkin & Jenrette Securities Corporation...
Banc of America Securities LLC........................
----------
Total............................................
==========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to enter into Purchase Contracts, purchase and pledge
Trust Preferred Securities and sell Call Options with respect to all of the
Units offered hereby, if any Purchase Contracts are entered into, Trust
Preferred Securities are taken and Call Options sold.
S-73
<PAGE> 76
The Underwriters propose to offer the Units in part directly to the public
at the initial public offering price set forth on the cover page of this
prospectus supplement and in part to certain securities dealers at such price
less a concession of $ per Unit. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per Unit to certain
brokers and dealers. After the Units are released for sale to the public, the
offering price and other selling terms may from time to time be varied by the
Underwriters.
The Company and the Trust have granted the Underwriters an option
exercisable for days after the date of this prospectus to enter into Purchase
Contracts and purchase Trust Preferred Securities underlying up to an aggregate
of additional Units solely to cover over-allotments, if any. If Purchase
Contracts underlying any such additional Units are entered into and Trust
Preferred Securities are purchased, the Underwriters would pledge under the
Pledge Agreement such Trust Preferred Securities and would sell to the Call
Option Holder the Call Options underlying such Units. If the Underwriters
exercise their over-allotment option, each of the Underwriters has severally
agreed, subject to certain conditions, to effect the foregoing transactions with
respect to approximately the same percentage of such Units that the respective
number of Units set forth opposite its name in the foregoing table bears to the
Units offered hereby.
The Company has agreed, subject to certain exceptions, that during the
period beginning from the date of this prospectus supplement and continuing to
and including the date days after the date of this prospectus supplement,
it will not offer, sell, contract to sell or otherwise dispose of any Units,
Trust Preferred Securities or Common Stock (other than pursuant to employee
stock option or purchase plans existing, or on the conversion or exchange of
convertible or exchangeable securities outstanding, on the date of this
prospectus supplement) or any securities of the Company which are substantially
similar to the Common Stock, or which are convertible into or exchangeable for,
or otherwise represent the right to receive, Common Stock or any such other
similar securities, without the prior written consent of the Underwriters.
The Units will be a new issue of securities with no established trading
market. Application will be made to list the Normal Units on the NYSE. The
Underwriters have advised the Company that they intend to make a market in the
Normal Units, but they are not obligated to do so and may discontinue market
making at any time without notice. No assurance can be given as to the liquidity
of the trading market for the Units.
In connection with the Offering, the Underwriters may purchase and sell the
Units of Common Stock in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover short
positions created by the Underwriters in connection with the Offering.
Stabilizing transactions consist of certain bids or purchases for the purpose of
preventing or retarding a decline in the market price of the Units or Common
Stock, as applicable; and short positions created by the Underwriters involve
the sale by the Underwriters of a greater number of Units than they are required
to purchase from the Company and the Trust in the Offering. The Underwriters
also may impose a penalty bid, whereby selling concessions allowed to
broker-dealers in respect of the Units sold in the Offering may be reclaimed by
the Underwriters if such Units are repurchased by the Underwriters in
stabilizing or covering transactions. These activities may stabilize, maintain
or otherwise affect the market price of the Units or the Common Stock, which may
be higher than the price that might otherwise prevail in the open market, and
these activities, if commenced, may be discontinued at any time. These
transactions may be effected on the NYSE, in the over-the-counter market or
otherwise.
S-74
<PAGE> 77
Each of Salomon Smith Barney Inc., Donaldson, Lufkin & Jenrette Securities
Corporation and Banc of America Securities LLC and certain of their respective
affiliates have provided, and may continue to provide, investment banking and/or
commercial banking services to the Company and its affiliates.
The Company and the Trust have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act of
1933.
LEGAL OPINIONS
Opinions as to the legality of the Units will be rendered for CMS by
Michael D. Van Hemert, Assistant General Counsel for CMS. Skadden, Arps, Slate,
Meagher & Flom LLP will act as counsel for the Underwriters. As of March 31,
1999, an attorney currently employed by Skadden, Arps, Slate, Meagher & Flom
LLP, and formerly employed by CMS, owned approximately 50,326 shares of CMS
Energy Common Stock, 2,000 shares of Class G Common Stock, 10 shares of
Consumers $4.50 Series Preferred Stock, $100 par value, and $50,000 aggregate
principal amount of certain debt securities issued by CMS. As of March 31, 1999,
Mr. Van Hemert beneficially owned approximately 2,889 shares of CMS Common
Stock.
EXPERTS
The consolidated financial statements and schedule of CMS as of December
31, 1998 and 1997, and for each of the three years in the period ended December
31, 1998 incorporated by reference in this Prospectus Supplement and the
accompanying Prospectus have been audited by Arthur Andersen LLP, 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, 1999 and 1998, Arthur Andersen LLP has applied
limited procedures in accordance with professional standards for a review of
such information. However, their separate report thereon states that they did
not audit and they did not express an opinion on that interim consolidated
financial information. Accordingly, the degree of reliance on their report on
that information should be restricted in light of the limited nature of the
review procedures applied. In addition, the accountants are not subject to the
liability provisions of Section 11 of the Securities Act for their report on the
unaudited interim consolidated financial information because that report is not
a "report" or "part" of the registration statement prepared or certified by the
accountants within the meaning of Sections 7 and 11 of the Securities Act.
Future consolidated financial statements of CMS and the reports thereon of
Arthur Andersen LLP also will be incorporated by reference in this prospectus
supplement and the accompanying 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.
S-75
<PAGE> 78
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus supplement
and the accompanying base prospectus. You must not rely on any unauthorized
information or representations. This prospectus supplement and the accompanying
base prospectus offer to sell only the Units offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so. The information
contained in this prospectus supplement is current only as of its date.
S-76
<PAGE> 79
UNAUDITED PRO FORMA FINANCIAL INFORMATION
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF CMS ENERGY CORPORATION
The following Unaudited Pro Forma Combined Financial Statements (the "PRO
FORMA FINANCIAL STATEMENTS") of CMS Energy Corporation ("CMS ENERGY") illustrate
the effects of: (1) various restructuring, realignment, and elimination of
activities between the Panhandle Companies (as defined below) and Duke Energy
Corporation and its subsidiaries ("DUKE ENERGY") prior to the closing of the
acquisition (the "ACQUISITION") of Panhandle Eastern Pipe Line Company
("PANHANDLE") and its principal subsidiaries, Trunkline Gas Company and Pan Gas
Storage Company, and its affiliates, Panhandle Storage Company and Trunkline LNG
Company (collectively the "PANHANDLE COMPANIES") by CMS Energy; (2) the
adjustments resulting from the Acquisition by CMS Energy; and (3) the public
issuance of $800 million of Notes by CMS Panhandle Holding Company ("CMS
HOLDING"), $500 million of Senior Notes by CMS Energy, and 13 million shares of
common stock by CMS Energy aggregating approximately $600 million (the
"FINANCING TRANSACTIONS"). A portion of the net proceeds from the Financing
Transactions were used to retire bridge facilities of CMS Energy which initially
were used in financing the Acquisition. The Unaudited Pro Forma Combined Balance
Sheet has been prepared as if such transactions occurred on December 31, 1998;
the Unaudited Pro Forma Combined Income Statement has been prepared as if such
transactions occurred as of January 1, 1998.
The Pro Forma Financial Statements reflect CMS Energy acquiring all of the
common stock of the Panhandle Companies. The Pro Forma Financial Statements also
reflect, prior to the Acquisition, the transfer of Panhandle's interest in
Northern Border Partners LP and certain non-operating assets to other
subsidiaries of Duke Energy, and the elimination of certain intercompany
accounts, including advances, between Panhandle and Duke Energy. The purchase
price for the common stock of the Panhandle Companies was $1.9 billion in cash.
After giving effect to the merger of CMS Holding into Panhandle during the
second quarter of 1999, Panhandle has approximately $1.1 billion of debt
outstanding. This indebtedness includes approximately $300 million of
pre-existing Panhandle debt and the $800 million of CMS Holding debt incurred in
the Financing Transactions. CMS Energy's acquisition of the Panhandle Companies
was accounted for under the purchase method.
A final determination of required purchase accounting adjustments,
including the allocation of the purchase price to the assets acquired and
liabilities assumed based on their respective fair values and the final
determination of estimated remaining useful lives of the acquired property,
plant and equipment, have not yet been made. Accordingly, the pro forma
accounting adjustments made in connection with the development of the Pro Forma
Financial Statements are preliminary and have been made solely for purposes of
developing the pro forma combined financial information. However, CMS Energy
management believes that the pro forma adjustments and the underlying
assumptions reasonably present the significant effects of the Acquisition and
the Financing Transactions. In addition, CMS Energy will undertake studies to
determine the fair value of the assets and liabilities and estimated remaining
useful lives of the acquired property, plant and equipment of the Panhandle
Companies and will revise the accounting adjustments upon completion of these
studies. The actual financial position and results of operations of the combined
entity will differ, perhaps significantly, from the pro forma amounts reflected
herein because of a variety of factors, including access to additional
information, changes
F-1
<PAGE> 80
in value and changes in operating results between the dates of the Pro Forma
Financial Statements and the date of the Acquisition. In addition, changes will
result from the consummation of CMS Energy's financing of the Acquisition as
compared to the financing plans described above. The Pro Forma Financial
Statements are not necessarily indicative of actual operating results or
financial position had the Acquisition and the Financing Transactions occurred
as of the dates indicated above, nor do they purport to indicate operating
results or financial position which may be attained in the future.
The significant adjustments to the pro forma net income reflect (1) higher
depreciation and amortization expense to give effect to the allocation of excess
purchase price amortized over 40 years and the fair value of net assets acquired
related to property, plant and equipment prospectively depreciated over a
revised estimated average remaining life of 40 years, (2) elimination of pension
and rental income, and (3) lower interest expense from the cancellation of
certain indebtedness between Panhandle and Duke Energy and additional interest
expense reflecting the new debt issuances of both Panhandle and CMS Energy.
The significant adjustments to the pro forma financial position reflect (1)
elimination of the advances to Duke Energy and the notes payable to Duke Energy,
(2) increases to property, plant and equipment and accrued liabilities for the
purchase price allocation, (3) recognition of goodwill in the fair value
calculation, (4) decreases in taxes and other liabilities assumed by Duke
Energy, and (5) increases in long-term debt and common stockholders' equity in
connection with the Acquisition and the Financing Transactions.
The Panhandle Companies financial statements utilized in the preparation of
the Pro Forma Financial Statements are based upon financial statements and
information obtained from Duke Energy and Panhandle.
The Pro Forma Financial Statements should be read in conjunction with the
historical financial statements of both CMS Energy and Panhandle and the notes
to the Pro Forma Financial Statements included elsewhere herein. The pro forma
adjustments do not reflect any potential operating efficiencies or cost savings
which CMS Energy management believes may be achievable with respect to the
combined companies.
F-2
<PAGE> 81
CMS ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PANHANDLE COMPANIES
PRE-ACQUISITION PRO FORMA
---------------------------------------------------------
RESTRUCTURING ELIMINATION OF PANHANDLE
CMS ENERGY PANHANDLE AND DUKE ENERGY COMPANIES
HISTORICAL HISTORICAL REALIGNMENT ACTIVITIES AS ADJUSTED
---------- ---------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Operating revenue.................. $5,141 $496 $(3)(a) $(14)(b) $479
Operating expenses
Operations and maintenance....... 3,667 213 (2)(a) 9(c) 220
Depreciation and amortization.... 484 56 (2)(a) (4)(d) 50
Property and other taxes......... 215 26 2(a) (1)(e) 27
------ ---- --- ---- ----
4,366 295 (2) 4 297
------ ---- --- ---- ----
Pretax operating income............ 775 201 (1) (18) 182
Other income (deductions).......... (46) 24 (14)(f) 10
Fixed charges...................... 387 77 (1)(a) (54)(g) 22
------ ---- --- ---- ----
Income before income taxes......... 342 148 -- 22 170
Income taxes....................... 100 57 1(a) 7(h) 65
------ ---- --- ---- ----
Consolidated net income before
cumulative effect of change in
accounting principle............. 242 91 (1) 15 105
Cumulative effect of change in
accounting for property taxes,
net of $23 Tax................... 43 43
------ ---- --- ---- ----
Consolidated net income............ $ 285 $ 91 $(1) $ 15 $105
====== ==== === ==== ====
Basic earnings per average common
share
CMS Energy....................... $ 2.65
======
Class G.......................... $ 1.56
======
Diluted earnings per average common
share
CMS Energy....................... $ 2.62
======
Class G.......................... $ 1.56
======
Average common shares outstanding
CMS Energy....................... 102
======
Class G.......................... 8
======
<CAPTION>
PRO FORMA ACQUISITION
------------------------------------------------------
ACQUISITION FINANCING INTERCOMPANY CMS ENERGY
ADJUSTMENTS TRANSACTIONS ELIMINATIONS PRO FORMA
----------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Operating revenue.................. $ (9)(i) $ -- $(45)(o) $5,566
Operating expenses
Operations and maintenance....... (45)(o) 3,842
Depreciation and amortization.... 7(j) 541
Property and other taxes......... 242
---- ---- ---- ------
7 -- (45) 4,625
---- ---- ---- ------
Pretax operating income............ (16) -- -- 941
Other income (deductions).......... (36)
Fixed charges...................... 91(l) 500
---- ---- ---- ------
Income before income taxes......... (16) (91) -- 405
Income taxes....................... (6)(k) (32)(m) 128
---- ---- ---- ------
Consolidated net income before
cumulative effect of change in
accounting principle............. (10) (59) -- 277
Cumulative effect of change in
accounting for property taxes,
net of $23 Tax................... 43
---- ---- ---- ------
Consolidated net income............ $(10) $(59) $ -- $ 320
==== ==== ==== ======
Basic earnings per average common
share
CMS Energy....................... $ 2.66
======
Class G.......................... $ 1.56
======
Diluted earnings per average common
share
CMS Energy....................... $ 2.63
======
Class G.......................... $ 1.56
======
Average common shares outstanding
CMS Energy....................... 14(n) 116
==== ======
Class G.......................... -- 8
==== ======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Income Statement.
F-3
<PAGE> 82
CMS ENERGY CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1998
RESTRUCTURING AND REALIGNMENT:
(a) To reflect the results of operations of Panhandle Storage Company and
Trunkline LNG Company, both acquired by CMS Energy, and the transfer of
Panhandle's interest in Northern Border Partners LP and certain
non-operating assets to other subsidiaries of Duke Energy under the
provisions of the Stock Purchase Agreement dated as of October 31, 1998,
between CMS Energy and subsidiaries of Duke Energy (the "STOCK PURCHASE
AGREEMENT").
ELIMINATION OF DUKE ENERGY ACTIVITIES:
(b) To reflect the elimination of rental income earned by Panhandle on an
office building, which was transferred to Duke Energy under the provisions
of the Stock Purchase Agreement.
(c) To reflect the elimination of pension income recognized by Panhandle on the
overfunded pension plans of Duke Energy. Under the provisions of the Stock
Purchase Agreement, Duke Energy transferred to CMS Energy an amount of
pension assets equivalent to the Panhandle Companies' liabilities assumed
by CMS Energy.
(d) To reflect the elimination of depreciation associated with an office
building and certain other assets, which were transferred to Duke Energy
under the provisions of the Stock Purchase Agreement.
(e) To reflect the elimination of ad valorem taxes associated with an office
building, which was transferred to Duke Energy under the provisions of the
Stock Purchase Agreement.
(f) To reflect the elimination of a December 1998 gain on the sale of
Panhandle's general partnership interest in Northern Border Partners LP.
(g) To reflect a reduction in interest expense relating to the settlement of
certain short-term notes payable to Duke Energy under the provisions of the
Stock Purchase Agreement.
(h) To reflect the income tax expense effects of the pro forma adjustments (b)
through (g) at an estimated rate of 35%.
ACQUISITION ADJUSTMENTS:
(i) To reflect the elimination of non-cash amortization of deferred credits
associated with a Trunkline LNG Company rate settlement.
(j) To reflect depreciation expense on the fair value of property, plant and
equipment prospectively depreciated over a revised estimated average
remaining life of 40 years. Also reflects amortization expense over a
40-year period of the estimated goodwill recognized in the Acquisition.
F-4
<PAGE> 83
(k) To reflect the income tax expense effects of pro forma adjustment (i) and
(j) at an estimated rate of 35%.
FINANCING TRANSACTIONS:
(l) To reflect the increase of interest expense relating to the issuance of
$800 million of CMS Holding Notes with a weighted average interest rate of
6.8% and $500 million of CMS Energy Senior Notes with a weighted average
interest rate of 7.5%.
(m) To reflect the income tax expense effects of pro forma adjustment (l) at an
estimated rate of 35%.
(n) Represents an estimated per share offering price of $45. The difference
between the referenced 14 million shares and the 13 million shares
referenced elsewhere herein is a function of rounding.
INTERCOMPANY ELIMINATIONS:
(o) To reflect the elimination of intercompany transactions between CMS Energy
and the Panhandle Companies.
F-5
<PAGE> 84
CMS ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1998
(DOLLARS IN MILLION)
<TABLE>
<CAPTION>
PANHANDLE COMPANIES
PRE-ACQUISITION PRO FORMA
---------------------------------------------------------
RESTRUCTURING ELIMINATION OF PANHANDLE
CMS ENERGY PANHANDLE AND DUKE ENERGY COMPANIES
HISTORICAL HISTORICAL REALIGNMENT ACTIVITIES AS ADJUSTED
---------- ---------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
NET PROPERTY, PLANT AND
EQUIPMENT........................ $ 6,040 $ 979 $101(a) $ (72)(b) $1,008
INVESTMENTS
Advances and notes receivable --
parent......................... -- 738 -- (738)(c) --
Investments in affiliates and
other.......................... 2,073 50 (41)(a) 9
------- ------ ---- ----- ------
2,073 788 (41) (738) 9
------- ------ ---- ----- ------
CURRENT ASSETS
Cash and temporary cash
investments.................... 101 --
Accounts receivable and accrued
revenue........................ 720 94 (3)(a) (1)(c) 90
Other current assets............. 586 86 (2)(a) (6)(d) 78
------- ------ ---- ----- ------
1,407 180 (5) (7) 168
------- ------ ---- ----- ------
NON-CURRENT ASSETS................. 1,790 26 -- (2)(d) 24
------- ------ ---- ----- ------
TOTAL ASSETS................. $11,310 $1,973 $ 55 $(819) $1,209
======= ====== ==== ===== ======
STOCKHOLDER'S EQUITY AND
LIABILITIES
CAPITALIZATION
Common stockholders' equity...... $ 2,216 $ 558 $ 16(a) $ 142(g) $ 716
Preferred stock of subsidiary.... 238 --
Trust preferred securities....... 393 --
Long-term debt................... 4,726 299 (3)(a) 3(c) 299
Non-current portion of capital
leases......................... 105 --
------- ------ ---- ----- ------
7,678 857 13 145 1,015
------- ------ ---- ----- ------
CURRENT LIABILITIES
Current portion of long-term debt
and capital leases............. 293 --
Notes payable.................... 328 675 (675)(e) --
Accounts payable................. 501 56 (48)(a) 8
Other current liabilities........ 688 183 3(a) (68)(f) 108
(10)(d)
------- ------ ---- ----- ------
1,810 914 (45) (753) 116
------- ------ ---- ----- ------
NON-CURRENT LIABILITIES
Deferred income taxes............ 649 99 51(a) (150)(f) --
Postretirement benefits.......... 489 --
Other non-current liabilities.... 684 103 36(a) (61)(b) 78
------- ------ ---- ----- ------
1,822 202 87 (211) 78
------- ------ ---- ----- ------
TOTAL STOCKHOLDERS' INVESTMENT AND
LIABILITIES...................... $11,310 $1,973 $ 55 $(819) $1,209
======= ====== ==== ===== ======
<CAPTION>
PRO FORMA ACQUISITION
------------------------------------------------------
ACQUISITION FINANCING INTERCOMPANY CMS ENERGY
ADJUSTMENTS TRANSACTIONS ELIMINATIONS PRO FORMA
----------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
ASSETS
NET PROPERTY, PLANT AND
EQUIPMENT........................ $ 603(h) $ -- $ -- $ 7,616
(35)(i)
INVESTMENTS
Advances and notes receivable --
parent.........................
Investments in affiliates and
other.......................... 2,082
------ ------- -------- -------
-- -- -- 2,082
------ ------- -------- -------
CURRENT ASSETS
Cash and temporary cash
investments.................... (3)(o) 101
Accounts receivable and accrued
revenue........................ 807
Other current assets............. 664
------ ------- -------- -------
-- -- (3) 1,572
------ ------- -------- -------
NON-CURRENT ASSETS................. 700(j) -- -- 2,514
------ ------- -------- -------
TOTAL ASSETS................. $1,268 $ -- $ (3) $13,784
====== ======= ======== =======
STOCKHOLDER'S EQUITY AND
LIABILITIES
CAPITALIZATION
Common stockholders' equity...... $1,184(k) $ 600(l) $ -- $ 2,816
(1,900)(m)
Preferred stock of subsidiary.... 238
Trust preferred securities....... 393
Long-term debt................... 19(j) 1,300(n) 6,344
Non-current portion of capital
leases......................... 105
------ ------- -------- -------
1,203 -- -- 9,896
------ ------- -------- -------
CURRENT LIABILITIES
Current portion of long-term debt
and capital leases............. 293
Notes payable.................... 328
Accounts payable................. 506
Other current liabilities........ 796
------ ------- -------- -------
-- -- (3)(o) 1,923
------ ------- -------- -------
NON-CURRENT LIABILITIES
Deferred income taxes............ 649
Postretirement benefits.......... 489
Other non-current liabilities.... 100(j) 827
(35)(i)
------ ------- -------- -------
65 -- -- 1,965
------ ------- -------- -------
TOTAL STOCKHOLDERS' INVESTMENT AND
LIABILITIES...................... $1,268 $ -- $ (3) $13,784
====== ======= ======== =======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Balance Sheet.
F-6
<PAGE> 85
CMS ENERGY CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1998
RESTRUCTURING AND REALIGNMENT:
(a) To reflect the financial position of Panhandle Storage Company and
Trunkline LNG Company, both acquired by CMS Energy, and the transfer of
Panhandle's interest in Northern Border Partners LP and certain
non-operating assets to other subsidiaries of Duke Energy under the
provisions of the Stock Purchase Agreement.
ELIMINATION OF DUKE ENERGY ACTIVITIES:
(b) To reflect the transfer to Duke Energy of certain assets, primarily an
office building, under the provisions of the Stock Purchase Agreement.
(c) To reflect the settlement of the advances and notes receivable from Duke
Energy under the provisions of the Stock Purchase Agreement.
(d) To reflect the transfer from the Panhandle Companies to Duke Energy of
certain environmental and litigation liabilities and the related assets
under the provisions of the Stock Purchase Agreement.
(e) To reflect the settlement of certain short-term notes payable to Duke
Energy under the provisions of the Stock Purchase Agreement.
(f) To reflect the transfer from the Panhandle Companies to Duke Energy of all
tax liabilities under the provisions of the Stock Purchase Agreement.
(g) To reflect the settlement and transfer of certain assets and liabilities
described in pro forma adjustments (b) through (f).
ACQUISITION ADJUSTMENTS:
(h) To reflect the increase in property, plant and equipment to adjust the
historical value of these assets to their estimated fair values. The
allocation reflects CMS Energy's internal evaluation of the excess purchase
price and is subject to the completion of a study to determine the fair
value of the property. Should the study not support such allocation to
property, plant and equipment, the excess of total purchase price over the
fair value of the net assets acquired will be reflected as an adjustment to
the preliminary estimate of goodwill.
(i) To reflect the elimination of deferred credits associated with a Trunkline
LNG Company rate settlement.
(j) To reflect the preliminary estimated acquisition adjustments under the
purchase method of accounting to record assets acquired and liabilities
assumed at estimated fair value for (1) the preliminary estimate of
goodwill, (2) the increase of certain other assets, (3) the elimination of
previously recorded regulatory assets, assuming Panhandle ceases to apply
Statement of Financial Accounting Standards No. 71 accounting for its
regulated assets, (4) the long-term debt assumed, (5) the assumption of
benefit plan obligations by the Panhandle Companies, previously assumed by
Duke Energy, and (6) the accrual of certain obligations of the
F-7
<PAGE> 86
Panhandle Companies which are expected to be paid after completion of the
transaction. The following adjustments reflect CMS Energy management's
intended business strategies and outlook which may differ from the business
strategies and outlook of Duke Energy management prior to the Acquisition:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
<S> <C>
Other assets including goodwill............... $700
Other non-current liabilities................. 100
</TABLE>
(k) To reflect the increase in common stockholders' equity as a result of pro
forma adjustments (h) through (j).
FINANCING TRANSACTIONS:
(l) To reflect the assumed public issuance of approximately 14 million shares
of common stock of CMS Energy aggregating $600 million.
(m) To reflect the payment of $1.9 billion in cash to Duke Energy for the
acquisition of the Panhandle Companies.
(n) To reflect the issuance of $800 million of CMS Holding Notes and $500
million CMS Energy Senior Notes.
INTERCOMPANY ELIMINATIONS:
(o) To reflect the elimination of intercompany transactions between CMS Energy
and the Panhandle Companies.
F-8
<PAGE> 87
CMS ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PANHANDLE COMPANIES
PRE-ACQUISITION PRO FORMA
------------------------------------------- PRO FORMA ACQUISITION
RESTRUCTURING ELIMINATION OF --------------------------
CMS ENERGY PANHANDLE AND DUKE ENERGY ACQUISITION FINANCING
HISTORICAL HISTORICAL REALIGNMENT ACTIVITIES ADJUSTMENTS TRANSACTIONS
---------- ---------- ------------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenue..... $1,538 $133 $-- $ (3)(b) $(2)(g) $ --
Operating expenses
Operations and
maintenance....... 1,077 43 (1)(a) 4(c)
Depreciation and
amortization...... 150 14 (1)(a) (1)(d) 2(h)
Property and other
taxes............. 66 7 -- --
------ ---- --- ---- --- ----
1,293 64 (2) 3 2 --
------ ---- --- ---- --- ----
Pretax operating
income.............. 245 69 2 (6) (4) --
Other income
(deductions)........ 1 5
Fixed charges......... 111 19 2 (13)(e) 23(j)
Income before income
taxes............... 135 55 -- 7 (4) (23)
Income taxes.......... 37 21 -- 2(f) (1)(i) (8)(k)
------ ---- --- ---- --- ----
Consolidated net
income.............. $ 98 $ 34 $-- $ 5 $(3) $(15)
====== ==== === ==== === ====
Basic earnings per
average common share
CMS Energy.......... $ .82
======
Class G............. $ 1.19
======
Diluted earnings per
average common share
CMS Energy.......... $ .80
======
Class G............. $ 1.19
======
Average common shares
outstanding CMS
Energy.............. 108 13(l)
====== ====
Class G............. 8 --
====== ====
<CAPTION>
PRO FORMA ACQUISITION
-------------------------
INTERCOMPANY CMS ENERGY
ELIMINATIONS PRO FORMA
------------ ----------
<S> <C> <C>
Operating revenue..... $ (4)(n) $1,650
(12)(m)
Operating expenses
Operations and
maintenance....... (2)(n) 1,109
(12)(m)
Depreciation and
amortization...... (1)(n) 163
Property and other
taxes............. 73
---- ------
(15) 1,345
---- ------
Pretax operating
income.............. (1) 305
Other income
(deductions)........ 6
Fixed charges......... 142
Income before income
taxes............... (1) 169
Income taxes.......... (1) 50
---- ------
Consolidated net
income.............. $ -- $ 119
==== ======
Basic earnings per
average common share
CMS Energy.......... $ .90
======
Class G............. $ 1.19
======
Diluted earnings per
average common share
CMS Energy.......... $ .88
======
Class G............. $ 1.19
======
Average common shares
outstanding CMS
Energy.............. 121
======
Class G............. 8
======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Income Statement.
F-9
<PAGE> 88
CMS ENERGY CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
FOR THE THREE MONTHS ENDED MARCH 31, 1999
RESTRUCTURING AND REALIGNMENT:
(a) To reflect the results of operations of Panhandle Storage Company and
Trunkline LNG Company, both acquired by CMS Energy, and the transfer of
Panhandle's interest in Northern Border Partners LP and certain
non-operating assets to other subsidiaries of Duke Energy under the
provisions of the Stock Purchase Agreement.
ELIMINATION OF DUKE ENERGY ACTIVITIES:
(b) To reflect the elimination of rental income earned by Panhandle on an
office building, which was transferred to Duke Energy under the provisions
of the Stock Purchase Agreement.
(c) To reflect the elimination of pension income recognized by Panhandle on the
overfunded pension plans of Duke Energy. Under the provisions of the Stock
Purchase Agreement, Duke Energy transferred to CMS Energy an amount of
pension assets equivalent to the Panhandle Companies' liabilities assumed
by CMS Energy.
(d) To reflect the elimination of depreciation associated with an office
building and certain other assets, which were transferred to Duke Energy
under the provisions of the Stock Purchase Agreement.
(e) To reflect a reduction in interest expense relating to the settlement of
certain short-term notes payable to Duke Energy under the provisions of the
Stock Purchase Agreement.
(f) To reflect the income tax expense effects of the pro forma adjustments (b)
through (e) at an estimated rate of 35%.
ACQUISITION ADJUSTMENTS:
(g) To reflect the elimination of non-cash amortization of deferred credits
associated with a Trunkline LNG Company rate settlement.
(h) To reflect depreciation expense on the fair value of property, plant and
equipment prospectively depreciated over a revised estimated average
remaining life of 40 years. Also reflects amortization expense over a
40-year period of the estimated goodwill recognized in the Acquisition.
(i) To reflect the income tax expense effects of pro forma adjustment (g) and
(h) at an estimated rate of 35%.
FINANCING TRANSACTIONS:
(j) To reflect the increase of interest expense relating to the issuance of
$800 million of CMS Holding Notes with a weighted average interest rate of
6.8% and $500 million of CMS Energy Senior Notes with a weighted average
interest rate of 7.5%.
F-10
<PAGE> 89
(k) To reflect the income tax expense effects of pro forma adjustment (j) at an
estimated rate of 35%.
(l) Represents an estimated per share offering price of $45.
INTERCOMPANY ELIMINATIONS:
(m) To reflect the elimination of intercompany transactions between CMS Energy
and the Panhandle Companies.
(n) To eliminate three days of activity subsequent to the acquisition which is
included in CMS Energy historical amounts.
F-11
<PAGE> 90
CMS ENERGY CORPORATION
CMS ENERGY COMMON STOCK
CLASS G COMMON STOCK
SENIOR DEBENTURES
SUBORDINATED DEBENTURES
STOCK PURCHASE CONTRACTS
STOCK PURCHASE UNITS
GUARANTEES
AND
CMS ENERGY TRUST II
CMS ENERGY TRUST III
TRUST PREFERRED SECURITIES
GUARANTEED TO THE EXTENT SET FORTH HEREIN BY
CMS ENERGY CORPORATION
OFFERING PRICE: $1,500,000,000
------------------------
We may offer, from time to time:
(i) shares of CMS Energy Common Stock,
(ii) shares of Class G Common Stock,
(iii) unsecured senior or subordinated debt securities consisting of
debentures, convertible debentures, notes and other unsecured evidence of
indebtedness,
(iv) stock purchase contracts to purchase CMS Energy Common Stock,
(v) stock purchase units, each representing ownership of a stock purchase
contract and unsecured senior or subordinated debt securities or trust preferred
securities or debt obligations of third parties, including U.S. Treasury
Securities, securing the holder's obligation to purchase the CMS Energy Common
Stock under the stock purchase contract, or any combination of the above, and
(vi) Guarantees of CMS Energy with respect to Trust Preferred Securities of
CMS Energy Trusts II and III.
For each type of securities listed above, the amount, price and terms will be
determined at or prior to the time of sale.
CMS Energy Trust II and CMS Energy Trust III, which are Delaware business
trusts, may offer trust preferred securities. The trust preferred securities
represent preferred undivided beneficial interests in the assets of CMS Energy
Trust II and CMS Energy Trust III in amounts, at prices and on terms to be
determined at or prior to the time of sale.
We will provide the specific terms of these securities in an accompanying
prospectus supplement or supplements. You should read this prospectus and the
accompanying prospectus supplement or supplements carefully before you invest.
CMS Energy Common Stock and Class G Common Stock are traded on the New York
Stock Exchange under the symbol "CMS". CMS Energy Common Stock and Class G
Common Stock sold pursuant to a prospectus supplement or supplements
accompanying this prospectus will also be listed for trading on the New York
Stock Exchange, subject to official notice of issuance.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
We intend to sell these securities through underwriters, dealers, agents or
directly to a limited number of purchasers. The names of, and any securities to
be purchased by or through, these parties, the compensation of these parties and
other special terms in connection with the offering and sale of these securities
will be provided in the related prospectus supplement or supplements.
This prospectus may not be used to consummate sales of any of these securities
unless accompanied by a prospectus supplement.
The date of this prospectus is May 7, 1999
<PAGE> 91
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT, AND ANY INFORMATION
OR REPRESENTATION NOT CONTAINED OR INCORPORATED HEREIN MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY CMS ENERGY OR ANY UNDERWRITER, DEALER OR AGENT.
THIS PROSPECTUS AND ANY PROSPECTUS SUPPLEMENT DO NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES
TO WHICH THEY RELATE OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT
NOR ANY SALE MADE HEREUNDER OR THEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED OR INCORPORATED HEREIN OR THEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF SUCH INFORMATION.
AVAILABLE INFORMATION
CMS Energy is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "EXCHANGE ACT"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "COMMISSION"). Information, as of particular dates, concerning
CMS Energy's directors and officers, their remuneration, the principal holders
of CMS Energy's securities and any material interest of such persons in
transactions with CMS Energy is disclosed in proxy statements distributed to
shareholders of CMS Energy and filed with the Commission. Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices
located at 500 West Madison Street, Chicago, Illinois 60661 and at Seven World
Trade Center, 13th Floor, New York, New York 10048. Copies of such materials can
be obtained by mail from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission
also maintains a Web site (http://www.sec.gov) that contains reports, proxy
statements and other information regarding CMS Energy. The outstanding shares of
CMS Energy Common Stock and Class G Common Stock are listed on the New York
Stock Exchange ("NYSE") and reports, proxy statements and other information
concerning CMS Energy may also be inspected and copied at the offices of such
exchange at 20 Broad Street, New York, New York 10005.
No separate financial statements of the Trusts have been included herein.
CMS Energy and the Trusts do not consider that such financial statements would
be material to holders of Trust Preferred Securities because each Trust is a
newly organized special purpose entity, has no operating history and no
independent operations and is not engaged in, and does not propose to engage in,
any activity other than as described under "CMS Energy Trusts". Further, CMS
Energy believes that financial statements of the Trusts are not material to the
holders of the Trust Preferred Securities since CMS Energy will guarantee the
Trust Preferred Securities such that the holders of the Trust Preferred
2
<PAGE> 92
Securities, with respect to the payment of distributions and amounts upon
liquidation, dissolution and winding-up, are at least in the same position
vis-a-vis the assets of CMS Energy as a preferred stockholder of CMS Energy. CMS
Energy beneficially owns directly or indirectly all of the undivided beneficial
interests in the assets of the Trusts (other than the beneficial interests
represented by the Trust Preferred Securities). See "CMS Energy Trusts,"
"Description of Securities -- Trust Preferred Securities" and "Description of
Securities -- The Guarantees." In future filings under the Exchange Act, an
audited footnote to CMS Energy's annual financial statements will state that the
Trusts are wholly-owned by CMS Energy, that the sole assets of the Trusts are
the Senior Debentures or the Subordinated Debentures of CMS Energy having a
specified aggregate principal amount, and, considered together, the back-up
undertakings, including the Guarantees, constitute a full and unconditional
guarantee by CMS Energy of the Trusts' obligations under the Trust Preferred
Securities issued by the Trusts.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by CMS Energy (File No. 1-9513) with the
Commission pursuant to the Exchange Act are hereby incorporated by reference in
this prospectus and shall be deemed to be a part hereof:
(1) CMS Energy's Registration Statement on Form 8-B/A dated November 21,
1996;
(2) CMS Energy's Annual Report on Form 10-K for the year ended December 31,
1998; and
(3) CMS Energy's Current Reports on Form 8-K filed January 20 and April 6,
1999.
All documents subsequently filed by CMS Energy pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act and prior to the termination of the
offering made by this prospectus (the "OFFERING") shall be deemed to be
incorporated by reference herein and shall be deemed 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").
Any statement contained in an Incorporated Document shall be deemed to be
modified or superseded for purposes of this prospectus to the extent that a
statement contained herein or in any other subsequently filed Incorporated
Document modifies or supersedes such statement. Any such statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this prospectus.
CMS Energy undertakes to provide without charge to each person, including
any beneficial owner, to whom a copy of this prospectus has been delivered, upon
the written or oral request of any such person, a copy of any and all of the
documents referred to above which have been or may be incorporated in this
prospectus by reference, other than exhibits to such documents (unless such
exhibits are specifically incorporated by reference into such documents).
Requests for such copies 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.
Certain information contained in this prospectus summarizes, is based upon,
or refers to information and financial statements contained in one or more
Incorporated Documents;
3
<PAGE> 93
accordingly, such information contained herein is qualified in its entirety by
reference to such documents and should be read in conjunction therewith.
CMS ENERGY CORPORATION
CMS Energy Corporation, a Michigan corporation ("CMS ENERGY") incorporated
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 all 68 counties of Michigan's Lower Peninsula,
is the largest subsidiary of CMS Energy. 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, services and
trading; (iv) storage, transmission and processing of natural gas; and (v)
international energy distribution.
CMS Energy conducts its principal operations through the following six
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; and (vi) storage,
transmission and processing of natural gas. Consumers or Consumers' subsidiaries
are engaged in two segments: electric operations and gas operations. Consumers'
electric and gas businesses are principally regulated utility operations. CMS
Energy and its subsidiaries routinely evaluate, invest in, acquire and divest
energy-related assets and/or companies both domestically and internationally.
Consideration for such transactions may involve the delivery of cash or
securities.
CMS Energy's 1998 consolidated operating revenue was $5.1 billion. This
consolidated operating revenue was derived from its electric utility operations
(approximately 51%), its gas utility operations (approximately 21%), marketing,
services and trading (approximately 18%), independent power production and other
non-utility activities (approximately 6%), gas transmission, storage and
processing activities (approximately 3%), and oil and gas exploration and
production activities (approximately 1%). Consumers' consolidated operations in
the electric and gas utility businesses account for the majority of CMS Energy's
total assets, revenue and income. The unconsolidated share of non-utility
independent power production, gas transmission and storage, marketing services
and trading, and international energy distribution revenue for 1998 was $1.317
billion.
Consumers is a public utility serving gas or electricity to almost six
million of Michigan's nine and a half million residents in Michigan's Lower
Peninsula. Industries in Consumers' service area include automotive, metal,
chemical, food and wood products industries and a diversified group of other
industries. Consumers' 1998 consolidated operating revenue of $3.7 billion was
derived approximately 70% from its electric utility business, approximately 29%
from its gas utility business and approximately 1% 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 (the "MPSC") and
the Federal Energy Regulatory Commission. Consumers' nuclear operations are
subject to the jurisdiction of the Nuclear Regulatory Commission.
4
<PAGE> 94
CMS Energy 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 or securities.
The foregoing information concerning CMS Energy and it subsidiaries does
not purport to be comprehensive. For additional information concerning CMS
Energy and its subsidiaries' business 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. See "Incorporation of Certain Documents by Reference" and "Available
Information" above.
The address of the principal executive offices of CMS Energy is Fairlane
Plaza South, 330 Town Center Drive, Suite 1100, Dearborn, Michigan 48126. Its
telephone number is (313) 436-9200.
RECENT DEVELOPMENTS
ACQUISITION OF THE PANHANDLE COMPANIES
On March 29, 1999 we acquired from Duke Energy Corporation all of the
outstanding common stock of Panhandle Eastern Pipe Line Company ("PANHANDLE")
and its principal subsidiaries, Trunkline Gas Company ("TRUNKLINE") and Pan Gas
Storage Company, as well as its affiliates, Panhandle Storage Company and
Trunkline LNG Company ("TRUNKLINE LNG" and, collectively, the "PANHANDLE
COMPANIES"). We paid $1.9 billion in cash to Duke Energy Corporation and assumed
approximately $300 million of existing Panhandle debt.
The Panhandle Companies are primarily engaged in the interstate
transmission and storage of natural gas. The Panhandle Companies operate one of
the nation's largest natural gas pipeline networks, providing customers in the
Midwest and Southwest with a comprehensive array of transportation services.
This interconnected 10,400 mile system accesses virtually all major natural gas
regions in the United States.
Panhandle's transmission system consists of four large-diameter parallel
pipelines and extends approximately 1,300 miles from producing areas in the
Anadarko Basin of Texas, Oklahoma and Kansas through the states of Missouri,
Illinois, Indiana and Ohio into Michigan. Panhandle's system connects with the
Trunkline system at Tuscola, Illinois.
Trunkline's transmission system consists principally of three
large-diameter parallel pipelines extending approximately 1,400 miles from the
Gulf Coast areas of Texas and Louisiana through the states of Arkansas,
Mississippi, Tennessee, Kentucky, Illinois and Indiana to a point on the
Indiana-Michigan border. Trunkline also owns and operates two offshore Louisiana
natural gas supply systems consisting of 337 miles of pipeline extending
approximately 81 miles into the Gulf of Mexico.
Panhandle's major customers include approximately 20 utilities located in
the Midwest market area that encompasses large portions of Michigan, Ohio,
Indiana, Illinois and Missouri. Trunkline's major customers include six
utilities located in portions of Illinois, Indiana, Michigan, Ohio and
Tennessee. Transportation service for Consumers accounted for approximately 10%
of the combined revenue of the Panhandle Companies.
5
<PAGE> 95
The Panhandle Companies own and operate five underground gas storage fields
located in Illinois, Michigan, Kansas, Oklahoma and Louisiana with a combined
maximum working gas storage capacity of 70 billion cubic feet.
Trunkline LNG owns a liquified natural gas ("LNG") regasification plant and
related LNG tanker port, unloading facilities and LNG and gas storage facilities
located at Lake Charles, Louisiana. The LNG plant has the capacity to deliver
700 million cubic feet per day but has been operated on a limited basis for a
number of years.
The rates and operations of the Panhandle Companies are subject to
regulation by the Federal Energy Regulatory Commission.
We used approximately $600 million in bridge financing, $500 million in
revolving credit loans and $800 million of senior unsecured notes issued by CMS
Panhandle Holding Company to fund the cash portion of the purchase price for the
acquisition of the Panhandle Companies. We expect to complete permanent
financing of the acquisition with existing arrangements and the sale of
approximately $600 million of our common stock and/or other securities.
Please refer to our Forms 8-K filed January 20 and April 6, 1999 for
further information concerning this transaction.
CMS ENERGY TRUSTS
CMS Energy Trust II and CMS Energy Trust III are statutory business trusts
formed under the Delaware Business Trust Act (the "TRUST ACT") (each, a "TRUST"
and collectively, the "TRUSTS") pursuant to: (i) a trust agreement executed by
CMS Energy, as sponsor, and the trustees of the Trusts (the "CMS TRUSTEES"); and
(ii) the filing of a certificate of trust with the Secretary of State of the
State of Delaware. At the time of public issuance of Trust Preferred Securities,
each trust agreement will be amended and restated in its entirety (as so amended
and restated, the "TRUST AGREEMENT") and will be qualified as an indenture under
the Trust Indenture Act of 1939, as amended (the "TRUST INDENTURE ACT"). CMS
Energy will directly or indirectly acquire common securities of each Trust (the
"COMMON SECURITIES" and, together with the Trust Preferred Securities, the
"TRUST SECURITIES") in an aggregate liquidation amount equal to approximately 3%
of the total capital of the Trust. Each Trust exists for the exclusive purposes
of: (i) issuing the Trust Preferred Securities and Common Securities
representing undivided beneficial interests in the assets of the Trust; (ii)
investing the gross proceeds of the Trust Securities in the Senior Debentures or
Subordinated Debentures; and (iii) engaging in only those other activities
necessary or incidental thereto. Each Trust has a term of approximately 30
years, but may terminate earlier as provided in the Trust Agreement.
The undivided common beneficial interests in the Trust will be owned by CMS
Energy. The proceeds from the offering of the Trust Preferred Securities and the
sale of the Common Securities may be contributed by the Trust to purchase from
CMS Energy Senior Debentures or Subordinated Debentures in an aggregate
principal amount equal to the aggregate liquidation preference of the Trust
Securities, bearing interest at an annual rate equal to the annual distribution
rate of such Trust Securities and having certain redemption terms which
correspond to the redemption terms for the Trust Securities. The Senior
Debentures will rank on an equal basis with all other unsecured debt of CMS
Energy except subordinated debt. The Subordinated Debentures will rank
subordinate in right of payment to all of CMS Energy's Senior Indebtedness (as
defined herein).
6
<PAGE> 96
Distributions on the Trust Securities may not be made unless the Trust receives
corresponding interest payments on the Senior Debentures or the Subordinated
Debentures from CMS Energy. CMS Energy will irrevocably guarantee, on a senior
or subordinated basis, as applicable, and to the extent set forth therein, with
respect to each of the Trust Securities, the payment of distributions, the
redemption price, including all accrued or deferred and unpaid distributions,
and payment on liquidation, but only to the extent of funds on hand. Each
Guarantee will be unsecured and will be either equal to or subordinate to, as
applicable, all Senior Indebtedness, of CMS Energy. Upon the occurrence of
certain events (subject to the conditions to be described in an accompanying
prospectus supplement) the Trust may be liquidated and the holders of the Trust
Securities could receive Senior Debentures or Subordinated Debentures in lieu of
any liquidating cash distribution.
Pursuant to the Trust Agreement, the number of CMS Trustees will initially
be three. Two of the CMS Trustees (the "ADMINISTRATIVE TRUSTEES") will be
persons who are employees or officers of or who are affiliated with CMS Energy.
The third trustee will be a financial institution that is unaffiliated with CMS
Energy, which trustee will serve as property trustee under the Trust Agreement
and as indenture trustee for the purposes of compliance with the provisions of
the Trust Indenture Act (the "PROPERTY TRUSTEE"). Initially, either The Bank of
New York, a New York banking corporation, or NBD Bank, a Michigan banking
corporation, will be the Property Trustee until removed or replaced by the
holder of the Common Securities. For the purpose of compliance with the
provisions of the Trust Indenture Act, The Bank of New York or NBD Bank will
also act as trustee (each a "GUARANTEE TRUSTEE" and collectively the "GUARANTEE
TRUSTEES"). The Bank of New York (Delaware) will act as the Delaware Trustee for
the purposes of the Trust Act, until removed or replaced by the holder of the
Common Securities. See "Description of Securities -- The Guarantees."
Each Property Trustee will hold title to the applicable Debt Securities for
the benefit of the holders of the Trust Securities and each Property Trustee
will have the power to exercise all rights, powers and privileges under the
applicable indentures (as defined herein) as the holder of the Debt Securities.
In addition, each Property Trustee will maintain exclusive control of a
segregated non-interest bearing bank account (the "PROPERTY ACCOUNT") to hold
all payments made in respect of the Debt Securities for the benefit of the
holders of the Trust Securities. Each Property Trustee will make payments of
distributions and payments on liquidation, redemption and otherwise to the
holders of the Trust Securities out of funds from the Property Account. The
Guarantee Trustees will hold the Guarantees for the benefit of the holders of
the Trust Securities. CMS Energy, as the direct or indirect holder of all the
Common Securities, will have the right to appoint, remove or replace any CMS
Trustee and to increase or decrease the number of CMS Trustees; provided, that
the number of CMS Trustees shall be at least three, a majority of which shall be
Administrative Trustees. CMS Energy will pay all fees and expenses related to
the Trusts and the offering of the Trust Securities.
The rights of the holders of the Trust Preferred Securities, including
economic rights, rights to information and voting rights, are set forth in the
Trust Agreement, the Trust Act and the Trust Indenture Act.
The trustee in the State of Delaware is The Bank of New York (Delaware),
White Clay Center, Route 273, Newark, Delaware 19711.
7
<PAGE> 97
The principal place of business of each Trust shall be c/o CMS Energy
Corporation, Fairlane Plaza South, 330 Town Center Drive, Suite 1100, Dearborn,
Michigan 48126-2712.
USE OF PROCEEDS
The proceeds received by each of the Trusts from the sale of its Trust
Preferred Securities or the Common Securities will be invested in the Senior
Debentures or the Subordinated Debentures. As will be more specifically set
forth in the applicable prospectus supplement, CMS Energy will use such borrowed
amounts and the net proceeds from the sale of CMS Energy Common Stock, Class G
Common Stock, Stock Purchase Contracts, Stock Purchase Units and any Senior
Debentures or Subordinated Debentures offered hereby for its general corporate
purposes, including capital expenditures, investment in subsidiaries, working
capital and repayment of debt.
RATIO OF EARNINGS TO FIXED CHARGES AND
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The ratios of earnings to fixed charges and the ratios of earnings to fixed
charges and preferred stock dividends for each of the years ended December 31,
1993 through 1998, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges.......... 1.59 1.78 1.96 1.90 2.07 1.75
Ratio of earnings to fixed charges and
preferred stock dividends................. 1.43 1.59 1.75 1.74 1.88 1.68
</TABLE>
For the purpose of computing such ratios, earnings represent net income
before income taxes, net interest charges and the estimated interest portion of
lease rentals.
8
<PAGE> 98
DESCRIPTION OF SECURITIES
INTRODUCTION
Specific terms of the shares of Common Stock, par value $.01 per share
("CMS ENERGY COMMON STOCK"), shares of Class G Common Stock, no par value
("CLASS G COMMON STOCK"), unsecured senior debt securities (the "SENIOR
DEBENTURES") and unsecured subordinated debt securities (the "SUBORDINATED
DEBENTURES") (individually a "DEBT SECURITY" and collectively the "DEBT
SECURITIES") consisting of debentures, convertible debentures, notes and other
unsecured evidence of indebtedness, Stock Purchase Contracts (the "STOCK
PURCHASE CONTRACTS") to purchase CMS Energy Common Stock, Stock Purchase Units
(the "STOCK PURCHASE UNITS"), each representing ownership of a Stock Purchase
Contract and Debt Securities, or Trust Preferred Securities or debt obligations
of third parties, including U.S. Treasury Securities, securing the holder's
obligation to purchase the CMS Energy Common Stock under the Stock Purchase
Contract, or any combination of the foregoing, irrevocable guarantees
(individually a "GUARANTEE" and collectively "GUARANTEES") of CMS Energy, on a
senior or subordinated basis as applicable, and to the extent set forth therein,
with respect to each of the Trust Securities, the payment of distributions, the
redemption price, including all accrued or deferred and unpaid distributions,
and payment on liquidation, but only to the extent of fund on hand, and trust
preferred securities (the "TRUST PREFERRED SECURITIES") representing preferred
undivided beneficial interests in the assets of the Trust, in respect of which
this prospectus is being delivered (collectively, the "OFFERED SECURITIES"),
will be set forth in an accompanying prospectus supplement or supplements,
together with the terms of the offering of the Offered Securities, the initial
price thereof and the net proceeds from the sale thereof. The prospectus
supplement will set forth with regard to the particular Offered Securities,
without limitation, the following: (i) in the case of Debt Securities, the
designation, aggregate principal amount, denomination, maturity, premium, if
any, any exchange, conversion, redemption or sinking fund provisions, interest
rate (which may be fixed or variable), the time or method of calculating
interest payments, the right of CMS Energy, if any, to defer payment or interest
on the Debt Securities and the maximum length of such deferral, put options, if
any, public offering price, ranking, any listing on a securities exchange and
other specific terms of the offering; (ii) in the case of CMS Energy Common
Stock or Class G Common Stock, the designation, number of shares, public
offering price and other specific terms of the Offering, from the sale thereof;
(iii) in the case of Trust Preferred Securities, the designation, number of
shares, liquidation preference per security, initial public offering price, any
listing on a securities exchange, dividend rate (or method of calculation
thereof), dates on which dividends shall be payable and dates from which
dividends shall accrue, any voting rights, any redemption, exchange, conversion
or sinking fund provisions and any other rights, preferences, privileges,
limitations or restrictions relating to a specific series of the Trust Preferred
Securities including a description of the Guarantee (as defined herein), as the
case may be; and (iv) in the case of Stock Purchase Units, the specific terms of
the Stock Purchase Contracts and any Debt Securities, Trust Preferred
Securities, or debt obligations of third parties securing the holders obligation
to purchase CMS Energy Common Stock and Class G Common Stock under the Stock
Purchase Contracts, and the terms of the offering and sale thereof.
CAPITAL STOCK
The following summary of certain rights of the holders of CMS Energy
capital stock does not purport to be complete and is qualified in its entirety
by express reference to the
9
<PAGE> 99
Restated Articles of Incorporation of CMS Energy (the "ARTICLES OF
INCORPORATION") and the By-Laws of CMS Energy, copies of which are filed as
exhibits to the Registration Statement of which this prospectus is a part, and
by express reference to the Registration Statement on Form 8-B/A, which is
incorporated into this prospectus by reference. See "Incorporation of Certain
Documents by Reference" herein.
The authorized capital stock of CMS Energy consists of 250 million shares
of CMS Energy Common Stock, 60 million shares of Class G Common, and 10 million
shares of CMS Energy Preferred Stock, $.01 par value ("PREFERRED STOCK"). The
CMS Energy Common Stock and the Class G Common Stock are sometimes together
referred to herein as the "Common Stock."
COMMON STOCK
The Class G Common Stock is intended to reflect the separate performance of
the gas distribution, storage and transportation businesses conducted by
Consumers and Michigan Gas Storage, a subsidiary of Consumers (such businesses,
collectively, have been attributed to the "CONSUMERS GAS GROUP"). The CMS Energy
Common Stock is intended to reflect the performance of all businesses of CMS
Energy and its subsidiaries, including the businesses of the Consumers Gas
Group, except for the interest in the Consumers Gas Group attributable to the
outstanding shares of Class G Common Stock.
DIVIDEND RIGHTS AND POLICY; RESTRICTIONS ON DIVIDENDS
Dividends on the CMS Energy Common Stock are paid at the discretion of the
Board of Directors based primarily upon the earnings and financial condition of
CMS Energy, including the Consumers Gas Group, except for the interest in the
Consumers Gas Group attributable to the outstanding shares of the Class G Common
Stock, and other factors. Dividends are payable out of the assets of CMS Energy
legally available therefore, including the Available Class G Dividend Amount (as
defined in the Articles of Incorporation).
Dividends on the Class G Common Stock are paid at the discretion of the
Board of Directors based primarily upon the earnings and financial condition of
the Consumers Gas Group, and, to a lesser extent, CMS Energy as a whole.
Dividends are payable out of the lesser of (i) the assets of CMS Energy legally
available therefore and (ii) the Available Class G Dividend Amount. Although the
Available Class G Dividend Amount is intended to reflect the amount available
for dividends to holders of outstanding Class G Common Stock, it is also legally
available for dividends to holders of CMS Energy Common Stock.
CMS Energy, in the sole discretion of its Board of Directors could pay
dividends exclusively to the holders of CMS Energy Common Stock, exclusively to
the holders of Class G Common Stock, or to the holders of both of such classes
in equal or unequal amounts.
CMS Energy is a holding company and its assets consist primarily of
investments in its subsidiaries. As a holding company with no significant
operations of its own, the principal sources of its funds are dependent
primarily upon the earnings of its subsidiaries (in particular, Consumers),
borrowings and sales of equity. CMS Energy's ability to pay dividends, including
dividends on CMS Energy Common Stock and Class G Common Stock, is dependent
primarily upon the earnings and cash flows of its subsidiaries and the
distribution or other payment of such earnings to CMS Energy in the form of
dividends,
10
<PAGE> 100
loans or advances and repayment of loans and advances from CMS Energy.
Accordingly, the ability of CMS Energy to pay dividends on its capital stock
will depend on the earnings, financial requirements, contractual restrictions of
the subsidiaries of CMS Energy, in particular, Consumers, and other factors. CMS
Energy's subsidiaries are separate and distinct legal entities and have no
obligation, contingent or otherwise, to pay any amounts on the capital stock of
CMS Energy or to make any funds available therefor, whether by dividends, loans
or other payments.
Dividends on capital stock of CMS Energy are limited by Michigan law to
legally available assets of CMS Energy. Distributions on Common Stock may be
subject to the rights of the holders, if any, of the CMS Energy Preferred Stock.
There are restrictions on CMS Energy's ability to pay dividends contained
in certain revolving credit and term loan agreements, the indenture dated as of
September 15, 1992, as amended and supplemented, between CMS Energy and NBD
Bank, as Trustee, and the indenture dated as of January 15, 1994, as amended and
supplemented, between CMS Energy and The Chase Manhattan Bank, as Trustee. A
discussion of specific restrictions on CMS Energy's ability to pay dividends
will be set forth in an accompanying prospectus supplement pursuant to which
convertible Senior Debentures, Subordinated Debentures, convertible Trust
Preferred Securities, Stock Purchase Contracts, Stock Purchase Units, CMS Energy
Common Stock or Class G Common Stock are offered.
VOTING RIGHTS
The holders of CMS Energy Common Stock vote with the holders of Class G
Common Stock as a single class, except on matters which would be required by law
or the Articles of Incorporation to be voted on by class. Each holder of Common
Stock is entitled to one vote for each share of Common Stock held by such holder
on each matter voted upon by the shareholders. Such right to vote is not
cumulative. A majority of the votes cast by the holders of shares entitled to
vote thereon is sufficient for the adoption of any question presented, except
that certain provisions of the Articles of Incorporation relating to special
shareholder meetings, the removal, indemnification and liability of the Board of
Directors and the requirements for amending these provisions may not be amended,
altered, changed or repealed unless such amendment, alteration, change or repeal
is approved by the affirmative vote of at least 75% of the outstanding shares
entitled to vote thereon.
Under Michigan law, the approval of the holders of a majority of the
outstanding shares of a class of Common Stock, voting as a separate class, would
be necessary for authorizing, effecting or validating the merger or
consolidation of CMS Energy into or with any other corporation if such merger or
consolidation would adversely affect the powers or special rights of such class
of stock, and to authorize any amendment to the Articles of Incorporation that
would increase or decrease the aggregate number of authorized shares of such
class (except pursuant to Section 303 of the Michigan Business Corporation Act,
which, under certain circumstances, would enable the Board of Directors to
increase the number of authorized shares to satisfy the exchange features of the
Common Stock described below) or alter or change the powers, preferences or
special rights of the shares of such class so as to affect them adversely. The
Articles of Incorporation also provide that unless the vote or consent of a
greater number of shares shall then be required by law, the vote or consent of
the holders of a majority of all the shares of either class of Common Stock then
outstanding, voting as a separate class, will be necessary for authorizing,
effecting or validating the merger or consolidation of CMS Energy into or with
any other
11
<PAGE> 101
entity if such merger or consolidation would adversely affect the powers or
special rights of such class of Common Stock, either directly by amendment to
the Articles of Incorporation or indirectly by requiring the holders of such
class to accept or retain, in such merger or consolidation, anything other than
(i) shares of such class or (ii) shares of the surviving or resulting
corporation, having, in either case, powers and special rights identical to
those of such class prior to such merger or consolidation. The effect of these
provisions may be to permit the holders of a majority of the outstanding shares
of either class of Common Stock to block any such merger or amendment which
would adversely affect the powers or special rights of holders of such class of
Common Stock.
PREEMPTIVE RIGHTS
The Articles of Incorporation provide that holders of Common Stock will
have no preemptive rights to subscribe for or purchase any additional shares of
the capital stock of CMS Energy of any class now or hereafter authorized, or
Preferred Stock, bonds, debentures, or other obligations or rights or options
convertible into or exchangeable for or entitling the holder or owner to
subscribe for or purchase any shares of capital stock, or any rights to exchange
shares issued for shares to be issued.
LIQUIDATION RIGHTS
In the event of the dissolution, liquidation or winding up of CMS Energy,
whether voluntary or involuntary, after payment or provision for payment of the
debts and other liabilities of CMS Energy and after there shall have been paid
or set apart for the holders of Preferred Stock the full preferential amounts
(including any accumulated and unpaid dividends) to which they are entitled, the
holders of CMS Energy Common Stock and Class G Common Stock shall be entitled to
receive, on a per share basis, the same portion of all of the assets of CMS
Energy remaining for distribution to the holders of Common Stock, regardless of
whether or not any of such assets were attributed to the Consumers Gas Group.
Neither the merger or consolidation of CMS Energy into or with any other
corporation, nor the merger or consolidation of any other corporation into or
with CMS Energy nor any sale, transfer or lease of all or any part of the assets
of CMS Energy, shall be deemed to be a dissolution, liquidation or winding up
for the purposes of this provision.
Because CMS Energy has subsidiaries which have debt obligations and other
liabilities of their own, CMS Energy's rights and the rights of its creditors
and its stockholders to participate in the distribution of assets of any
subsidiary upon the latter's liquidation or recapitalization will be subject to
prior claims of the subsidiary's creditors, except to the extent that CMS Energy
may itself be a creditor with recognized claims against the subsidiary.
SUBDIVISION OR COMBINATION
If CMS Energy subdivides (by stock split, stock dividend or otherwise) or
combines (by reverse stock split or otherwise) the outstanding shares of either
Class G Common Stock or CMS Energy Common Stock, the voting and liquidation
rights of shares of CMS Energy Common Stock relative to Class G Common Stock
will be appropriately adjusted so as to avoid any dilution in aggregate voting
or liquidation rights of either class of Common Stock. For example, in case CMS
Energy were to effect a two-for-one split of Class G Common Stock, the per share
liquidation rights of CMS Energy Common Stock would be multiplied by two in
order to avoid dilution in the aggregate liquidation rights of
12
<PAGE> 102
holders of CMS Energy Common Stock and each post-split share of Class G Common
Stock would have one-half of a vote on matters voted upon by the Shareholders.
EXCHANGES
The Articles of Incorporation do not provide for either the mandatory or
optional exchange or redemption of CMS Energy Common Stock but do provide that
Class G Common Stock may be exchanged for CMS Energy Common Stock as described
in the Registration Statement on Form 8-B/A incorporated by reference herein.
CMS Energy cannot predict the impact of the potential for such exchanges on the
market prices of CMS Energy Common Stock.
CMS Energy may exchange the Class G Common Stock for a proportionate number
of shares of a subsidiary that holds all the assets and liabilities attributed
to the Consumers Gas Group, and no other assets and liabilities. If CMS Energy
transfers all or substantially all of the properties and assets attributed to
the Consumers Gas Group, CMS Energy is required, subject to certain exceptions
and conditions, to exchange each outstanding share of Class G Common Stock for a
number of shares of CMS Energy Common Stock having a Fair Market Value (defined
in the Articles of Incorporation) equal to 110% of the Fair Market Value of one
share of Class G Common Stock.
CMS Energy may, in the sole discretion of the Board of Directors, at any
time, exchange each outstanding share of Class G Common Stock for a number of
shares of CMS Energy Common Stock having a Fair Market Value equal to 115% of
the Fair Market Value of one share of Class G Common Stock.
CMS Energy cannot predict the impact of the potential for such exchanges on
the market prices of the CMS Energy Common Stock.
TRANSFER AGENT AND REGISTRAR
CMS Energy Common Stock and Class G Common Stock are transferable at
Consumers Energy Company, 212 W. Michigan Avenue, Jackson, MI 49201. CMS Energy
is the registrar and transfer agent for CMS Energy Common Stock and Class G
Common Stock.
PREFERRED STOCK
The authorized Preferred Stock may be issued without the approval of the
holders of Common Stock in one or more series, from time to time, with each such
series to have such designation, powers, preferences and relative,
participating, optional or other special rights, voting rights, if any, and
qualifications, limitations or restrictions thereof, as shall be stated in a
resolution providing for the issue of any such series adopted by CMS Energy's
Board of Directors. The Articles of Incorporation provide that holders of
Preferred Stock will not have any preemptive rights to subscribe for or purchase
any additional shares of the capital stock of CMS Energy of any class now or
hereafter authorized, or any Preferred Stock, bonds, debentures or other
obligations or rights or options convertible into or exchangeable for or
entitling the holder or owner to subscribe for or purchase any shares of capital
stock. The future issuance of Preferred Stock may have the effect of delaying,
deterring or preventing a change in control of CMS Energy.
13
<PAGE> 103
PRIMARY SOURCE OF FUNDS OF CMS ENERGY; RESTRICTIONS ON SOURCES OF DIVIDENDS
The ability of CMS Energy to pay (i) dividends on its capital stock and
(ii) its indebtedness, including the Debt Securities, depends and will depend
substantially upon timely receipt of sufficient dividends or other distributions
from its subsidiaries, in particular Consumers. Consumers' ability to pay
dividends on its common stock depends upon its revenues, earnings and other
factors. Consumers' revenues and earnings will depend substantially upon rates
authorized by the MPSC.
Consumers' ability to pay dividends is restricted by its First Mortgage
Bond Indenture (the "MORTGAGE INDENTURE") and its Articles of Incorporation
("ARTICLES"). The Mortgage Indenture provides that Consumers can only pay
dividends on its common stock out of retained earnings accumulated subsequent to
September 30, 1945, provided that upon such payment, there shall remain of such
retained earnings an amount equivalent to any deficiency in maintenance and
replacement expenditures as compared with maintenance and replacement
requirements since December 31, 1945. Because of restrictions in its Articles
and Mortgage Indenture, Consumers was prohibited from paying dividends on its
common stock from June 1991 to December 31, 1992. However, as of December 31,
1992, Consumers effected a quasi-reorganization in which Consumers' accumulated
deficit of $574 million was eliminated against other paid-in capital. With the
accumulated deficit eliminated, Consumers satisfied the requirements under its
Mortgage Indenture and resumed paying dividends on its common stock in May 1993.
Consumers' Articles also provide two restrictions on its payment of
dividends on its common stock. First, prior to the payment of any common stock
dividend, Consumers must reserve retained earnings after giving effect to such
dividend payment of at least (i) $7.50 per share on all then outstanding shares
of its preferred stock, (ii) in respect to its Class A Preferred Stock, 7.5% of
the aggregate amount established by its Board of Directors to be payable on the
shares of each series thereof in the event of involuntary liquidation of
Consumers, and (iii) $7.50 per share on all then outstanding shares of all other
stock over which its preferred stock and Class A Preferred Stock do not have
preference as to the payment of dividends and as to assets. Second, dividend
payments during the 12 month period ending with the month the proposed payment
is to be paid are limited to: (i) 50% of net income available for the payment of
dividends during the base period (hereinafter defined) if the ratio of common
stock and surplus to total capitalization and surplus for 12 consecutive
calendar months within the 14 calendar months immediately preceding the proposed
dividend payment (the "BASE PERIOD"), adjusted to reflect the proposed dividend,
is less than 20%; and (ii) 75% of net income available for the payment of
dividends during the base period if the ratio of common stock and surplus to
total capitalization and surplus for the base period, adjusted to reflect the
proposed dividend, is at least 20% but less than 25%.
In addition, Consumers' Indenture dated January 1, 1996, between Consumers
and Bank of New York as Trustee ("INDENTURE"), and certain Preferred Securities
Guarantees by Consumers dated January 23, 1996 and September 11, 1997
(collectively the "CONSUMERS PREFERRED SECURITIES GUARANTEES"), in connection
with which the 8.36% Trust Preferred Securities of Consumers Power Company
Financing 1 and the 8.20% Trust Securities of Consumers Energy Financing II
(collectively the "CONSUMERS TRUST PREFERRED SECURITIES") were issued, provide
that Consumers shall not declare or pay any dividend on, make any distributions
with respect to, or redeem, purchase or make a liquidation payment with respect
to, any of its capital stock if: (i) there shall have occurred any event that
would constitute an event of default under the Indenture or the
14
<PAGE> 104
trust agreements pursuant to which the Consumers Trust Preferred Securities were
issued, (ii) a default with respect to its payment of any obligations under the
Consumers Preferred Securities Guarantees or certain Consumers common stock
guarantees, or (iii) it gives notice of its election to extend the interest
payment period on the subordinated notes issued under the Indenture, at any time
for up to 20 consecutive quarters provided, however, Consumers may declare and
pay stock dividends where the dividend stock is the same stock as that on which
the dividend is being paid.
Consumers' Articles also prohibit the payment of cash dividends on its
common stock if Consumers is in arrears on preferred stock dividend payments.
In addition, Michigan law prohibits payment of a dividend if, after giving
it effect, Consumers would not be able to pay its debts as they become due in
the usual course of business, or its total assets would be less than the sum of
its total liabilities plus, unless the articles permit otherwise, the amount
that would be needed, if Consumers were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the
distribution. Currently, it is Consumers' policy to pay annual dividends equal
to 80% of its annual consolidated net income. Consumers' Board of Directors
reserves the right to change this policy at any time.
DEBT SECURITIES
The Debt Securities offered by this prospectus will be unsecured
obligations of CMS Energy and will be either senior or subordinated debt. Senior
Debentures will be issued under a senior debt indenture and Subordinated
Debentures will be issued under a subordinated debt indenture. The senior debt
indenture and the subordinated debt indenture are sometimes referred to in this
prospectus individually as an "INDENTURE" and collectively as the "INDENTURES."
The following briefly summarizes the material provisions of the indentures
and the Debt Securities. You should read the more detailed provisions of the
applicable indenture, including the defined terms, for provisions that may be
important to you. You should also read the particular terms of a series of Debt
Securities, which will be described in more detail in the applicable prospectus
supplement. Copies of the indentures may be obtained from CMS Energy or the
applicable trustee.
Unless otherwise provided in the applicable prospectus supplement, the
trustee under the senior debt indenture will be NBD Bank and the trustee under
the subordinated debt indenture will be The Bank of New York.
GENERAL
The indentures provide that Debt Securities of CMS Energy may be issued in
one or more series, with different terms, in each case as authorized from time
to time by CMS Energy.
Federal income tax consequences and other special considerations applicable
to any Debt Securities issued by CMS Energy at a discount will be described in
the applicable prospectus supplement.
Because CMS Energy is a holding company, the claims of creditors of CMS
Energy's subsidiaries will have a priority over CMS Energy's equity rights and
the rights of CMS
15
<PAGE> 105
Energy's creditors, including the holders of Debt Securities, to participate in
the assets of the subsidiary upon the subsidiary's liquidation.
The applicable prospectus supplement relating to any series of Debt
Securities will describe the following terms, where applicable:
- the title of the Debt Securities;
- whether the Debt Securities will be senior or subordinated debt;
- the total principal amount of the Debt Securities;
- the percentage of the principal amount at which the Debt Securities will
be sold and, if applicable, the method of determining the price;
- the maturity date or dates;
- the interest rate or the method of computing the interest rate;
- the date or dates from which any interest will accrue, or how such date
or dates will be determined, and the interest payment date or dates and
any related record dates;
- the location where payments on the Debt Securities will be made;
- the terms and conditions on which the Debt Securities may be redeemed at
the option of CMS Energy;
- any obligation of CMS Energy to redeem, purchase or repay the Debt
Securities at the option of a holder upon the happening of any event and
the terms and conditions of redemption, purchase or repayment;
- any provisions for the discharge of CMS Energy's obligations relating to
the Debt Securities by deposit of funds or United States government
obligations;
- whether the Debt Securities are to trade in book-entry form and the terms
and any conditions for exchanging the global security in whole or in part
for paper certificates;
- any material provisions of the applicable indenture described in this
prospectus that do not apply to the Debt Securities;
- any additional amounts with respect to the Debt Securities that CMS
Energy will pay to a non-United States person because of any tax,
assessment or governmental charge withheld or deducted and, if so, any
option of CMS Energy to redeem the Debt Securities rather than paying
these additional amounts; and
- any other specific terms of the Debt Securities.
CONCERNING THE TRUSTEES
Each of NBD Bank, the trustee under the senior debt indenture, and The Bank
of New York, the trustee under the subordinated debt indenture, is one of a
number of banks with which CMS Energy and its subsidiaries maintain ordinary
banking relationships, including credit facilities.
16
<PAGE> 106
EXCHANGE AND TRANSFER
Debt Securities may be presented for exchange and registered Debt
Securities may be presented for registration of transfer at the offices and
subject to the restrictions set forth therein and in the applicable prospectus
supplement without service charge, but upon payment of any taxes or other
governmental charges due in connection therewith, subject to any limitations
contained in the applicable indenture. Debt Securities in bearer form and the
coupons appertaining thereto, if any, will be transferable by delivery.
PAYMENT
Distributions on the Debt Securities in registered form will be made at the
office or agency of the applicable trustee in the Borough of Manhattan, the City
of New York or its other designated office. However, at the option of CMS
Energy, payment of any interest may be made by check or by wire transfer.
Payment of any interest due on Debt Securities in registered form will be made
to the persons in whose name the Debt Securities are registered at the close of
business on the record date for such interest payments. Payments made in any
other manner will be specified in the prospectus supplement.
EVENTS OF DEFAULT
Each indenture provides that events of default regarding any series of Debt
Securities will be:
- failure to pay required interest on any Debt Security of such series for
30 days;
- failure to pay principal other than a scheduled installment payment or
premium, if any, on any Debt Security of such series when due;
- failure to make any required scheduled installment payment for 30 days on
Debt Securities of such series;
- failure to perform for 90 days after notice any other covenant in the
relevant indenture other than a covenant included in the relevant
indenture solely for the benefit of a series of Debt Securities other
than such series;
- certain events of bankruptcy or insolvency, whether voluntary or not; or
- entry of final judgments against CMS Energy or Consumers for more than
$25,000,000 which remain undischarged or unbonded for 60 days or a
default resulting in the acceleration of indebtedness of CMS Energy or
Consumers more than $25,000,000, and the acceleration has not been
rescinded or annulled within 10 days after written notice of such default
as provided in the applicable indenture; and
Additional events of default may be prescribed for the benefit of the
holders of a particular series of Debt Securities and will be described in the
prospectus supplement relating to those Debt Securities.
If an event of default regarding Debt Securities of any series issued under
the indentures should occur and be continuing, either the trustee or the holders
of 25% in the principal amount of outstanding Debt Securities of such series may
declare each Debt Security of that series due and payable.
Holders of a majority in principal amount of the outstanding Debt
Securities of any series will be entitled to control certain actions of the
trustee under the indentures and to
17
<PAGE> 107
waive past defaults regarding such series. The trustee generally will not be
requested, ordered or directed by any of the holders of Debt Securities, unless
one or more of such holders shall have offered to the trustee reasonable
security or indemnity.
Before any holder of any series of Debt Securities may institute action for
any remedy, except payment on such holder's Debt Security when due, the holders
of not less than 25% in principal amount of the Debt Securities of that series
outstanding must request the trustee to take action. Holders must also offer and
give the satisfactory security and indemnity against liabilities incurred by the
trustee for taking such action.
CMS Energy is required to annually furnish the relevant trustee a statement
as to CMS Energy's compliance with all conditions and covenants under the
applicable indenture. Each indenture provides that the relevant trustee may
withhold notice to the holders of the Debt Securities of any series of any
default affecting such series, except payment on holders' Debt Securities when
due, if it considers withholding notice to be in the interests of the holders of
the Debt Securities of such series.
CONSOLIDATION, MERGER OR SALE OF ASSETS
Each indenture provides that CMS Energy 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 the new corporation assumes the
obligations of CMS Energy under the Debt Securities and the indentures and is
organized and existing under the laws of the United States of America, any U.S.
state or the District of Columbia.
MODIFICATION OF THE INDENTURE
Each indenture permits CMS Energy and the relevant trustee to enter into
supplemental indentures without the consent of the holders of the Debt
Securities to establish the form and terms of any series of securities under the
indentures.
Each indenture also permits CMS Energy and the relevant trustee, with the
consent of the holders of at least a majority in total principal amount of the
Debt Securities of all series then outstanding and affected (voting as one
class), to change in any manner the provisions of the applicable indenture or
modify in any manner the rights of the holders of the Debt Securities of each
such affected series. CMS Energy and the relevant trustee may not, without the
consent of the holder of each Debt Security affected, enter into any
supplemental indenture to:
- change the time of payment of the principal;
- reduce the principal amount of such Debt Security;
- reduce the rate or change the time of payment of interest on such Debt
Security;
- reduce the amount payable on any securities issued originally at a
discount upon acceleration or provable in bankruptcy; or
- impair the right to institute suit for the enforcement of any payment on
any Debt Security when due.
In addition, no such modification may reduce the percentage in principal
amount of the 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 applicable indenture.
18
<PAGE> 108
Prior to the acceleration of the maturity of any Debt Security, the
holders, voting as one class, of a majority in total principal amount of the
Debt Securities with respect to which a default or event of default shall have
occurred and be continuing may on behalf of the holders of all such affected
Debt Securities waive any past default or event of default and its consequences,
except a default or an event of default in respect of a covenant or provision of
the applicable indenture or of any Debt Security which cannot be modified or
amended without the consent of the holder of each Debt Security affected.
DEFEASANCE, COVENANT DEFEASANCE AND DISCHARGE
Each indenture provides that, at the option of CMS Energy:
- CMS Energy will be discharged from all obligations in respect of the Debt
Securities of a particular series then outstanding (except for certain
obligations to register the transfer of or exchange the Debt Securities
of such series, to replace stolen, lost or mutilated Debt Securities of
such series, to maintain paying agencies and to maintain the trust
described below); or
- CMS Energy need not comply with certain restrictive covenants of the
relevant indenture (including those described under "Consolidation,
Merger or Sale of Assets").
If CMS Energy in each case irrevocably deposits in trust with the relevant
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 the
interest thereon in accordance with their terms, will provide money in an amount
sufficient to pay all the principal and interest on the Debt Securities of such
series on the stated maturities of such Debt Securities in accordance with the
terms thereof.
To exercise this option, CMS Energy is required to deliver to the relevant
trustee an opinion of independent counsel to the effect that:
- the exercise of such option would not cause the holders of the Debt
Securities of such series to recognize income, gain or loss for United
States federal income tax purposes as a result of such defeasance, and
such holders 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 above, 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 applicable
indenture there has been a change in the applicable federal income tax
law.
In the event:
- CMS Energy exercises its option to effect a covenant defeasance with
respect to the Debt Securities of any series as described above,
- the Debt Securities of such series 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,
- the amount of money and securities on deposit with the relevant trustee
would be insufficient to pay amounts due on the Debt Securities of such
series at the time of the acceleration resulting from such event of
default,
19
<PAGE> 109
CMS Energy would remain liable for such amounts.
GOVERNING LAW
Each indenture and the Debt Securities will be governed by, and construed
in accordance with, the laws of the State of Michigan unless the laws of another
jurisdiction shall mandatorily apply.
SENIOR DEBENTURES
The Senior Debentures will be issued under the senior debt indenture and
will rank on an equal basis with all other unsecured debt of CMS Energy except
subordinated debt.
SUBORDINATED DEBENTURES
The Subordinated Debentures will be issued under the subordinated debt
indenture and will rank subordinated and junior in right of payment, to the
extent set forth in the subordinated debt indenture, to all "SENIOR
INDEBTEDNESS" (as defined below) of CMS Energy.
If CMS Energy defaults in the payment of any distributions on any Senior
Indebtedness when it becomes due and payable after any applicable grace period,
then, unless and until the default is cured or waived or ceases to exist, CMS
Energy cannot make a payment on account of or redeem or otherwise acquire the
Subordinated Debentures. The subordinated debt indenture provisions described in
this paragraph, however, do not prevent CMS Energy from making sinking fund
payments in Subordinated Debentures acquired prior to the maturity of Senior
Indebtedness or, in the case of default, prior to such default and notice
thereof. If there is any insolvency, bankruptcy, liquidation or other similar
proceeding relating to CMS Energy, its creditors or its property, then all
Senior Indebtedness must be paid in full before any payment may be made to any
holders of Subordinated Debentures. Holders of Subordinated Debentures must
return and deliver any payments received by them, other than in a plan of
reorganization or through a defeasance trust as described above, directly to the
holders of Senior Indebtedness until all Senior Indebtedness is paid in full.
"SENIOR INDEBTEDNESS" means distributions on the following, whether
outstanding on the date of execution of the subordinated debt indenture or
thereafter incurred, created or assumed:
- indebtedness of CMS Energy for money borrowed by CMS Energy or evidenced
by debentures (other than the Subordinated Debentures), notes, bankers'
acceptances or other corporate debt securities or similar instruments
issued by CMS Energy;
- obligations of CMS Energy with respect to letters of credit;
- all indebtedness of others of the type referred to in the two preceding
clauses assumed by or guaranteed in any manner by CMS Energy or in effect
guaranteed by CMS Energy; or
- renewals, extensions or refundings of any of the indebtedness referred to
in the preceding three clauses unless, in the case of any particular
indebtedness, renewal, extension or refunding, under the express
provisions of the instrument creating or evidencing the same or the
assumption or guarantee of the same, or pursuant to which the same is
outstanding, such indebtedness or such renewal, extension or
20
<PAGE> 110
refunding thereof is not superior in right of payment to the subordinated
debt securities.
The subordinated debt indenture does not limit the total amount of Senior
Indebtedness that may be issued. As of December 31, 1998, Senior Indebtedness of
CMS Energy totaled approximately $2.766 billion.
CERTAIN COVENANTS
If Debt Securities are issued to a Trust or a trustee of such Trust in
connection with the issuance of Trust Preferred Securities by such Trust, CMS
Energy will covenant that it will not, and it will not cause any of its
subsidiaries to, (i) declare or pay any dividends or distributions on, or
redeem, purchase, acquire, or make a liquidation payment with respect to, any of
CMS Energy's capital stock or (ii) make any payment of principal, interest or
premium, if any, on or repay or repurchase or redeem any debt securities
(including guarantees of indebtedness for money borrowed) of CMS Energy that
rank pari passu (in the case of Subordinated Debentures) with or junior (in the
case of Senior and Subordinated Debentures) to that Debt Security (other than
(a) any dividend, redemption, liquidation, interest, principal or guarantee
payment by CMS Energy where the payment is made by way of securities (including
capital stock) that rank pari passu with or junior to the securities on which
such dividend, redemption, interest, principal or guarantee payment is being
made, (b) payments under the Guarantees, (c) purchases of CMS Energy Common
Stock related to the issuance of CMS Energy Common Stock under any of CMS
Energy's benefit plans for its directors, officers or employees, (d) as a result
of a reclassification of CMS Energy's capital stock or the exchange or
conversion of one series or class of CMS Energy's capital stock for another
series or class of CMS Energy's capital stock and (e) the purchase of fractional
interests in shares of CMS Energy's capital stock pursuant to the conversion or
exchange provisions of such capital stock or the security being converted or
exchanged) if at such time (i) there shall have occurred any event of which CMS
Energy has actual knowledge that (a) with the giving of notice or the lapse of
time, or both, would constitute an event of default under the indentures and (b)
in respect of which CMS Energy shall not have taken reasonable steps to cure,
(ii) CMS Energy shall be in default with respect to its payment of any
obligations under the Guarantees or (iii) CMS Energy shall have given notice of
its selection of an Extension Period as provided in the indentures with respect
to the Debt Securities and shall not have rescinded such notice, or such
Extension Period, or any extension thereof, shall be continuing. CMS Energy will
also covenant (i) for so long as Trust Preferred Securities are outstanding, not
to convert the Debt Securities except pursuant to a notice of conversion
delivered to the Conversion Agent (as defined in the indentures) by a holder of
Trust Preferred Securities, (ii) to maintain directly or indirectly 100%
ownership of the Common Securities, provided that certain successor which are
permitted pursuant to the indentures may succeed to CMS Energy's ownership of
the Common Securities, (iii) not to voluntarily terminate, wind-up or liquidate
such Trust, except (a) in connection with a distribution of the Debt Securities
to the holders of the Trust Preferred Securities in liquidation of such Trust or
(b) in connection with certain mergers, consolidations or amalgamations
permitted by the Trust Agreement, (iv) to maintain the reservation for issuance
of the number of shares of CMS Energy Common Stock that would be required from
time to time upon the conversion of all the Debt Securities then outstanding,
(v) to use its reasonable efforts, consistent with the terms and provisions of
the Trust Agreement, to cause such Trust to remain classified as a grantor trust
and not as an association taxable as a corporation for United States federal
income tax purposes and (vi) to deliver shares
21
<PAGE> 111
of CMS Energy Common Stock upon an election by the holders of the Trust
Preferred Securities to convert such Trust Preferred Securities into CMS Energy
Common Stock.
As part of the Guarantees, CMS Energy will agree that it will honor all
obligations described therein relating to the conversion or exchange of the
Trust Preferred Securities into or for CMS Energy Common Stock, Senior
Debentures or Subordinated Debentures.
CONVERSION RIGHTS
If the prospectus supplement provides, the Holders of Debt Securities may
convert such Debt Securities into CMS Energy Common Stock, as defined herein
(see "Description of Securities -- Common Stock"), at the option of the Holders
at the principal amount thereof, or of such portion thereof, at any time during
the period specified in the prospectus supplement, at the conversion price or
conversion rate specified in the prospectus supplement; except that, with
respect to any Debt Securities (or portion thereof) called for redemption, such
conversion right shall terminate at the close of business on the fifteenth day
prior to the date fixed for redemption of such Debt Security, unless CMS Energy
shall default in payment of the amount due upon redemption thereof.
The conversion privilege and conversion price or conversion rate will be
adjusted in certain events, including if CMS Energy:
- pays a dividend or makes a distribution in shares of CMS Energy Common
Stock;
- subdivides its outstanding shares of CMS Energy Common Stock into a
greater number of shares;
- combines its outstanding shares of CMS Energy Common Stock into a smaller
number of shares;
- pays a dividend or makes a distribution on its CMS Energy Common Stock
other than in shares of its CMS Energy Common Stock;
- issues by reclassification of its shares of CMS Energy Common Stock any
shares of its capital stock;
- issues any rights or warrants to all holders of shares of its CMS Energy
Common Stock entitling them (for a period expiring within 45 days, or
such other period as may be specified in the prospectus supplement) to
purchase shares of CMS Energy Common Stock (or Convertible Securities as
defined in the indentures) at a price per share less than the Average
Market Price (as defined in the indentures) per share for such CMS Energy
Common Stock; and
- distributes to all holders of shares of its CMS Energy Common Stock any
assets or Debt Securities or any rights or warrants to purchase
securities, provided that no adjustment shall be made under (vi) or (vii)
above if the adjusted conversion price would be higher than, or the
adjusted conversion rate would be less than, the conversion price or
conversion rate, as the case may be, in effect prior to such adjustment.
CMS Energy may reduce the conversion price or increase the conversion rate,
temporarily or otherwise, by any amount but in no event shall such adjusted
conversion price or conversion rate result in shares of CMS Energy Common Stock
being issuable upon conversion of the Debt Securities if converted at the time
of such adjustment at an
22
<PAGE> 112
effective conversion price per share less than the par value of the CMS Energy
Common Stock at the time such adjustment is made. No adjustments in the
conversion price or conversion rate need be made unless the adjustment would
require an increase or decrease of at least one percent (1%) in the initial
conversion price or conversion rate. Any adjustment which is not made shall be
carried forward and taken into account in any subsequent adjustment. The
foregoing conversion provisions may be modified to the extent set forth in the
prospectus supplement.
TRUST PREFERRED SECURITIES
GENERAL
Each Trust may issue, from time to time, Trust Preferred Securities having
terms described in the prospectus supplement relating thereto. The Trust
Agreement of each Trust will authorize the establishment of no more than one
series of Trust Preferred Securities, having such terms, including
distributions, redemption, voting, liquidation rights and such other preferred,
deferred or other special rights or such rights or restrictions as shall be set
forth therein or otherwise established by the Trust Trustees pursuant thereto.
Reference is made to the prospectus supplement relating to the Trust Preferred
Securities for specific terms, including: (i) the distinctive designation and
the number of Trust Preferred Securities to be offered which will represent
undivided beneficial interests in the assets of the Trust; (ii) the annual
distribution rate and the dates or date upon which such distributions will be
paid, provided, however distributions on the Trust Preferred Securities will be
paid quarterly in arrears to holders of Trust Preferred Securities as of a
record date on which the Trust Preferred Securities are outstanding; (iii)
whether holders' can convert the Trust Preferred Securities into shares of CMS
Energy Common Stock; (iv) whether distributions on Trust Preferred Securities
would be deferred during any deferral of interest payments on the Debt
Securities, provided, however that no such deferral, including extensions, if
any, may exceed 20 consecutive quarters nor extend beyond the stated maturity
date of the Debt Securities, and at the end of any such deferrals, CMS Energy
shall make all interest payments then accrued or deferred and unpaid (including
any compounded interest); (v) the amount of any liquidation preference; (vi) the
obligation, if any, of the Trust to redeem Trust Preferred Securities through
the exercise of CMS Energy of an option on the corresponding Debt Securities and
the price or prices at which, the period or periods within which and the terms
and conditions upon which Trust Preferred Securities shall be purchased or
redeemed, in whole or in part, pursuant to such obligation; (vii) the period or
periods within which and the terms and conditions, if any, including the price
or prices or the rate or rates of conversion or exchange and the terms and
conditions of any adjustments thereof, upon which the Trust Preferred Securities
shall be convertible or exchangeable at the option of the holder of the Trust
Preferred Securities or other property or cash; (viii) the voting rights, if
any, of the Trust Preferred Securities in addition to those required by law and
in the Trust Agreement, or set forth under a Guarantee (as defined below); (ix)
the additional payments, if any, which the Trust will pay as a distribution as
necessary so that the net amounts reserved by the Trust and distributable to the
holders of the Trust Preferred Securities, after all taxes, duties, assessments
or governmental charges of whatever nature (other than withholding taxes) have
been paid will not be less than the amount that would have been reserved and
distributed by the Trust, and the amount the holders of the Trust Preferred
Securities would have reserved, had no such taxes, duties, assessments or
governmental charges been imposed; (x) the terms and conditions, if any, upon
which the Debt Securities may be distributed to holders of Trust Preferred
Securities; and (xi) any other relative rights,
23
<PAGE> 113
powers, preferences, privileges, limitations or restrictions of the Trust
Preferred Securities not inconsistent with the Trust Agreement or applicable
law. All Trust Preferred Securities offered hereby will be irrevocably
guaranteed by CMS Energy, on a senior or subordinated basis, as applicable, and
to the extent set forth below under "The Guarantees." Any applicable federal
income tax considerations applicable to any offering of the Trust Preferred
Securities will be described in the prospectus supplement relating thereto. The
aggregate number of Trust Preferred Securities which the Trust shall have
authority to issue will be pursuant to the terms of the Trust Agreement.
EFFECT OF OBLIGATIONS UNDER THE DEBT SECURITIES
AND THE GUARANTEES
As set forth in the Trust Agreement, the sole purpose of the Trust is to
issue the Trust Securities evidencing undivided beneficial interests in the
assets of each of the Trust, and to invest the proceeds from such issuance and
sale to acquire directly the Debt Securities from CMS Energy.
As long as payments of interest and other payments are made when due on the
Debt Securities, such payments will be sufficient to cover distributions and
payments due on the Trust Securities because of the following factors:
- the aggregate principal amount of Debt Securities will be equal to the
sums of the aggregate stated liquidation amount of the Trust Securities;
- the interest rate and the interest and other payment dates on the Debt
Securities will match the distribution rate and distribution and other
payment dates for the Trust Securities;
- CMS Energy shall pay all, and the Trust shall not be obligated to pay,
directly or indirectly, all costs, expenses, debt and obligations of the
Trust (other than with respect to the Trust Securities); and
- the Trust Agreement further provides that CMS Energy Trustees shall not
take or cause or permit the Trust to, among other things, engage in any
activity that is not consistent with the purposes of the Trust.
Payments of distributions (to the extent funds therefore are available) and
other payments due on the Trust Preferred Securities (to the extent funds
therefor are available) are guaranteed by CMS Energy as and to the extent set
forth under "The Guarantees" below. If CMS Energy does not make interest
payments on the Debt Securities purchased by the Trust, it is expected that the
Trust will not have sufficient funds to pay distributions on the Trust Preferred
Securities. The Guarantees do not apply to any payment of distributions unless
and until the Trust has sufficient funds for the payment of distributions and
other payments on the Trust Preferred Securities only if and to the extent that
CMS Energy has made a payment of interest or principal on the Debt Securities
held by the Trust as its sole asset. The Guarantees, when taken together with
CMS Energy's obligations under the Debt Securities and the Indenture and its
obligations under the Trust Agreement, including its obligations to pay costs,
expenses, debts and liabilities of the Trust (other than with respect to the
Trust securities), provide a full and unconditional guarantee of amounts on the
Trust Preferred Securities.
If CMS Energy fails to make interest or other payments on the Debt
Securities when due (taking account of any extension period), the Trust
Agreement provides a mechanism
24
<PAGE> 114
whereby the holders of the Trust Preferred Securities may direct a Property
Trustee to enforce its rights under the Debt Securities. If a Property Trustee
fails to enforce its rights under the Debt Securities, a holder of Trust
Preferred Securities may institute a legal proceeding against CMS Energy to
enforce a Property Trustee's rights under the Debt Securities without first
instituting any legal proceeding against a Property Trustee or any other person
or entity. Notwithstanding the foregoing, if an event of default has occurred
and is continuing under the Trust Agreement, and such event is attributable to
the failure of CMS Energy to pay interest or principal on the Debt Securities on
the date such interest or principal is otherwise payable (or in the case of
redemption on the redemption date), then a holder of Trust Preferred Securities
may institute legal proceedings directly against CMS Energy to obtain payment.
If CMS Energy fails to make payments under the Guarantees, the Guarantees
provide a mechanism whereby the holders of the Trust Preferred Securities may
direct a Guarantee Trustee to enforce its rights thereunder. Any holder of Trust
Preferred Securities may institute a legal proceeding directly against CMS
Energy to enforce a Guarantee Trustee's rights under a Guarantee without first
instituting a legal proceeding against the Trust, the Guarantee Trustee, or any
other person or entity.
THE GUARANTEES
Set forth below is a summary of information concerning the Guarantees which
will be executed and delivered by CMS Energy for the benefit of the holders,
from time to time, of the Trust Preferred Securities. Each Guarantee will be
qualified as an indenture under the Trust Indenture Act of 1939. Either The Bank
of New York, or NBD Bank, each an independent trustee, will act as indenture
trustee under the Guarantees for the purpose of compliance with the provisions
of the Trust Indenture Act of 1939. This summary does not purport to be complete
and is subject in all respects to the provisions of, and is qualified in its
entirety by reference to, the Guarantees, which is filed as an exhibit to the
Registration Statement of which this prospectus forms a part.
GENERAL
CMS Energy will irrevocably agree to pay in full, on a senior or
subordinated basis, as applicable, to the extent set forth herein, the Guarantee
Payments (as defined below) to the holders of the Trust Preferred Securities, as
and when due, regardless of any defense, right of set-off or counterclaim that
the Trust may have or assert other than the defense of payment. The following
payments with respect to the Trust Preferred Securities, to the extent not paid
by or on behalf of the Trust (the "GUARANTEE PAYMENTS"), will be subject to a
Guarantee: (i) any accumulated and unpaid distributions required to be paid on
the Trust Preferred Securities, to the extent that the Trust has funds on hand
available therefor at such time; (ii) the redemption price with respect to any
Trust Preferred Securities called for redemption to the extent that the Trust
has funds on hand available therefor at such time; or (iii) upon a voluntary or
involuntary dissolution, winding up or liquidation of the Trust (unless the Debt
Securities are distributed to holders of the Trust Preferred Securities), the
lesser of (a) the liquidation distribution, to the extent that the Trust has
funds on hand available therefor at such time, and (b) the amount of assets of
the Trust remaining available for distribution to holders of Trust Preferred
Securities. CMS Energy's obligation to make a Guarantee Payment may be satisfied
by direct payment of the required amounts of CMS Energy to the holders of the
Trust Preferred Securities or by causing the Trust to pay such amount to such
holders.
25
<PAGE> 115
Such Guarantees will be irrevocable guarantees, on a senior or subordinated
basis, as applicable, of the Trust's obligations under the Trust Preferred
Securities, but will apply only to the extent that the Trust has funds
sufficient to make such payments, and are not guarantees of collection. If CMS
Energy does not make interest payments on the Debt Securities held by the Trust,
the Trust will not be able to pay distributions on the Trust Preferred
Securities and will not have funds legally available therefor.
CMS Energy has, through the Guarantees, the Trust Agreements, the Senior
Debentures, the Subordinated Debentures, the indentures and the Expense
Agreement, taken together, fully, irrevocably and unconditionally guaranteed all
of the Trust's obligations under the Trust Preferred Securities. No single
document standing alone or operating in conjunction with fewer than all of the
other documents constitutes such guarantee. It is only the combined operation of
these documents that has the effect of providing a full, irrevocable and
unconditional guarantee of the Trust's obligations under the Trust Preferred
Securities.
CMS Energy has also agreed separately to irrevocably and unconditionally
guarantee the obligations of the Trust with respect to the Common Securities to
the same extent as the Guarantees, except that upon the occurrence and during
the continuation of a Trust Agreement Event of Default, holders of Trust
Preferred Securities shall have priority over holders of Common Securities with
respect to distributions and payments on liquidation, redemption or otherwise.
CERTAIN COVENANTS OF CMS ENERGY
CMS Energy will covenant in each Guarantee that if and so long as (i) the
Trust is the holder of all the Debt Securities, (ii) a Tax Event (as defined in
the Guarantee) in respect of the Trust has occurred and is continuing and (iii)
CMS Energy has elected, and has not revoked such election, to pay Additional
Sums (as defined in the Guarantee) in respect of the Trust Preferred Securities
and Common Securities, CMS Energy will pay to the Trust such Additional Sums.
CMS Energy will also covenant that it will not, and it will not cause any of its
subsidiaries to (i) declare or pay any dividends or distributions on, or redeem,
purchase, acquire, or make a liquidation payment with respect to, any of CMS
Energy's capital stock or (ii) make any payment of principal, interest or
premium, if any, on or repay or repurchase or redeem any debt securities
(including guarantees of indebtedness for money borrowed) of CMS Energy that
rank pari passu (in the case of Subordinated Debentures with or junior in the
case of the Senior and Subordinated Debentures) to the Debt Securities (other
than (a) any dividend, redemption, liquidation, interest, principal or guarantee
payment by CMS Energy where the payment is made by way of securities (including
capital stock) that rank pari passu with or junior to the securities on which
such dividend, redemption, interest, principal or guarantee payment is being
made, (b) payments under the Guarantees, (c) purchases of CMS Energy Common
Stock related to the issuance of CMS Energy Common Stock under any of CMS
Energy's benefit plans for its directors, officers or employees, (d) as a result
of a reclassification of CMS Energy's capital stock or the exchange or
conversion of one series or class of CMS Energy's capital stock for another
series or class of CMS Energy's capital stock and (e) the purchase of fractional
interests in shares of CMS Energy's capital stock pursuant to the conversion or
exchange provisions of such capital stock or the security being converted or
exchanged) if at such time (i) there shall have occurred any event of which CMS
Energy has actual knowledge that (a) with the giving of notice or the lapse of
time, or both, would constitute a event of default and (b) in respect of which
CMS Energy shall
26
<PAGE> 116
not have taken reasonable steps to cure, (ii) CMS Energy shall be in default
with respect to its payment of any obligations under the Guarantee or (iii) CMS
Energy shall have given notice of its selection of an Extension Period as
provided in the indentures with respect to the Debt Securities and shall not
have rescinded such notice, or such Extension Period, or any extension thereof,
shall be continuing. CMS Energy also will covenant to (i) for so long as Trust
Preferred Securities are outstanding, not convert Debt Securities except
pursuant to a notice of conversion delivered to the Conversion Agent by a holder
of Trust Preferred Securities, (ii) maintain directly or indirectly 100%
ownership of the Common Securities, provided that certain successors which are
permitted pursuant to the indentures may succeed to CMS Energy's ownership of
the Common Securities, (iii) not voluntarily terminate, wind-up or liquidate the
Trust, except (a) in connection with a distribution of the Debt Securities to
the holders of the Trust Preferred Securities in liquidation of the Trust or (b)
in connection with certain mergers, consolidations or amalgamations permitted by
the Trust Agreement, (iv) maintain the reservation for issuance of the number of
shares of CMS Energy Common Stock that would be required from time to time upon
the conversion of all the Debt Securities then outstanding, (v) use its
reasonable efforts, consistent with the terms and provisions of the Trust
Agreement, to cause the Trust to remain classified as a grantor trust and not as
an association taxable as a corporation for United States federal income tax
purposes and (vi) deliver shares of CMS Energy Common Stock upon an election by
the holders of the Trust Preferred Securities to convert such Trust Preferred
Securities into CMS Energy Common Stock.
As part of the Guarantees, CMS Energy will agree that it will honor all
obligations described therein relating to the conversion or exchange of the
Trust Preferred Securities into or for CMS Energy Common Stock, Senior
Debentures or Subordinated Debentures.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes which do not materially adversely affect
the rights of holders of the Trust Preferred Securities (in which case no vote
will be required), the Guarantees may not be amended without the prior approval
of the holders of not less than a majority in aggregate liquidation amount of
such outstanding Trust Preferred Securities. All guarantees and agreements
contained in the Guarantees shall bind the successors, assigns, receivers,
trustees and representatives of CMS Energy and shall inure to the benefit of the
holders of the Trust Preferred Securities then outstanding.
TERMINATION OF THE GUARANTEES
The Guarantees will terminate and be of no further force and effect upon
full payment of the redemption price of the Trust Preferred Securities, upon
full payment of the amounts payable upon liquidation of the Trust, upon the
distribution, if any, of CMS Energy Common Stock to the holders of Trust
Preferred Securities in respect of the conversion of all such holders' Trust
Preferred Securities into CMS Energy Common Stock or upon distribution of the
Debt Securities to the holders of the Trust Preferred Securities in exchange for
all of the Trust Preferred Securities. The Guarantees will continue to be
effective or will be reinstated, as the case may be, if at any time any holder
of Trust Preferred Securities must restore payment of any sums paid under such
Trust Preferred Securities or the Guarantees.
27
<PAGE> 117
EVENTS OF DEFAULT
An event of default under a Guarantee will occur upon the failure of CMS
Energy to perform any of its payment or other obligations thereunder. The
holders of a majority in aggregate liquidation amount of the Trust Preferred
Securities have the right to direct the time, method and place of conducting any
proceeding for any remedy available to a Guarantee Trustee in respect of a
Guarantee or to direct the exercise of any trust or power conferred upon a
Guarantee Trustee under the Guarantees.
If a Guarantee Trustee fails to enforce a Guarantee, any holder of the
Trust Preferred Securities may institute a legal proceeding directly against CMS
Energy to enforce its rights under such Guarantee without first instituting a
legal proceeding against the Trust, the Guarantee Trustee or any other person or
entity. In addition, any record holder of Trust Preferred Securities shall have
the right, which is absolute and unconditional, to proceed directly against CMS
Energy to obtain Guarantee Payments, without first waiting to determine if the
Guarantee Trustee has enforced a Guarantee or instituting a legal proceeding
against the Trust, the Guarantee Trustee or any other person or entity. CMS
Energy has waived any right or remedy to require that any action be brought just
against the Trust, or any other person or entity before proceeding directly
against CMS Energy.
CMS Energy, as guarantor, is required to file annually with each Guarantee
Trustee a certificate as to whether or not CMS Energy is in compliance with all
the conditions and covenants applicable to it under the Guarantees.
STATUS OF THE GUARANTEES
The Guarantees will constitute unsecured obligations of CMS Energy and will
rank equal to or subordinate and junior in right of payment to all other
liabilities of CMS Energy, as applicable. The Guarantees will rank pari passu
with or senior to, as applicable, any guarantee now or hereafter entered into by
CMS Energy in respect of any preferred or preference stock of any affiliate of
CMS Energy.
The Guarantees will constitute a guarantee of payment and not of collection
(i.e., the guaranteed party may institute a legal proceeding directly against
the Guarantor to enforce its rights under the Guarantee without first
instituting a legal proceeding against any other person or entity). The
Guarantees will be held for the benefit of the holders of the Trust Preferred
Securities. The Guarantees will not be discharged except by payment of the
Guarantee Payments in full to the extent not paid by the Trust or upon
distribution of the Debt Securities to the holders of the Trust Preferred
Securities. The Guarantees do not place a limitation on the amount of additional
indebtedness that may be incurred by CMS Energy or any of its subsidiaries.
DESCRIPTION OF STOCK PURCHASE CONTRACTS AND STOCK PURCHASE UNITS
CMS Energy may issue Stock Purchase Contracts, representing contracts
obligating holders to purchase from CMS Energy, and CMS Energy to sell to the
holders, a specified number of shares of CMS Energy Common Stock at a future
date or dates. The price per share of CMS Energy Common Stock may be fixed at
the time the Stock Purchase Contracts are issued or may be determined by
reference to a specific formula set forth in the Stock Purchase Contracts. The
Stock Purchase Contracts may be issued separately or as part of Stock Purchase
Units consisting of a Stock Purchase Contract and Senior Debentures,
Subordinated Debentures, Trust Preferred Securities or debt obligations of
28
<PAGE> 118
third parties, including U.S. Treasury securities, securing the holders'
obligations to purchase the Common Stock under the Stock Purchase Contracts. The
Stock Purchase Contracts may require CMS Energy to make periodic payments to the
holders of the Stock Purchase Units or visa versa, and such payments may be
unsecured or refunded on some basis. The Stock Purchase Contracts may require
holders to secure their obligations thereunder in a specified manner.
The applicable prospectus supplement will describe the terms of any Stock
Purchase Contracts or Stock Purchase Units. The description in the prospectus
supplement will not purport to be complete and will be qualified in its entirety
by reference to the Stock Purchase Contracts, and, if applicable, collateral
arrangements and depositary arrangements, relating to such Stock Purchase
Contracts or Stock Purchase Units.
LEGAL OPINIONS
Opinions as to the legality of certain of the Offered Securities will be
rendered for CMS Energy by Michael D. Van Hemert, Esq., Assistant General
Counsel for CMS Energy. Certain matters of Delaware law relating to the validity
of the Trust Preferred Securities will be passed upon on behalf of the Trusts by
Skadden, Arps, Slate, Meagher & Flom LLP, special Delaware counsel to the
Trusts. Certain United States Federal income taxation matters may be passed upon
for CMS Energy and the Trust by either Theodore J. Vogel, tax counsel for CMS
Energy, or by special tax counsel to CMS Energy and of the Trust, who will be
named in the prospectus supplement. Certain legal matters with respect to
Offered Securities will be passed upon by counsel for any underwriters, dealers
or agents, each of whom will be named in the related prospectus supplement.
EXPERTS
The consolidated financial statements and schedule of CMS Energy as of
December 31, 1998 and 1997, and for each of the three years in the period ended
December 31, 1998 incorporated by reference in this prospectus, have been
audited by Arthur Andersen LLP, 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.
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.
PLAN OF DISTRIBUTION
CMS Energy and/or the Trusts may sell the Offered Securities: (i) through
the solicitation of proposals of underwriters or dealers to purchase the Offered
Securities; (ii) through underwriters or dealers on a negotiated basis; (iii)
directly to a limited number of purchasers or to a single purchaser; or (iv)
through agents. The prospectus supplement with respect to any Offered Securities
will set forth the terms of such offering, including the name or names of any
underwriters, dealers or agents; the purchase price of
29
<PAGE> 119
the Offered Securities and the proceeds to CMS Energy and/or the Trust from such
sale; any underwriting discounts and commissions and other items constituting
underwriters' compensation; any initial public offering price and any discounts
or concessions allowed or reallowed or paid to dealers and any securities
exchange on which such Offered Securities may be listed. Any initial public
offering price, discounts or concessions allowed or reallowed or paid to dealers
may be changed from time to time.
If underwriters are used in the sale, the Offered Securities will be
acquired by the underwriters for their own account and may be resold from time
to time in one or more transactions, including negotiated transactions, at a
fixed public offering price or at varying prices determined at the time of sale.
The Offered Securities may be offered to the public either through underwriting
syndicates represented by one or more managing underwriters or directly by one
or more firms acting as underwriters. The underwriter or underwriters with
respect to a particular underwritten offering of Offered Securities will be
named in the prospectus supplement relating to such offering and, if an
underwriting syndicate is used, the managing underwriter or underwriters will be
set forth on the cover of such prospectus supplement. Unless otherwise set forth
in the prospectus supplement relating thereto, the obligations of the
underwriters to purchase the Offered Securities will be subject to certain
conditions precedent, and the underwriters will be obligated to purchase all the
Offered Securities if any are purchased.
If dealers are utilized in the sale of Offered Securities, CMS Energy
and/or the Trusts will sell such Offered Securities to the dealers as
principals. The dealers may then resell such Offered Securities to the public at
varying prices to be determined by such dealers at the time of resale. The names
of the dealers and the terms of the transaction will be set forth in the
prospectus supplement relating thereto.
The Offered Securities may be sold directly by CMS Energy and/or the Trusts
or through agents designated by CMS Energy and/or the Trusts from time to time.
Any agent involved in the offer or sale of the Offered Securities in respect to
which this prospectus is delivered will be named, and any commissions payable by
CMS Energy and/or the Trusts to such agent will be set forth, in the prospectus
supplement relating thereto. Unless otherwise indicated in the prospectus
supplement, any such agent will be acting on a best efforts basis for the period
of its appointment.
The Offered Securities may be sold directly by CMS Energy and/or the Trust
to institutional investors or others, who may be deemed to be underwriters
within the meaning of the Securities Act with respect to any resale thereof. The
terms of any such sales will be described in the prospectus supplement relating
thereto.
The CMS Energy Common Stock and the Class G Common Stock may be offered
other than through the facilities of a national securities exchange and other
than to or through a market marker other than on an exchange.
Agents, dealers and underwriters may be entitled under agreements with CMS
Energy and/or the Trust to indemnification by CMS Energy and/or the Trust
against certain civil liabilities, including liabilities under the Securities
Act, or to contribution with respect to payments which such agents, dealers or
underwriters may be required to make in respect thereof. Agents, dealers and
underwriters may be customers of, engage in transactions with, or perform
services for CMS Energy and/or the Trust in the ordinary course of business.
The Offered Securities may also be offered and sold, if so indicated in the
applicable prospectus supplement, in connection with a remarketing upon their
purchase, in
30
<PAGE> 120
accordance with a redemption or repayment pursuant to their terms, or otherwise,
by one or more firms ("REMARKETING FIRMS"), acting as principals for their own
accounts or as agents for CMS Energy and/or the Trusts. Any remarketing firm
will be identified and the terms of its agreement, if any, with its compensation
will be described in the applicable prospectus supplement. Remarketing firms may
be deemed to be underwriters, as such term is defined in the Securities Act, in
connection with the Offered Securities remarketed thereby. Remarketing firms may
be entitled under agreements which may be entered into with CMS Energy and/or
the Trusts to indemnification or contribution by CMS Energy and/or the Trusts
against certain civil liabilities, including liabilities under the Securities
Act, and may be customers of, engage in transactions or perform services for CMS
Energy and its subsidiaries in the ordinary course of business.
The Offered Securities may or may not be listed on a national securities
exchange. Reference is made to the prospectus supplement with regard to such
matter. No assurance can be given that there will be a market for any of the
Offered Securities.
31
<PAGE> 121
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
JUNE , 1999
[LOGO]
$300,000,000
UNITS
% ADJUSTABLE CONVERTIBLE TRUST SECURITIES
------------------------------------------
PROSPECTUS SUPPLEMENT
------------------------------------------
Joint Book-Running Managers
SALOMON SMITH BARNEY DONALDSON, LUFKIN & JENRETTE
BANC OF AMERICA SECURITIES LLC
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations other than those contained in this prospectus supplement or the
base prospectus, and, if given or made, such information or representations must
not be relied upon as having been authorized. This prospectus supplement and the
base prospectus do not constitute an offer to sell or the solicitation of an
offer to buy any securities other than the securities described in this
prospectus supplement or an offer to sell or the solicitation of an offer to buy
such securities in any circumstances in which such offer or solicitation is
unlawful. Neither the delivery of this prospectus supplement or the base
prospectus nor any sale made hereunder or thereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof or that the information contained
herein or therein is correct as of any time subsequent to its date.
- --------------------------------------------------------------------------------
