<PAGE>
Rule No. 424(b)(4)
Registration No. 33-65285
PROSPECTUS
$75,000,000
NIPSCO Capital Markets, Inc.
7 3/4% QUARTERLY DEBT CAPITAL SECURITIES
(JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES, SERIES A)
Entitled to the Benefit of a Support Agreement
Providing for the Payment of Principal and Interest by
NIPSCO Industries, Inc.
---------------
The Junior Subordinated Deferrable Interest Debentures, Series A (the
"Subordinated Debentures"), of NIPSCO Capital Markets, Inc. ("Capital") will
mature on March 31, 2026. Interest on the Subordinated Debentures is payable
quarterly in arrears on March 31, June 30, September 30 and December 31 of
each year, beginning March 31, 1996, provided that, so long as an Event of
Default (as defined herein) has not occurred and is not continuing, Capital
has the right to extend the interest payment period at any time and from time
to time on the Subordinated Debentures to a period not exceeding 20
consecutive quarters. The Subordinated Debentures will be redeemable at the
option of Capital, in whole or in part, on or after March 31, 2001 at 100% of
the principal amount redeemed together with unpaid interest accrued to the
redemption date. See "Description of the Subordinated Debentures -- Optional
Redemption."
The Subordinated Debentures will be represented by a Global Security or
Securities that will be deposited with, or on behalf of, The Depository Trust
Company ("DTC"). The Subordinated Debentures will be available for purchase in
denominations of $25 and any integral multiple thereof. See "Description of
the Subordinated Debentures."
The Subordinated Debentures are unsecured debt obligations of Capital and
are entitled to the benefits of a Support Agreement, dated as of April 4,
1989, as amended (the "Support Agreement"), between Capital and its parent
company, NIPSCO Industries, Inc. ("Industries"), providing for the payment of
principal of and interest on the Subordinated Debentures in the event of
default of Capital. Payment of the principal of and interest on the
Subordinated Debentures is subordinate and subject in right of payment to the
prior payment in full of all Senior Indebtedness of Capital. As of September
30, 1995, outstanding Senior Indebtedness of Capital aggregated approximately
$131.7 million.
---------------
The Subordinated Debentures have been approved for listing on the New York
Stock Exchange, subject to official notice of issuance.
---------------
SEE "RISK FACTORS" ON PAGE 4 FOR CERTAIN INFORMATION RELEVANT TO AN INVESTMENT
IN THE SUBORDINATED DEBENTURES, INCLUDING THE PERIOD AND CIRCUMSTANCES
DURING AND UNDER WHICH PAYMENT OF INTEREST ON THE SUBORDINATED
DEBENTURES MAY BE DEFERRED AND THE RELATED UNITED STATES
FEDERAL INCOME TAX CONSEQUENCES OF SUCH DEFERRAL.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
PRICE 100% AND ACCRUED INTEREST, IF ANY
---------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC (1) COMMISSIONS (2) CAPITAL (1)(3)
----------- --------------- --------------
<S> <C> <C> <C>
Per Series A Junior Subordinated
Deferrable Interest Debenture...... 100.00% 3.15% 96.85%
Total............................... $75,000,000 $2,362,500 $72,637,500
</TABLE>
- -------
(1)Plus accrued interest, if any, from the date of initial issue.
(2) Capital and Industries have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended. See "Underwriting."
(3)Before deducting estimated expenses of $218,000 payable by Capital.
---------------
The Subordinated Debentures are offered, subject to prior sale, when, as and
if accepted by the Underwriters and subject to approval of certain legal
matters by Sonnenschein Nath & Rosenthal, counsel for the Underwriters. It is
expected that delivery of the Subordinated Debentures will be made on or about
February 13, 1996 through the book-entry facilities of DTC against payment
therefor in immediately available funds.
---------------
MORGAN STANLEY & CO.
Incorporated
DEAN WITTER REYNOLDS INC.
A.G. EDWARDS & SONS, INC.
GOLDMAN, SACHS & CO.
SMITH BARNEY INC.
February 8, 1996
<PAGE>
AVAILABLE INFORMATION
Capital and Industries have filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-3 (including
any amendments thereto, the "Registration Statement") under the Securities Act
of 1933, as amended (the "Securities Act"), with respect to the Subordinated
Debentures. This Prospectus does not contain all of the information set forth
in the Registration Statement and the exhibits and schedules thereto, certain
portions of which have been omitted pursuant to the rules of the Commission.
Statements made in this Prospectus as to the contents of any contract,
agreement or other document are not necessarily complete. With respect to each
such contract, agreement or other document filed or incorporated by reference
as an exhibit to the Registration Statement, reference is made to such exhibit
for a more complete description of the matter involved, and each such
statement is qualified in its entirety by such reference.
Industries is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Reports, proxy statements and other information filed by
Industries with the Commission may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices
located at Suite 1400, 500 West Madison Street, Chicago, Illinois 60661 and at
Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of such
materials may be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such
reports, proxy statements and other information concerning Industries may also
be inspected at the offices of the New York Stock Exchange, 20 Broad Street,
New York, New York 10005, the Chicago Stock Exchange, 440 South LaSalle
Street, Chicago, Illinois 60605, and the Pacific Stock Exchange, 301 Pine
Street, San Francisco, California 94104, on which exchanges certain of
Industries' securities are listed.
On September 25, 1992, the staff of the Commission informed Industries and
Capital by letter that it would not recommend enforcement action to the
Commission if Capital did not file periodic reports pursuant to Sections 13
and 15(d) of the Exchange Act, subject to Industries' compliance with the
conditions set forth therein. In reliance upon such letter, no documents have
been filed or will be filed by Capital under the Exchange Act. Capital does
not intend to issue any periodic or other reports to holders of the
Subordinated Debentures. Capital has been advised by the Commission's staff
that financial information regarding Capital need not be included in any
registration statement on Form S-3 filed by Capital and Industries with
respect to the Subordinated Debentures and the Support Agreement.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed by Industries with the Commission are
incorporated herein by reference:
(a) Industries' Annual Report on Form 10-K for the year ended December
31, 1994; and
(b) Industries' Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1995, June 30, 1995 and September 30, 1995.
All documents subsequently filed by Industries pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and
prior to the termination of the offering of the Subordinated Debentures shall
be deemed to be incorporated by reference in this Prospectus and to be a part
hereof from the date of filing of such documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference in this
Prospectus shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
2
<PAGE>
INDUSTRIES WILL PROVIDE WITHOUT CHARGE TO EACH PERSON, INCLUDING ANY
BENEFICIAL OWNER, TO WHOM A COPY OF THIS PROSPECTUS HAS BEEN DELIVERED, ON THE
WRITTEN OR ORAL REQUEST OF SUCH PERSON, A COPY OF ANY OR 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 WHICH ARE NOT SPECIFICALLY
INCORPORATED BY REFERENCE INTO THE INFORMATION THAT THE PROSPECTUS
INCORPORATES. REQUESTS FOR SUCH COPIES SHOULD BE DIRECTED TO NINA M. RAUSCH,
SECRETARY, NIPSCO INDUSTRIES, INC., 5265 HOHMAN AVENUE, HAMMOND, INDIANA
46320, TELEPHONE NUMBER (219) 853-5199.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY CAPITAL, INDUSTRIES OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH AN OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF CAPITAL
OR INDUSTRIES SINCE THE DATE OF THIS PROSPECTUS.
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SUBORDINATED
DEBENTURES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK
EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT
ANY TIME.
3
<PAGE>
RISK FACTORS
Prospective purchasers of Subordinated Debentures should carefully review
the information contained elsewhere in this Prospectus and should particularly
consider the following matters:
RIGHT OF CAPITAL TO DEFER PAYMENT OF INTEREST
So long as Capital shall not be in default in the payment of interest on the
Subordinated Debentures, Capital shall have the right under the Indenture (as
defined below) to extend the interest payment period at any time and from time
to time for a period not exceeding 20 consecutive calendar quarters. No
interest shall be due and payable during an Extension Period (as defined
below), but on the interest payment date occurring at the end of each
Extension Period, Capital shall pay to the holders of record on the record
date for such interest payment date (regardless of who the holders of record
may have been on other dates during the Extension Period) all accrued and
unpaid interest on the Subordinated Debentures, together with interest
thereon, compounded quarterly at the rate of interest on the Subordinated
Debentures. In the event that Capital exercises such right to extend, neither
Capital nor Industries may declare or pay dividends on, or, subject to certain
limited exceptions, redeem, purchase or acquire, any shares of its capital
stock until deferred interest on the Subordinated Debentures is paid in full.
Upon the termination of any Extension Period and the payment of all interest
then due, Capital may commence a new Extension Period. Capital may also prepay
at any time all or a portion of the interest accrued during an Extension
Period. Consequently, there could be multiple Extension Periods of varying
lengths throughout the term of the Subordinated Debentures. See "Description
of the Subordinated Debentures--Option to Extend Interest Payment Period."
Capital has no present intention of exercising its right to defer payments
of interest by extending the interest payment period on the Subordinated
Debentures.
NO CASH PAYMENTS DURING EXTENSION PERIOD TO PAY ACCRUED TAX LIABILITY
In the event an Extension Period occurs, holders of the Subordinated
Debentures would continue, under the original issue discount rules, to accrue
income on the Subordinated Debentures for United States federal income tax
purposes. As a result, a holder that is subject to United States federal
income tax ordinarily would include such amounts in gross income in advance of
the receipt of cash. A holder that disposes of its Subordinated Debentures
prior to the record date for payment of interest at the end of an Extension
Period will not receive cash from Capital related to such interest because
such interest will be paid to the holder of record on such record date,
regardless of who the holders of record may have been on other dates during
the Extension Period. The extent to which such a holder will receive a return
on the Subordinated Debentures for the period it held such Subordinated
Debentures will depend on the market for the Subordinated Debentures at the
time of such disposition. See "Differences in Timing and Amount Between
Interest Payments and Taxable Income" below and "Certain Federal Income Tax
Considerations."
CERTAIN TRADING CHARACTERISTICS
The Subordinated Debentures are expected to trade in the market as equity
securities. Accordingly, the Subordinated Debentures are expected to trade
"flat"; thus, purchasers of Subordinated Debentures will not pay and sellers
will not receive any accrued and unpaid interest thereon that is not included
in the trading price. However, for United States federal income tax purposes,
interest on the Subordinated Debentures is included in income as it accrues,
rather than when it is paid. See "Certain Federal Income Tax Considerations."
DIFFERENCES IN TIMING AND AMOUNT BETWEEN INTEREST PAYMENTS AND TAXABLE INCOME
Because the original issue discount rules apply to the Subordinated
Debentures, even if an Extension Period does not occur there may be
differences in timing and amount between the gross income recognized with
respect
4
<PAGE>
to a Subordinated Debenture and the interest payable on such Subordinated
Debenture. An owner of a Subordinated Debenture that does not use a calendar
year for tax accounting may be required to include in income in each tax year
original issue discount corresponding to a portion of the interest payable
during such owner's next succeeding tax year. An owner that disposes of its
Subordinated Debentures may be required to include in income original issue
discount corresponding to interest payable after the disposition. See "Certain
Federal Income Tax Considerations."
POTENTIAL MARKET VOLATILITY DURING EXTENSION PERIOD
As described above, Capital has the right to extend an interest payment
period from time to time for a period not exceeding 20 consecutive calendar
quarters. In the event Capital determines to extend an interest payment
period, or in the event Capital thereafter extends an Extension Period or
prepays interest accrued during an Extension Period as described above, the
market price of the Subordinated Debentures is likely to be adversely
affected. In addition, as a result of such rights, the market price of the
Subordinated Debentures may be more volatile than other debt instruments with
original issue discount that do not have such rights. A holder that disposes
of its Subordinated Debentures during an Extension Period, therefore, may not
receive the same return on its investment as a holder that continues to hold
its Subordinated Debentures. See "Description of the Subordinated Debentures--
Option to Extend Interest Payment Period."
SUBORDINATION OF SUBORDINATED DEBENTURES
The Subordinated Debentures are senior to the capital shares of Capital, but
will be unsecured obligations of Capital and subordinate to all existing and
future Senior Indebtedness of Capital. On September 30, 1995, approximately
$131.7 million of such Senior Indebtedness was outstanding. There are no terms
of the Subordinated Debentures that limit Capital's ability to incur
additional indebtedness, including indebtedness that would rank senior to the
Subordinated Debentures. The Indenture does not contain any cross-defaults to
any other indebtedness of Capital or Industries and, therefore, a default with
respect to, or the acceleration of, any such other indebtedness will not
constitute an Event of Default (as defined in the Indenture) with respect to
the Subordinated Debentures. Moreover, because the obligor under the Support
Agreement is Industries, the rights of the holders of the Subordinated
Debentures under the Support Agreement effectively will be subordinate to all
obligations of Industries' subsidiaries other than Capital. See "Description
of the Subordinated Debentures--Subordination."
CAPITAL
Capital was incorporated in Indiana in 1989. Capital was organized by
Industries to engage in financing activities that provide funds for use in
Industries' business operations and those of its direct and indirect wholly-
owned subsidiaries, excluding Northern Indiana Public Service Company
("Northern Indiana"). Industries owns all of the 1,000 authorized capital
shares of Capital.
Capital and Industries have entered into the Support Agreement, dated April
4, 1989, and amended as of May 15, 1989, December 10, 1990, and February 14,
1991, in which Industries has agreed, among other things, to ensure the timely
payment of principal, premium, if any, and interest owed on any debt
securities issued by Capital, with the limitation that no holder of such debt
securities will have recourse to or against the stock or assets of Northern
Indiana, or any interest of Industries or Capital therein. See "Description of
the Support Agreement."
On March 27, 1991 the Commission issued an order pursuant to Section 6(c) of
the Investment Company Act of 1940, as amended (the "Investment Company Act"),
granting an exemption to Capital from all of the provisions of the Investment
Company Act, subject to Capital's compliance with the conditions set forth
therein.
The principal executive offices of Capital are located at 5265 Hohman
Avenue, Hammond, Indiana 46320. Its telephone number is (219) 853-5200.
5
<PAGE>
INDUSTRIES
Industries is an Indiana corporation, incorporated in 1987, which serves as
the holding company for a number of wholly-owned subsidiaries, including three
public utility operating companies: Northern Indiana, Kokomo Gas and Fuel
Company ("Kokomo Gas") and Northern Indiana Fuel and Light Company, Inc.
("NIFL"). In addition to Capital, Industries has two other major non-utility
subsidiaries, NIPSCO Development Company, Inc. and NIPSCO Energy Services,
Inc. The principal executive offices of Industries are located at 5265 Hohman
Avenue, Hammond, Indiana 46320, and its telephone number is (219) 853-5200.
Northern Indiana, Industries' largest and dominant subsidiary, was
incorporated in Indiana in 1912 and supplies electricity and natural gas to
the public in 30 counties in the northern part of Indiana, serving an area of
about 12,000 square miles with a population of approximately 2,188,000. At
September 30, 1995, it supplied approximately 405,100 customers with
electricity and approximately 632,100 customers with natural gas. For the
twelve months ended September 30, 1995, about 63% of its revenues were derived
from the sale of electricity and about 37% from the sale and transportation of
natural gas. Kokomo Gas, which was incorporated in Indiana in 1917, and NIFL,
which was incorporated in Indiana in 1906, are both engaged in supplying
natural gas to the public in service territories contiguous to Northern
Indiana's service territory. At September 30, 1995, Kokomo Gas and NIFL served
approximately 31,400 and 30,400 customers, respectively.
USE OF PROCEEDS
Capital will advance the net proceeds of this offering to Industries
promptly after completion of the offering. In the interim, Capital will invest
any funds held by it only in the manner permitted by Rule 3a-5 under the
Investment Company Act. Industries will use the funds advanced to it to repay
earlier advances made to Industries out of a portion of the proceeds of
Capital's short-term bank borrowings and commercial paper issuances, which
Capital will then repay. These bank and commercial paper borrowings had an
average interest rate of 6.02% per annum at September 30, 1995. $35,000,000 of
the proceeds of these short-term borrowings were used by Industries to pay for
the mandatory redemption of all of its 8.75% Cumulative Preferred Shares on
January 12, 1996, and the balance was used for general corporate purposes,
including the purchase of Industries' Common Shares pursuant to Industries'
share repurchase program.
6
<PAGE>
SELECTED FINANCIAL INFORMATION
The financial information presented below should be read in conjunction with
Industries' historical financial statements and the notes thereto, which are
incorporated by reference herein. The consolidated financial statements of
Industries for each of the five years ended December 31, 1990 through 1994,
and for the twelve months ended September 30, 1995, have been audited by
Arthur Andersen LLP, independent public accountants.
<TABLE>
<CAPTION>
12 MONTHS
ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, ----------------------------------------------------------
1995 1994 1993 1992 1991 1990
------------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF INCOME DATA
Operating Revenues...... $1,681,582 $1,676,401 $1,677,872 $1,582,356 $1,535,161 $1,520,995
Operating Income........ 271,832 261,149 262,045 246,217 254,354 247,777
Interest Charges (Net).. 102,186 99,378 103,835 111,053 109,533 115,491
Net Income.............. 172,570 163,987 156,140 136,648 133,388 125,361
Ratio of Earnings to
Fixed Charges(a)....... 3.23x 3.16x 3.12x 2.74x 2.54x 2.41x
</TABLE>
<TABLE>
<CAPTION>
(DOLLARS
IN
CONSOLIDATED BALANCE SHEET DATA AT SEPTEMBER 30, 1995: THOUSANDS) (PERCENT)
<S> <C> <C>
Long-Term Debt (excluding amounts due within one year)(b)
First Mortgage Bonds....................................... $ 135,756 5.5%
Unsecured.................................................. 1,040,465 42.0
---------- ------
Total.................................................... 1,176,221 47.5
---------- ------
Cumulative Preferred Shares:
Series with mandatory redemption provisions................ 99,207 4.0
Series without mandatory redemption provisions............. 81,525 3.3
Common Shareholders' Equity.................................. 1,117,182 45.2
---------- ------
Total Capitalization..................................... $2,474,135 100.00%
========== ======
</TABLE>
- --------
(a) For the purpose of calculating the ratios of earnings to fixed charges,
"earnings" consist of income from continuing operations before income
taxes, and "fixed charges" consist of interest on all indebtedness,
amortization of debt expense, the percentage of rental expense on
operating leases deemed representative of the interest factor, and
preferred stock dividend requirements of majority-owned subsidiaries.
(b) Short-term debt outstanding at September 30, 1995 was $263.3 million,
including the current portion of long-term debt ($93.0 million).
RECENT FINANCIAL RESULTS
On January 30, 1996, Industries reported 1995 net income of $175.5 million
or earnings of $2.72 per average common share compared to net income of $164.0
million or earnings of $2.48 per average common share in 1994.
Revenues for the twelve-month period ended December 31, 1995 were $1.722
billion compared to $1.676 billion for the same period a year earlier.
Operating margin, the difference between operating revenues and cost of
energy, for the twelve-month period increased $43.9 million to $1,037.2
million. Electric operating margin for the twelve-month period increased $30.1
million, reflecting increased sales to residential and commercial customers
due to warmer weather in the third quarter of 1995 and increased sales to
wholesale customers, partially offset by transitional rate adjustments to
industrial customers signing 5-year contracts. Gas operating margin increased
$13.8 million, reflecting colder weather in the fourth quarter.
7
<PAGE>
Earnings for the three-month period ended December 31, 1995 were 81 cents
per average common share compared to 75 cents per average common share for the
same period in 1994.
Revenues for the three months ended December 31, 1995 were $469.0 million
compared to $428.2 million a year earlier. Operating margin for the three-
month period increased $24.4 million. Electric operating margin increased $6.6
million reflecting increased sales to residential, commercial and industrial
customers, partially offset by transitional rate adjustments to industrial
customers signing 5-year contracts. Gas operating margin increased $17.8
million due to colder weather and increased deliveries of gas transported for
others.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31.
--------------------- ---------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating Revenues:
Gas
Sales.......................... $ 627,147 $ 647,932 $ 202,448 $ 178,205
Transport...................... 64,255 33,977 15,837 10,688
Electric......................... 1,030,923 994,492 250,701 239,350
---------- ---------- ---------- ----------
Total........................ $1,722,325 $1,676,401 $ 468,986 $ 428,243
========== ========== ========== ==========
Operating Margins:
Gas.............................. $ 292,289 $ 278,472 $ 94,731 $ 76,908
Electric......................... 744,905 714,855 179,251 172,636
---------- ---------- ---------- ----------
Total........................ $1,037,194 $ 993,327 $ 273,982 $ 249,544
========== ========== ========== ==========
Net Income......................... $ 175,465 $ 163,987 $ 51,828 $ 48,933
Dividend Requirements on Preferred
Shares............................ 3,063 3,063 766 766
---------- ---------- ---------- ----------
Balance Available for Common
Shareholders...................... $ 172,402 $ 160,924 $ 51,062 $ 48,167
========== ========== ========== ==========
Average Common Shares Outstanding.. 63,281,177 64,820,039 62,535,137 64,020,303
Earnings per Average Common Share.. $2.72 $2.48 $0.81 $0.75
Dividends Declared per Common
Share............................. $1.59 $1.47 $0.42 $0.39
Gas Sales (MDth)................... 124,365 118,592 43,977 33,393
Gas Transported (MDth)............. 191,571 188,583 53,064 50,966
Electric Sales (Mwh)............... 16,924,353 15,536,394 4,202,337 3,811,831
</TABLE>
DESCRIPTION OF THE SUBORDINATED DEBENTURES
The Subordinated Debentures will be issued under an Indenture, dated as of
February 1, 1996 (the "Indenture"), among Capital, Industries and Chemical
Bank, as trustee (the "Trustee"), which shall act as indenture trustee for the
purposes of the Trust Indenture Act of 1939, as amended. The forms of the
Indenture and the Subordinated Debentures are filed as exhibits to the
Registration Statement. Capitalized terms used in this section which are not
otherwise defined in this Prospectus shall have the meanings set forth in the
Indenture.
The following summaries of certain provisions of the Subordinated Debentures
and the Indenture do not purport to be complete and are subject to, and are
qualified in their entirety by express reference to, all the provisions of the
Subordinated Debentures and the Indenture, including the definitions therein
of certain terms.
GENERAL
The Subordinated Debentures will be unsecured, subordinated obligations of
Capital. The Subordinated Debentures are not subject to a sinking fund
provision. The entire principal amount of the Subordinated Debentures will
mature and become due and payable, together with any accrued and unpaid
interest thereon, on March 31, 2026.
8
<PAGE>
The Indenture does not limit the aggregate principal amount of Subordinated
Debentures that may be issued thereunder and provides that Subordinated
Debentures may be issued thereunder from time to time in one or more series.
The Subordinated Debentures are issuable in one or more series pursuant to an
indenture supplement to the Indenture or a resolution of the Company's Board
of Directors or a special committee thereof (each, a "Supplemental
Indenture").
The Subordinated Debentures will initially be issued as a Global Security
(as defined below). As described herein, under certain limited circumstances,
Subordinated Debentures may be issued in certificated form in exchange for a
Global Security. See "Global Securities" below. In the event that Subordinated
Debentures are issued in certificated form, such Subordinated Debentures will
be in denominations of $25 or any integral multiple thereof and may be
transferred or exchanged at the offices described below. No service charge
will be made for any transfer or exchange of Subordinated Debentures, but
Capital may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith.
Payments on Subordinated Debentures issued as a Global Security will be made
to DTC, a successor depositary or, in the event that no depositary is used, to
a Paying Agent for the Subordinated Debentures. In the event the Subordinated
Debentures are issued in certificated form, principal and interest will be
payable, the transfer of the Subordinated Debentures will be registrable and
Subordinated Debentures will be exchangeable for Subordinated Debentures of
other denominations of a like aggregate principal amount at the corporate
trust office of the Trustee in New York, New York; provided that payment of
interest may be made at the option of Capital by check mailed to the address
of the persons entitled thereto as they appear in the Security Register.
The Indenture does not contain any provisions that may afford the Holders of
Subordinated Debentures protection in the event of a highly leveraged
transaction or other transaction involving Capital or Industries that may
occur in connection with a takeover attempt resulting in a decline in the
credit rating of the Subordinated Debentures. The Indenture also does not
contain any provisions that would limit the ability of Capital or Industries
to incur indebtedness.
SUBORDINATION
The Indenture provides that the Subordinated Debentures are subordinated and
junior in right of payment to all Senior Indebtedness of Capital. No payment
of principal of or interest on the Subordinated Debentures may be made (i) if
any Senior Indebtedness of Capital is not paid when due, (ii) if any
applicable grace period with respect to such default has ended and such
default has not been cured or waived or ceased to exist, or (iii) if the
maturity of any Senior Indebtedness of Capital has been accelerated because of
a default and such acceleration has not been revoked in accordance with the
instrument evidencing such Senior Indebtedness or such Senior Indebtedness has
not been paid in full. Upon any distribution of assets of Capital to creditors
upon any dissolution, winding-up, liquidation or reorganization, whether
voluntary or involuntary, or in bankruptcy, insolvency, receivership or other
proceedings, all principal, premium, if any, and interest due or to become due
on all Senior Indebtedness of Capital must be paid in full before the holders
of Subordinated Debentures are entitled to receive or retain any payment. Upon
satisfaction of all claims of all Senior Indebtedness then outstanding, the
rights of the holders of the Subordinated Debentures will be subrogated to the
rights of the holders of Senior Indebtedness of Capital to receive payments or
distributions applicable to Senior Indebtedness until all amounts owing on the
Subordinated Debentures are paid in full.
"Senior Indebtedness" means the principal of, and premium, if any, and
interest on and any other payment due pursuant to any of the following,
whether outstanding at the date of execution of the Indenture or thereafter
incurred, created or assumed: (i) all indebtedness of Capital evidenced by
notes, debentures, bonds or other securities sold by Capital for money, (ii)
all indebtedness of others of the kinds described in the preceding clause (i)
assumed by or guaranteed in any manner by Capital or in effect guaranteed by
Capital through an agreement to purchase, contingent or otherwise, and (iii)
all renewals, extensions or refundings of indebtedness of the kinds described
in either of the preceding clauses (i) and (ii) unless, in the case of any
particular indebtedness, renewal, extension or refunding, the instrument
creating or evidencing the same or the assumption or guarantee of the
9
<PAGE>
same expressly provides that such indebtedness, renewal, extension or
refunding is not superior in right of payment to or is pari passu with the
Subordinated Debentures. Such Senior Indebtedness will continue to be Senior
Indebtedness and entitled to the benefits of the subordination provisions set
forth in Article Fourteen of the Indenture irrespective of any amendment,
modification or waiver of any term of such Senior Indebtedness.
The Indenture does not limit the aggregate amount of Senior Indebtedness
that may be issued by Capital. As of September 30, 1995, Senior Indebtedness
of Capital aggregated approximately $131.7 million. The Indenture does not
contain any cross-defaults to any other indebtedness of Capital or Industries
and, therefore, a default with respect to, or the acceleration of, any such
other indebtedness will not constitute an Event of Default with respect to the
Subordinated Debentures. Because the obligor under the Support Agreement is
Industries, the rights of the holders of the Subordinated Debentures under the
Support Agreement effectively will be subordinate to all obligations of
Industries' subsidiaries other than Capital.
OPTIONAL REDEMPTION
The Subordinated Debentures will be redeemable at the option of Capital, in
whole or in part, at any time on or after March 31, 2001 and prior to
maturity, upon not less than 30 nor more than 60 days' notice, at 100% of the
principal amount redeemed together with unpaid interest accrued to the
redemption date. If less than all of the Subordinated Debentures are to be
redeemed, the particular Subordinated Debentures to be redeemed will be
selected by the Trustee, not more than 60 days prior to the redemption date,
by such method as the Trustee shall deem fair and appropriate.
INTEREST
Each Subordinated Debenture shall bear interest at the rate per annum shown
on the front cover of this Prospectus from the original date of issuance until
the principal becomes due and payable. Such interest shall be payable
quarterly in arrears on March 31, June 30, September 30 and December 31 of
each year (each, an "Interest Payment Date"), commencing March 31, 1996, to
the person in whose name such Subordinated Debenture is registered, at the
close of business on the Business Day next preceding such Interest Payment
Date.
The amount of interest payable for any period will be computed on the basis
of a 360-day year of twelve 30-day months. The amount of interest payable for
any period shorter than a full quarterly period for which interest is computed
will be computed on the basis of the actual number of days elapsed per 30-day
month. In the event that any date on which interest is payable on the
Subordinated Debentures is not a Business Day, then payment of the interest
payable on such date will be made on the next succeeding day 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, then such payment shall be made on the immediately preceding Business
Day, in each case with the same force and effect as if made on such date.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
Capital shall have the right at any time, and from time to time, during the
term of the Subordinated Debentures, so long as an Event of Default has not
occurred and is not continuing, to defer payments of interest by extending the
interest payment period for a period not exceeding 20 consecutive quarters
(the "Extension Period"), at the end of which Extension Period Capital shall
pay all interest then accrued and unpaid together with interest thereon
compounded quarterly at the rate specified for the Subordinated Debentures to
the extent permitted by applicable law. Capital shall give the Trustee and the
holders of the Subordinated Debentures notice of its selection of any
Extension Period 10 Business Days prior to the earlier of (i) the next
Interest Payment Date or (ii) the date upon which Capital is required to give
notice to the holders of the Subordinated Debentures (or, if applicable, to
the New York Stock Exchange or other applicable self-regulatory organization)
of the record or payment date of such related interest payment. During any
such Extension Period, neither Capital nor Industries shall (i) declare or pay
any dividends on, make any distribution with respect to, or, subject to
certain
10
<PAGE>
limited exceptions, redeem, purchase, acquire or make a liquidation payment
with respect to, any of its capital stock, (ii) make any payment of interest,
principal or premium, if any, on or repay, repurchase or redeem any debt
securities issued by Capital or Industries that rank pari passu with or junior
to the Subordinated Debentures or (iii) make any guarantee payments with
respect to any of the foregoing.
Prior to the termination of any such Extension Period, Capital may further
defer payments of interest by extending the interest payment period; provided,
however, that such Extension Period, including all such previous and further
extensions, may not exceed 20 consecutive quarters. Upon the termination of
any Extension Period and the payment of all amounts then due, Capital may
commence a new Extension Period, subject to the terms set forth in this
section. No interest during an Extension Period, except at the end thereof,
shall be due and payable other than with respect to a Subordinated Debenture
redeemed by Capital during such Extension Period. Capital has no present
intention of exercising its right to defer payments of interest by extending
the interest payment period on the Subordinated Debentures.
GLOBAL SECURITIES
The Subordinated Debentures will be issued in the form of one or more Global
Securities, which will have an aggregate principal amount equal to that of the
Subordinated Debentures. The Global Security or Securities will be deposited
with, or on behalf of, DTC and registered in the name of DTC or its nominee.
DTC has advised Capital, Industries and the Underwriters that DTC is (i) a
limited-purpose trust company organized under the New York Banking Law, (ii) a
"banking organization" within the meaning of the New York Banking Law, (iii) a
member of the Federal Reserve System, (iv) a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and (v) a "clearing agency"
registered pursuant to the provisions
of Section 17A of the Exchange Act. DTC was created to hold securities of its
participating organizations ("participants") and to facilitate the clearance
and settlement among its participants of securities transactions, such as
transfers and pledges, in such securities through electronic computerized
book-entry changes in participants' accounts, thereby eliminating the need for
physical movement of securities certificates. Participants include securities
brokers and dealers (including the Underwriters), banks, trust companies,
clearing corporations and certain other organizations, some of whom (and/or
their representatives) own DTC. Access to DTC's book-entry system is also
available to others, such as banks, brokers, dealers and trust companies that
clear transactions through or maintain a custodial relationship with a
participant, either directly or indirectly. Persons who are not participants
may beneficially own securities held by DTC only through participants.
As long as DTC, or its nominee, is the registered owner of the Global
Security or Securities representing the Subordinated Debentures, DTC or such
nominee, as the case may be, will be considered the sole owner and holder of
such Global Security and the Subordinated Debentures represented thereby for
all purposes under the Indenture. Owners of beneficial interests in such
Global Security will not be entitled to have such Global Security or, except
in limited circumstances, the Subordinated Debentures represented thereby
registered in their names, will not receive or be entitled to receive physical
delivery of Subordinated Debentures in certificated form and will not be
considered the holders thereof for any purposes under the Indenture. All
payments of principal of and interest on a Global Security will be made to DTC
or its nominee, as the case may be, as the holder thereof. The laws of some
jurisdictions require that certain purchasers of securities take physical
delivery of such securities in certificated form. The foregoing limitations
and such laws may impair the ability to transfer beneficial interests in such
Global Securities.
In connection with the issuance of the Global Security or Securities
representing the Subordinated Debentures, DTC will credit on its book-entry
registration and transfer system the respective principal amounts of the
Subordinated Debentures represented by such Global Securities to the accounts
of its participants. Ownership of beneficial interests in a Global Security
will be shown only on, and the transfer of those ownership interests will be
effected only through, records maintained by DTC (with respect to
participants' interests) or any such participant (with respect to interests of
persons held by such participants on their behalf). Payments, transfers,
exchanges and other matters relating to beneficial interests in a Global
Security may be subject to
11
<PAGE>
various policies and procedures adopted by DTC from time to time. None of
Capital, Industries or the Trustee, or any agent of any of the foregoing, will
have any responsibility or liability for any aspect of DTC's or any
participant's records relating to, or for payments made on account of,
beneficial ownership interests in a Global Security or for maintaining,
supervising or reviewing any records relating to such beneficial interests.
DTC may discontinue providing its services as securities depositary with
respect to the Subordinated Debentures at any time by giving reasonable notice
to Capital. Under such circumstances, in the event that a successor securities
depositary is not obtained, Subordinated Debentures in certificated form are
required to be printed and delivered.
DISCONTINUANCE OF THE DEPOSITARY'S SERVICES
A Global Security shall be exchangeable for Subordinated Debentures
registered in the names of persons other than the depositary or its nominee
only if (i) the depositary notifies Capital that it is unwilling or unable to
continue as a depositary for such Global Security and no successor depositary
shall have been appointed, (ii) the depositary, at any time, ceases to be a
clearing agency registered under the Exchange Act at which time the depositary
is required to be so registered to act as such depositary and no successor
depositary shall have been appointed, (iii) Capital, in its sole discretion,
determines that such Global Security shall be so exchangeable or (iv) there
shall have occurred an Event of Default with respect to such Subordinated
Debentures. Any Global Security that is exchangeable pursuant to the preceding
sentence shall be exchangeable for Subordinated Debentures registered in such
names as the depositary shall direct. It is expected that such instructions
will be based upon directions received by the depositary from its participants
with respect to ownership of beneficial interests in such Global Security.
CONSOLIDATION, MERGER AND SALE
Under the terms of the Indenture, neither Capital nor Industries may merge
or consolidate with or into any other Corporation, or sell or convey
substantially all of its assets or otherwise engage in restructuring
transactions unless (i) the Corporation formed by any such consolidation or
into which it is merged or the Person which acquires by conveyance or
transfer, or which leases, its properties and assets substantially as an
entirety shall be a Corporation organized and existing under the laws of any
domestic jurisdiction and shall expressly assume, in the case of Capital, its
obligations under the Subordinated Debentures and the Indenture and, in the
case of Industries, its obligations under the Indenture and the Support
Agreement, (ii) immediately after giving effect to such transaction, no Event
of Default, and no event which, after notice or lapse of time, would become an
Event of Default, shall have occurred and be continuing, and (iii) Capital or
Industries, as applicable, shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger, conveyance, transfer or lease complies with the Indenture and that all
conditions precedent therein provided for relating to such transaction have
been complied with.
EVENTS OF DEFAULT
The Indenture provides that any one or more of the following events that has
occurred and is continuing shall constitute an Event of Default with respect
to the Subordinated Debentures: (i) default in the payment of any interest
upon any Subordinated Debenture when the same becomes due and payable and
continues for 30 days; provided, however, that a valid extension of the
interest payment period by Capital for the Subordinated Debentures shall not
constitute a default in the payment of interest for this purpose; (ii) default
in the payment of principal of any Subordinated Debenture when due; (iii)
default in the performance or breach of any covenant or warranty of Capital or
Industries in the Indenture or the Support Agreement (other than a covenant or
warranty included in or pursuant to the Indenture solely for the benefit of
one or more series of debt securities other than the Subordinated Debentures),
and continuance thereof for 30 days after written notice to Capital and
Industries as provided in the Indenture; and (iv) certain events in
bankruptcy, insolvency or reorganization of Capital, Industries or Northern
Indiana.
12
<PAGE>
If an Event of Default with respect to the Subordinated Debentures occurs
and is continuing, either the Trustee or the Holders of at least 33 percent in
principal amount of the outstanding Subordinated Debentures may declare all
such Subordinated Debentures due and payable immediately. At any time after
the declaration of acceleration with respect to the Subordinated Debentures
has been made, but before a judgment or decree based on acceleration has been
obtained, the Holders of a majority in principal amount of the outstanding
Subordinated Debentures may, under certain circumstances, rescind and annul
such acceleration.
The Indenture provides that, subject to the duty of the Trustee during
default to act with the required standard of care, the Trustee will be under
no obligation to exercise any of its rights or powers under the Indenture at
the request or direction of any of the Holders, unless such Holders shall have
offered to the Trustee reasonable indemnity. Subject to such provisions for
the indemnification of the Trustee, the Holders of a majority in principal
amount of the outstanding Subordinated Debentures will have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee, or exercising any trust or power conferred on the
Trustee, with respect to the Subordinated Debentures. The right of a Holder of
any Subordinated Debenture to institute a proceeding with respect to the
Indenture is subject to certain conditions precedent, but each Holder has an
absolute and unconditional right to receive payment of principal when due and
to institute suit for the enforcement of any such payment. The Indenture
provides that the Trustee, within 90 days after the occurrence of a default
with respect to the Subordinated Debentures, is required to give the Holders
of the Subordinated Debentures notice of such default, unless cured or waived;
provided that, except in the case of default in the payment of principal on
any Subordinated Debenture, the Trustee may withhold such notice if it
determines in good faith that it is in the interest of such Holders to do so.
Each of Capital and Industries will be required to furnish annually to the
Trustee a statement as to the performance by it of certain of its obligations
under the Indenture and as to any default in such performance.
The Holders of not less than a majority in principal amount of the
Subordinated Debentures may, on behalf of the Holders of all the Subordinated
Debentures, waive any past default under the Indenture with respect to the
Subordinated Debentures and its consequences, except a default (i) in the
payment of the principal of or interest on any Subordinated Debenture or (ii)
in respect of a covenant or provision that cannot be modified or amended
without the consent of the Holder of each outstanding Subordinated Debenture
affected thereby.
MODIFICATION OF THE INDENTURE
The Indenture contains provisions permitting Capital, Industries and the
Trustee to execute supplemental indentures, with the consent of the holders of
not less than a majority in principal amount of the outstanding securities of
each series then outstanding under the Indenture affected by such supplemental
indenture, adding any provisions to or changing in any manner or eliminating
any of the provisions of the Indenture or modifying in any manner the rights
of the holders of securities of each such series, except that no such
supplemental indenture, without the consent of the holders of all such
securities so affected, may, among other things, (i) change the stated
maturity of any securities outstanding under the Indenture, or reduce the
principal amount thereof or the rate of interest thereon or any premium
payable upon the redemption thereof, or change the method of calculating the
rate of interest thereon, or reduce the amount of principal of the securities
due at maturity or upon a declaration of acceleration of maturity thereof
pursuant to the Indenture, or (ii) reduce the aforesaid percentage of
securities of any series outstanding under the Indenture, the holders of which
are required to consent to any such supplemental indenture. See also
"Description of the Support Agreement."
The Indenture also permits Capital, Industries and the Trustee to amend the
Indenture in certain circumstances without the consent of the holders of the
securities then outstanding under the Indenture to evidence the merger of
Industries or Capital or the replacement of the Trustee with respect to the
securities of one or more series and for certain other purposes.
13
<PAGE>
DESCRIPTION OF THE SUPPORT AGREEMENT
The Support Agreement between Capital and Industries provides that, during
the term thereof, (i) Industries will own all of the voting stock of Capital,
(ii) Industries will cause Capital to have at all times a positive net worth
(net assets less intangible assets, if any), as determined in accordance with
generally accepted accounting principles, and (iii) if Capital is unable to
make timely payment of principal of or any premium or interest on any Debt (as
defined below) issued by Capital, Industries will, at the request of Capital
or any Lender (as defined below), provide funds to Capital to make such
payments. The Support Agreement also provides that any Lender to Capital shall
have the right to demand that Capital enforce its rights against Industries
under the Support Agreement as described in the previous sentence, and, in the
event that Capital fails to require Industries to perform such obligations or
Capital defaults in the timely payment of principal of or any premium or
interest on any Debt owed to a Lender, such Lender may proceed directly
against Industries to enforce Capital's rights against Industries under the
Support Agreement or to obtain payment of such defaulted principal, premium or
interest owed to such Lender.
The Support Agreement provides that in no event may any Lender, on default
of Capital or Industries or upon failure by Capital or Industries to comply
with the Support Agreement, have recourse to or against the stock or assets of
Northern Indiana, or any interest of Capital or Industries therein.
Notwithstanding this limitation, the Support Agreement provides that funds
available to Industries to satisfy any obligations under the Support Agreement
will include cash dividends paid by Northern Indiana to Industries. In
addition to the cash dividends paid to Industries by any of its subsidiaries,
the assets of Industries other than the stock and assets of Northern Indiana
are available as recourse to holders of Capital's Debt. The carrying value of
such assets reflected in Industries' consolidated balance sheet at September
30, 1995 is approximately $345.6 million. The term "Debt" is defined in the
Support Agreement as debt securities or other obligations, and includes the
Subordinated Debentures. The term "Lender" is defined in the Support Agreement
as any person, firm or corporation to which Capital is indebted for money
borrowed or to which Capital otherwise owes any Debt or which is acting as
trustee or authorized representative on behalf of such person, firm or
corporation. The Indenture provides that each Holder of a Subordinated
Debenture, as well as the Trustee, shall be considered a "Lender" for purposes
of the Support Agreement.
Funds to pay the principal of, and premium, if any, and interest on, the
Subordinated Debentures pursuant to the Support Agreement would come from
earnings in the form of dividends paid to Industries by Northern Indiana,
Kokomo Gas and NIFL, the earnings of other businesses of Industries and its
subsidiaries or the proceeds of refinancing transactions. During the next few
years, it is expected that the majority of Industries' earnings that would
ultimately be available to pay the principal of and interest on the
Subordinated Debentures will depend upon dividends paid to Industries by
Northern Indiana. Northern Indiana's Indenture of Mortgage provides that
Northern Indiana will not declare or pay any dividends on any class of capital
stock (other than preferred or preference stock) except out of earned surplus
or net profits of Northern Indiana. At September 30, 1995, Northern Indiana
had approximately $139.5 million of retained earnings (earned surplus)
available for the payment of dividends. Future dividends payable by Northern
Indiana to Industries will depend upon adequate retained earnings, adequate
future earnings and the absence of adverse developments. In addition, since
Industries is a holding company, the right of its creditors, including holders
of the Subordinated Debentures pursuant to the Support Agreement, to
participate in any distribution of the assets of any subsidiary other than
Capital upon its liquidation or reorganization or otherwise is necessarily
subject to the prior claims of creditors of the subsidiary, except to the
extent claims of Industries as a creditor may be recognized. The Indenture
does not limit the amount of indebtedness that Capital, Industries or any of
Industries' other subsidiaries may incur.
The Support Agreement may be amended or terminated at any time by agreement
of Industries and Capital, provided that (i) no amendment regarding the terms
described above may be made unless all Lenders consent in advance and in
writing to such amendment; (ii) no amendment regarding any other term of the
Support Agreement may be made in a manner that adversely affects the rights of
Lenders unless all affected Lenders consent in advance and in writing to such
amendment; and (iii) no termination shall be effective until such time as all
Debt (including the Subordinated Debentures) shall have been paid in full.
14
<PAGE>
UNITED STATES TAX CONSIDERATIONS
GENERAL
The following is a summary of certain of the material United States federal
income tax consequences of the purchase, ownership and disposition of
Subordinated Debentures and represents the opinion of Schiff Hardin & Waite,
counsel to Capital and Industries, insofar as it relates to matters of law and
legal conclusions. Unless otherwise stated, this summary deals only with
Subordinated Debentures held as capital assets by holders who purchase the
Subordinated Debentures upon original issuance ("Initial Holders"). It does
not deal with special classes of holders such as banks, thrifts, real estate
investment trusts, regulated investment companies, insurance companies,
dealers in securities or currencies, tax-exempt investors, or persons that
will hold the Subordinated Debentures as a position in a "straddle," as part
of a "synthetic security" or "hedge," as part of a "conversion transaction" or
other integrated investment, or as other than a capital asset. This summary
also does not address the tax consequences to persons whose functional
currency is other than the U.S. Dollar or the tax consequences to
shareholders, partners or beneficiaries of a holder of Subordinated
Debentures. Further, it does not include any description of any alternative
minimum tax consequences or the tax laws of any state or local government or
of any foreign government that may be applicable to the Subordinated
Debentures. This summary is based on the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury regulations thereunder and administrative and
judicial interpretations thereof, as of the date hereof, all of which are
subject to change, possibly on a retroactive basis.
ORIGINAL ISSUE DISCOUNT
Because Capital has the option, under the terms of the Subordinated
Debentures, to defer payments of interest by extending interest payment
periods for up to 20 quarters, all payments in respect of the Subordinated
Debentures will be treated as "original issue discount" ("OID"). Holders of
debt instruments issued with OID must include that discount in income on an
economic accrual basis whether or not cash attributable to the interest has
yet been received, regardless of their method of tax accounting. Generally,
all of a holder's taxable interest income with respect to the Subordinated
Debentures will be accounted for as OID, and actual distributions of stated
interest will not be separately reported as taxable income. The amount of OID
that accrues in any month will approximately equal the amount of the interest
that accrues on the Subordinated Debentures in that month at the stated
interest rate. In the event that the interest payment period is extended,
holders will continue to accrue OID approximately equal to the amount of the
interest payment due at the end of the Extension Period on an economic accrual
basis over the length of the extended interest period.
MARKET DISCOUNT AND BOND PREMIUM
Holders of Subordinated Debentures other than Initial Holders may be
considered to have acquired their Subordinated Debentures with market discount
or acquisition premium as such phrases are defined for United States federal
income tax purposes. Such holders are advised to consult their tax advisors as
to the income tax consequences of the acquisition, ownership and disposition
of the Subordinated Debentures.
SALES OF SUBORDINATED DEBENTURES
A holder that sells Subordinated Debentures will recognize gain or loss
equal to the difference between its adjusted tax basis in the Subordinated
Debentures and the amount realized on the sale of such Subordinated
Debentures. A holder's adjusted tax basis in the Subordinated Debentures
generally will be its initial purchase price increased by OID previously
includible in such holder's gross income to the date of disposition and
decreased by payments received on the Subordinated Debentures. Such gain or
loss generally will be a capital gain or loss and generally will be a long-
term capital gain or loss if the Subordinated Debentures have been held for
more than one year.
15
<PAGE>
The Subordinated Debentures may trade at a price that does not accurately
reflect the value of accrued but unpaid interest thereon. A holder who
disposes of his Subordinated Debentures between record dates for payments of
interest thereon will be required to include accrued but unpaid interest on
the Subordinated Debentures through the date of disposition in income as
ordinary income, and to add such amount to his adjusted tax basis in the
Subordinated Debentures disposed of. To the extent the selling price is less
than the holder's adjusted tax basis (which will include, in the form of OID,
all accrued but unpaid interest) a holder will recognize a capital loss.
Subject to certain limited exceptions, capital losses cannot be applied to
offset ordinary income for United States federal income tax purposes.
UNITED STATES ALIEN HOLDERS
For purposes of this discussion, a "United States Alien Holder" is any
corporation, individual, partnership, estate or trust that is, as to the
United States, a foreign corporation, a non-resident alien individual, a
foreign partnership, or a non-resident fiduciary of a foreign estate or trust.
Under present United States federal income tax law: (i) payments by Capital
or Industries to any holder of a Subordinated Debenture that is a United
States Alien Holder will not be subject to United States federal withholding
tax; provided that (a) the beneficial owner of the Subordinated Debenture does
not actually or constructively own 10% or more of the total combined voting
power of all classes of stock of Industries entitled to vote, (b) the
beneficial owner of the Subordinated Debenture is not a controlled foreign
corporation that is related to Industries through stock ownership, and (c)
either (A) the beneficial owner of the Subordinated Debenture certifies to
Capital or its agent, under penalties of perjury, that it is not a United
States holder and provides its name and address or (B) a securities clearing
organization, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business (a "Financial
Institution"), and holds the Subordinated Debenture in such capacity,
certifies to Capital or its agent, under penalties of perjury, that such
statement has been received from the beneficial owner by it or by a Financial
Institution between it and the beneficial owner and furnishes Capital or its
agent with a copy thereof; and (ii) a United States Alien Holder of a
Subordinated Debenture will generally not be subject to United States federal
income or withholding tax on any gain realized upon the sale or other
disposition of a Subordinated Debenture, except that a United States Alien
Holder will be subject to United States income tax on any gain if such United
States Alien Holder (a) is engaged in a trade or business in the United States
and such gain is effectively connected to the conduct of such trade or
business or (b) is an individual present in the United States for 183 days or
more during the taxable year, and certain other conditions are met.
INFORMATION REPORTING TO HOLDERS
Subject to the qualifications discussed below, income on the Subordinated
Debentures will be reported to holders on Forms 1099, which forms should be
mailed to holders of Subordinated Debentures by January 31 following each
calendar year. Capital will be obligated to report annually to Cede & Co., as
holder of record of the Subordinated Debentures, the OID related to the
Subordinated Debentures that accrued during the year. Capital currently
intends to report such information on Form 1099 prior to January 31 following
each calendar year. The Underwriters have indicated to Capital that, to the
extent that they hold Subordinated Debentures as nominees for beneficial
holders, they currently expect to report to such beneficial holders on Forms
1099 by January 31 following each calendar year. Under current law, holders of
Subordinated Debentures who hold as nominees for beneficial holders will not
have any obligation to report information regarding the beneficial holders to
Capital. Capital, moreover, will not have any obligation to report to
beneficial holders who are not also record holders. Thus, beneficial holders
of Subordinated Debentures who hold their Subordinated Debentures through the
Underwriters will receive Forms 1099 reflecting the income on their
Subordinated Debentures from such nominee holders rather than Capital.
BACKUP WITHHOLDING
Payments made in respect of, and proceeds from the sale of, the Subordinated
Debentures may be subject to a "backup" withholding tax of 31% unless the
holder complies with certain identification requirements. Any withheld amounts
will be allowed as a credit against the holder's United States federal income
tax, provided the required information is provided to the Internal Revenue
Service.
16
<PAGE>
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED
FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A
HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH
RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE SUBORDINATED DEBENTURES, INCLUDING THE TAX CONSEQUENCES
UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF
CHANGES IN UNITED STATES FEDERAL OR OTHER TAX LAWS.
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof, the Underwriters named below (the
"Underwriters") have severally agreed to purchase, and Capital has agreed to
sell to the Underwriters, the respective principal amounts of Subordinated
Debentures set opposite their names below:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
SUBORDINATED
NAME DEBENTURES
---- ------------
<S> <C>
Morgan Stanley & Co. Incorporated............................ $15,000,000
Dean Witter Reynolds Inc..................................... 15,000,000
A.G. Edwards & Sons, Inc..................................... 15,000,000
Goldman, Sachs & Co.......................................... 15,000,000
Smith Barney Inc............................................. 15,000,000
-----------
Total.................................................... $75,000,000
===========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Subordinated Debentures are
subject to the approval of certain legal matters by their counsel and to
certain other conditions. The Underwriters are committed to take and pay for
all of the Subordinated Debentures if any are taken.
The Underwriters initially propose to offer all or part of the Subordinated
Debentures directly to the public at the public offering price set forth on
the cover page hereof this Prospectus, and all or part to certain dealers at a
price that represents a concession not in excess of 2% of the principal amount
of the Subordinated Debentures. Any Underwriter may allow, and such dealers
may reallow, a concession not in excess of 1% of the principal amount of the
Subordinated Debentures to certain other dealers. After the initial public
offering, the public offering price and concession and discount to dealers may
be changed by the Underwriters.
The Subordinated Debentures are a new issue of securities with no
established trading market. The Subordinated Debentures have been approved for
listing on the New York Stock Exchange, subject to official notice of
issuance, and trading on the New York Stock Exchange is expected to commence
within a 30-day period after the initial delivery of the Subordinated
Debentures. However, there can be no assurance that an active trading market
for the Subordinated Debentures will develop or be sustained. Accordingly, no
assurance can be given as to the liquidity of the trading market for the
Subordinated Debentures.
Capital and Industries have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act.
Certain of the Underwriters and dealers and their associates may be engaged
in transactions with and perform services for Capital and Industries and their
affiliates in the ordinary course of business.
17
<PAGE>
LEGAL MATTERS
The validity of the Subordinated Debentures and the Support Agreement and
certain matters relating thereto will be passed upon for Capital and
Industries by Schiff Hardin & Waite, Chicago, Illinois. Certain legal matters
will be passed upon for the Underwriters by Sonnenschein Nath & Rosenthal,
Chicago, Illinois. In giving their opinion, Sonnenschein Nath & Rosenthal may
rely as to all matters of Indiana law on the opinion of Schiff Hardin & Waite.
The statements as to matters of law and legal conclusions made in this
Prospectus under the caption "United States Tax Considerations" have been
passed upon by Schiff Hardin & Waite, counsel to Capital and Industries, and
are stated herein on their authority as experts.
EXPERTS
The consolidated financial statements and schedules 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 incorporated by reference herein in reliance upon the
authority of said firm as experts in auditing and accounting in giving such
reports. Reference is made to said reports which include an explanatory
paragraph with respect to changes in the methods of accounting for income
taxes and postretirement benefits other than pensions, as discussed in the
notes to the consolidated financial statements.
18
