<PAGE>
Filed Pursuant to Rule 424(b)(3)
Registration Number 333-69279
333-69279-01
333-69279-02
PROSPECTUS SUPPLEMENT
(To Prospectus dated January 22, 1999)
6,000,000 Premium Income Equity Securitiessm ("PIES/sm/")
Consisting of 6,000,000 Corporate PIES
NIPSCO Industries, Inc.
NIPSCO Capital Markets, Inc.
NIPSCO Capital Trust I
[NIPSCO LOGO APPEARS HERE]
- -------------------------------------------------------------------------------
Each PIES being offered will be a Corporate PIES, which is a unit consisting
of a stock purchase contract issued by NIPSCO Industries, Inc. ("Industries")
and a preferred security issued by NIPSCO Capital Trust I (the "Trust").
. The stock purchase contract will obligate the holder to purchase from
Industries, no later than February 19, 2003 for a price of $50, the
following number of Industries' Common Shares:
. if the average closing price of the Common Shares over a 20-day period
prior to February 19, 2003 equals or exceeds $31.0500, 1.6103 Common
Shares;
. if the average closing price is less than $31.0500 but greater than
$26.3125, a number of Common Shares equal to $50 divided by the
average closing price; and
. if the average closing price is less than or equal to $26.3125, 1.9002
Common Shares.
. The preferred security will have a stated liquidation amount of $50, will
represent an undivided beneficial ownership interest in the assets of the
Trust and will be guaranteed to the extent described in this Prospectus
Supplement by NIPSCO Capital Markets, Inc. ("Capital Markets"). The
preferred security will be pledged to secure the holder's obligation to
purchase Industries' Common Shares under the related stock purchase
contract.
. Payments will accumulate under the stock purchase contracts and the
preferred securities at the combined rate of 7.75% per annum, payable on
February 19, May 19, August 19 and November 19 of each year, beginning May
19, 1999.
.The assets of the Trust will consist solely of debentures of Capital Markets
maturing on February 19, 2005.
For a more detailed description of the securities comprising the Corporate
PIES, see "Description of the PIES" beginning on page S-31.
The Corporate PIES have been approved for listing on the New York Stock
Exchange under the trading symbol "NIPr." Trading of the Corporate PIES on the
New York Stock Exchange is expected to commence within five business days
after the date of this Prospectus Supplement.
Investing in the Corporate PIES involves risks.
For a description of these risks, see "Risk Factors" beginning on page S-16.
<TABLE>
<CAPTION>
Per Corporate PIES Total
------------------ ------------
<S> <C> <C>
Public Offering Price.......................... $50 $300,000,000
Underwriting Compensation...................... see below see below
Proceeds to the Trust.......................... $50 $300,000,000
</TABLE>
Any accumulated distributions on the preferred securities and any contract
adjustment payments on the stock purchase contracts that are a part of the
Corporate PIES from February 16, 1999 should be added to the Public Offering
Price.
Industries and the Trust have granted the underwriters a 30-day option to
purchase up to 900,000 additional Corporate PIES on the same terms and
conditions set forth above solely to cover over-allotments, if any.
Industries and the Trust will not pay any underwriting commissions. Because
the proceeds from the sale of the Corporate PIES will be invested in
debentures of Capital Markets, Capital Markets will pay to the underwriters
$1.50 for each Corporate PIES sold (a total of $9,000,000, or a total of
$10,350,000 if the over-allotment option is exercised in full) as compensation
for arranging that investment.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this Prospectus Supplement or the accompanying Prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
Lehman Brothers Inc. expects to deliver the Corporate PIES to purchasers on or
about February 16, 1999.
- -------------------------------------------------------------------------------
Lehman Brothers
Goldman, Sachs & Co.
Morgan Stanley Dean Witter
February 9, 1999
"Premium Income Equity Securities" and "PIES" are service marks owned by
Lehman Brothers Inc.
<PAGE>
ABOUT THIS PROSPECTUS SUPPLEMENT
You should read this Prospectus Supplement along with the Prospectus that
accompanies it. You should rely only on the information provided or
incorporated by reference in this Prospectus Supplement and the accompanying
Prospectus. The information in this Prospectus Supplement and the accompanying
Prospectus is accurate as of the dates on these documents, and you should not
assume that it is accurate as of any other date. All references to Industries'
Common Shares, including numbers of shares, per share amounts and market
prices, have been restated to reflect a two-for-one stock split paid in
February 1998.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Prospectus Supplement Page
--------------------- ----
<S> <C>
Forward-Looking Information........ S-2
Index of Selected Terms for
Prospectus
Supplement........................ S-3
Prospectus Supplement Summary...... S-4
Risk Factors....................... S-16
Use of Proceeds.................... S-20
Price Range of Common Shares and
Dividend Policy................... S-21
Capitalization..................... S-21
Accounting Treatment............... S-22
Management's Discussion and
Analysis of Financial Condition
and Results of Operations......... S-23
Description of the PIES............ S-31
Description of the Purchase
Contracts......................... S-35
Certain Provisions of the Purchase
Contracts, the Purchase Contract
Agreement and the Pledge
Agreement......................... S-42
Description of the Preferred
Securities........................ S-44
Description of the Debentures...... S-48
Description of the Guarantee....... S-51
Certain United States Federal
Income
Tax Consequences.................. S-52
ERISA Considerations............... S-59
Underwriting....................... S-61
Legal Matters...................... S-62
Experts............................ S-62
</TABLE>
<TABLE>
<CAPTION>
Prospectus Page
---------- ----
<S> <C>
Prospectus Summary................. 3
Available Information.............. 6
Incorporation of Certain Documents
by Reference...................... 6
Forward-Looking Information........ 7
Industries......................... 7
Capital Markets.................... 8
The Trust.......................... 9
Ratio of Earnings to Fixed
Charges........................... 10
Use of Proceeds.................... 10
Description of the Debentures...... 11
Description of the Preferred
Securities........................ 18
Description of the Guarantee....... 28
Relationship Among the Preferred
Securities, the Debentures and the
Guarantee......................... 31
Description of the Common Shares... 32
Description of the Stock Purchase
Contracts and the Stock Purchase
Units............................. 36
Description of the Medium-Term
Notes............................. 36
Description of the Support
Agreement......................... 54
Book-Entry Issuance................ 55
Plan of Distribution............... 58
Legal Matters...................... 59
Experts............................ 59
</TABLE>
FORWARD-LOOKING INFORMATION
Certain of the matters discussed in this Prospectus Supplement and in the
documents incorporated by reference in the accompanying Prospectus contain
forward-looking statements within the meaning of the securities laws. Forward-
looking statements include terms such as "may," "will," "expect," "believe,"
"plan" and other similar terms. Industries, Capital Markets and the Trust
caution that, while each of them believes those statements to be based on
reasonable assumptions and makes those statements in good faith, there can be
no assurance that actual results will not differ materially from those
assumptions or that the expectations set forth in the forward-looking
statements derived from those assumptions will be realized. Investors should be
aware of important factors that could have a material impact on future results.
These factors include, but are not limited to: the weather; the federal and
state regulatory environment; year 2000 issues; the economic climate; regional,
commercial, industrial and residential growth in the service territories served
by Industries' subsidiaries; customers' usage patterns and preferences; the
speed and degree to which competition enters the utility industry; changing
conditions in the capital and equity markets; and other uncertainties, all of
which are difficult to predict, and many of which are beyond the control of
Industries, Capital Markets and the Trust. Certain of these factors are
discussed under "Risk Factors--Risk Factors Relating to Industries" on page S-
20.
S-2
<PAGE>
INDEX OF SELECTED TERMS FOR PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
Term Page
- ---- ----
<S> <C>
Applicable Ownership Interest.............................................. S-32
Business Day............................................................... S-33
Common Securities.......................................................... S-7
Contract Adjustment Payments............................................... S-8
Corporate PIES............................................................. S-7
Debentures................................................................. S-7
Declaration................................................................ S-7
Early Settlement........................................................... S-12
Failed Remarketing......................................................... S-37
Guarantee.................................................................. S-51
Indenture.................................................................. S-48
OID........................................................................ S-10
Pledge Agreement........................................................... S-9
Pledged Securities......................................................... S-41
Preferred Securities....................................................... S-7
Purchase Contract.......................................................... S-7
Purchase Contract Agreement................................................ S-7
Purchase Contract Settlement Date.......................................... S-8
Remarketing Date........................................................... S-45
Reset Rate................................................................. S-45
Settlement Rate............................................................ S-35
Support Agreement.......................................................... S-7
Tax Event.................................................................. S-9
Tax Event Redemption....................................................... S-57
Threshold Appreciation Price............................................... S-35
Treasury Portfolio......................................................... S-9
Treasury Security.......................................................... S-9
Treasury PIES.............................................................. S-9
Trust Securities........................................................... S-9
</TABLE>
S-3
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified by the more detailed information and the
consolidated financial statements of Industries appearing elsewhere in this
Prospectus Supplement or the accompanying Prospectus or incorporated by
reference in the accompanying Prospectus. A listing of the pages on which
definitions of certain capitalized terms used in this Prospectus Supplement
Summary are defined is set forth in the "Index of Selected Terms for Prospectus
Supplement" on page S-3.
INDUSTRIES
Industries is an energy and utility-based holding company that provides
natural gas, electricity, water and related services for residential,
commercial and industrial uses through a number of wholly-owned regulated and
non-regulated subsidiaries. Industries operates primarily in Indiana and, with
the acquisition of Bay State Gas Company ("Bay State"), New England.
Industries' business strategy is:
. to establish itself as a premier supplier of natural gas, electricity and
water in the Great Lakes and Northeast regions; and
. to continue to support its energy and utility businesses with strong
production and distribution assets, innovative products and superior
service.
Industries believes that it can best serve its customers and grow shareholder
value by focusing on its core businesses.
Focus on Energy and Utility Services. Industries intends to continue to
concentrate on the distribution of natural gas, electricity and water and
related products and services in its selected markets. As the energy industry
has deregulated, Industries has expanded its product and service offerings and
distribution channels through a combination of internal growth and strategic
partnerships and acquisitions. In 1997, Industries entered the water utility
business and expanded its non-regulated utility services businesses by
acquiring IWC Resources Corporation ("IWCR") and its subsidiaries, including
Indianapolis Water Company ("IWC"), Harbour Water Corporation ("Harbour"), SM&P
Utility Resources, Inc. and Miller Pipeline Corporation. Industries expects to
complete its acquisition of Bay State and its subsidiaries, including Northern
Utilities, Inc. ("Northern Utilities") and EnergyUSA, Inc. ("EnergyUSA"), in
the first quarter of 1999, which will further expand Industries' natural gas
utility business and utility services businesses. These acquisitions strengthen
Industries' position as a regional supplier and distributor in the energy and
utility services business and diversify its offerings of other utility-related
products and services. Industries intends to continue to explore and pursue
strategic acquisitions in the future.
Geographic Focus--Great Lakes and Northeast Regions. Industries intends to
grow by focusing on customers and markets in the Great Lakes and Northeast
regions. While many of Industries' non-utility businesses have a national
focus, Industries believes that it can increase earnings most effectively by
pursuing growth opportunities in the regions it knows best. Industries'
northern Indiana markets benefit from extensive natural gas pipeline service, a
skilled workforce, a diversified industrial base and a central location in the
Great Lakes region. Industries' acquisition of Bay State offers additional
opportunities for growth. Constrained pipeline capacity to the Northeast has
limited natural gas penetration to less than 50% of households (as compared to
more than 95% in the Great Lakes region). Industries is participating in two
pipeline construction projects designed to increase the supply of natural gas
to the Northeast, which should foster the development of new customer markets
in and around Bay State's service territories.
S-4
<PAGE>
Natural Gas
Industries distributes natural gas to approximately 739,400 customers in
northern Indiana through three wholly-owned utility subsidiaries: Northern
Indiana Public Service Company ("Northern Indiana"), Kokomo Gas and Fuel
Company ("Kokomo Gas") and Northern Indiana Fuel and Light Company, Inc.
("NIFL"). Northern Indiana, Kokomo Gas and NIFL operate in 41 counties across
northern Indiana, serving an area of about 13,865 square miles with a
population of approximately 2.4 million. Based on total throughput, Industries
is the tenth largest local gas distribution company in the United States.
Bay State and Northern Utilities distribute natural gas to more than 300,000
customers in the areas of Brockton, Lawrence and Springfield, Massachusetts,
Lewiston and Portland, Maine and Portsmouth, New Hampshire. Bay State and
Northern Utilities operate in 12 counties in New England, serving an area of
about 2,152 square miles with a population of approximately 1.8 million.
Industries purchases its gas supply on the spot market and under agreements
with gas marketers and producers. Industries ensures an adequate supply of
natural gas for its customers through firm transportation agreements with all
of the major interstate pipelines serving its territories, an underground gas
storage field, liquefied natural gas plants, salt dome gas storage facilities
and gas storage service agreements.
Industries' wholly-owned subsidiary, Crossroads Pipeline Company
("Crossroads"), owns and operates an interstate pipeline extending from the
northwestern corner of Indiana (near the border with Chicago) eastward into
Ohio. At its western end, Crossroads' pipeline connects to the interstate
pipelines of the Natural Gas Pipeline Company of America (which supply the
Chicago metropolitan area with gas from Texas and Louisiana). At its eastern
end, the pipeline connects with interstate facilities owned by Columbia Gas
Transmission Corporation. Industries and Consolidated Natural Gas Company plan
to extend Crossroads' pipeline 20 miles to connect with the Consolidated system
that supplies Pennsylvania, upstate New York and the Northeast. This project
will maximize the use of existing facilities to allow delivery of natural gas
from the U.S. and Canadian supply basins eastward through the Chicago area and
into expanding Northeastern markets. Because the project will utilize existing
pipelines, it is expected to have little environmental impact and to be in
service before a number of other pipelines being built to supply the
comparatively underserved Northeast.
In addition to extending the Crossroads pipeline, Industries and Bay State
collectively own a 19% share of Portland Natural Gas Transmission System
("PNGTS"), a 292-mile pipeline being built to bring Canadian gas from New
Brunswick into Maine, New Hampshire and Massachusetts in order to increase the
gas supply to the region. Industries expects the PNGTS pipeline to be in
service by Spring 1999. Industries believes that, with the largest service
territory in New England in terms of square miles, Bay State and Northern
Utilities are well-positioned to expand as more natural gas is brought to the
Northeast.
Electricity
Industries generates and distributes electricity to the public primarily
through its largest subsidiary, Northern Indiana. Through its Primary Energy,
Inc. ("Primary Energy") subsidiary, Industries also is active in developing
unregulated power projects. Northern Indiana provides electric service in 30
counties in the northern part of Indiana, with an area of approximately 12,000
square miles and a population of approximately 2.2 million. At December 31,
1998, Northern Indiana provided approximately 421,000 customers with
electricity. For the year ended December 31, 1998, industrial customers
accounted for approximately 28% of Industries' electric energy revenues, with
residential customers providing approximately 20%, commercial customers
contributing approximately 19% and wholesale customers accounting for
approximately 30%.
S-5
<PAGE>
Northern Indiana owns and operates four coal-fired electric generating
stations, two hydroelectric generating plants and four gas-fired combustion
turbine generating units, providing a total system net capability of 3,392
megawatts ("MW"). Northern Indiana has no nuclear power plants. During the year
ended
December 31, 1998, Northern Indiana generated approximately 95% of its electric
energy requirements and purchased the balance in the spot market. Northern
Indiana is the first energy utility in North America to receive the
International Standards Organization's ISO 14001 Certification for effective
environmental management systems at all of its facilities.
Deregulation in the electric energy industry is giving utility customers
broader choices in meeting their electricity needs. Industries believes that
industrial customers that consume large amounts of electricity, such as steel
and refining companies, are most likely to take advantage of these increased
choices. These customers historically have required a significant portion of
Northern Indiana's generating capacity and have negotiated relatively low rates
in return. Primary Energy works with industrial customers to develop cost-
effective, long-term sources of energy for energy-intensive facilities. In
these projects, Primary Energy offers its expertise in managing the
engineering, construction, operation and maintenance of "inside the fence"
cogeneration plants that process previously wasted fuels or improve plant
efficiency to provide lower-cost electricity and steam. In addition, by helping
large industrial customers satisfy their demands for power, Industries has been
able to free up its generating capacity and focus on providing electricity to a
growing base of higher-margin residential and commercial consumers. At December
31, 1998, Primary Energy operated four cogeneration plants with a combined
capacity of 394 MW for three steel companies in Northern Indiana's service
territory and owned a 50% interest in a pulverized coal injection facility
serving one of those companies. In December 1998, Primary Energy and BP Amoco
Corporation announced plans to construct a 550 MW natural gas-fired
cogeneration plant at BP Amoco's Whiting, Indiana refinery. The definitive
agreement for that project currently is under negotiation.
Water
Industries operates the sixth largest investor-owned water utility business
in the United States, serving approximately 253,700 customers through the
utility subsidiaries of IWCR. These companies supply water for residential,
commercial and industrial uses and for fire protection service in Indianapolis
and the surrounding areas. The principal sources of the water utilities'
present water supply are the White River and other streams, supplemented by
three large surface reservoirs. The territory served by the water utilities
covers an area of approximately 309 square miles in six counties of central
Indiana. IWCR also manages the municipal water system for Lawrence, Indiana,
and participates in a partnership that operates municipal wastewater treatment
facilities in Indianapolis and Gary, Indiana.
Non-Regulated Energy Services
In addition to the activities of Primary Energy described above, Industries
provides non-regulated energy services through its wholly-owned subsidiary, NI
Energy Services, Inc. ("NESI"). Through its subsidiaries and investments, NESI
provides a variety of energy-related services, including gas marketing, gas
transmission, supply and storage and energy efficiency design services. Bay
State provides non-regulated energy services through EnergyUSA, which markets
products and services, such as propane, energy advisory services and home
security services, to customers of local utilities in 22 states. These products
and services are branded and operated either under the local utility's label or
with the EnergyUSA name.
Other Non-Regulated Subsidiaries
Industries also provides non-regulated utility-related services, primarily
through the following wholly-owned subsidiaries:
. Miller Pipeline Corporation ("Miller") installs, repairs and maintains
underground pipelines used in gas, water and sewer transmission and
distribution systems.
S-6
<PAGE>
. SM&P Utility Resources, Inc. ("SM&P") is the largest underground utility
locating and marking service business in the United States, currently
operating in Indiana and ten other states.
. NIPSCO Development Company, Inc. invests in real estate, residential
housing and venture capital projects, primarily within Industries'
utility subsidiaries' service territories.
CAPITAL MARKETS
Capital Markets is a wholly-owned subsidiary of Industries that engages in
financing activities to generate funds for the business operations of
Industries and its wholly-owned subsidiaries (excluding Northern Indiana).
Capital Markets and Industries have entered into a Support Agreement (the
"Support Agreement") under which Industries has agreed, among other things, to
ensure the timely payment of amounts owed on any debt securities issued by
Capital Markets, including the debentures (the "Debentures") to be purchased by
the Trust, with the limitation that no holder of such debt securities will have
recourse to or against the stock or assets of Northern Indiana, or against any
interest of Industries or Capital Markets in such stock or assets. See
"Description of the Support Agreement" in the accompanying Prospectus.
THE TRUST
The Trust is a statutory business trust that was created under the Delaware
Business Trust Act (the "Trust Act"). Prior to the issuance of the Corporate
PIES, the declaration of trust governing the Trust will be amended and restated
in its entirety (as so restated, the "Declaration"), substantially in the form
filed as an exhibit to the Registration Statement. Capital Markets will hold
all of the common securities of the Trust (the "Common Securities") in an
aggregate liquidation amount equal to at least three percent of the total
capital of the Trust. Upon the sale and issuance of the Common Securities and
the preferred securities of the Trust (the "Preferred Securities"), the Trust
will use all of the proceeds to purchase the Debentures from Capital Markets.
The Trust's business and affairs will be conducted initially by five trustees
(the "Trustees"), three of which are employees, officers or persons affiliated
with Capital Markets (the "Regular Trustees"). The fourth trustee is The Chase
Manhattan Bank, a financial institution that is unaffiliated with Capital
Markets, which serves as property trustee under the Declaration (the "Property
Trustee"). The fifth Trustee is Chase Manhattan Bank Delaware, which serves as
trustee in the State of Delaware for the purpose of complying with the
provisions of the Trust Act.
THE OFFERING
Corporate PIES
Industries and the Trust are offering 6,000,000 PIES, consisting of 6,000,000
Corporate PIES, to the public for $50 each. Each Corporate PIES is a unit
consisting of two parts:
. a purchase contract for Industries' Common Shares; and
. a Preferred Security.
Purchase Contract. Industries has entered into a Purchase Contract Agreement
with The Chase Manhattan Bank, which will act as agent for all of the holders
of the Corporate PIES (as well as the holders of the Treasury PIES described
below). Each Corporate PIES that you purchase will be issued under the Purchase
Contract Agreement, which creates a contractual arrangement between you and
Industries for the purchase of Industries' Common Shares (a "Purchase
Contract"). Under this Purchase Contract, you will be obligated to purchase,
for each of your Corporate PIES, Industries' Common Shares at a purchase price
of $50. You will
S-7
<PAGE>
not be obligated to pay the purchase price, and you will not receive your
Common Shares, until February 19, 2003, which has been set as the "Purchase
Contract Settlement Date." The number of Common Shares that you will be
entitled to receive on that date will depend on the fair market value of the
Common Shares over a 20-day period prior to that date. Until you actually
purchase the Common Shares, your obligation to pay the $50 purchase price will
be secured by the Preferred Security that is a part of your Corporate PIES,
which will be pledged as collateral. Under certain circumstances, the
Debentures or a portfolio of U.S. treasury securities may be substituted as
collateral. More information about the Purchase Contracts is provided under the
heading "Description of the Purchase Contracts" starting on page S-35.
Preferred Security. Each Corporate PIES you purchase also will include a
Preferred Security that will represent an undivided beneficial ownership
interest in the assets of the Trust. The stated liquidation amount of each
Preferred Security is $50. As long as the Trust exists, its assets will consist
of the Debentures that the Trust will purchase from Capital Markets. If the
Trust is dissolved (other than as a result of the redemption of the
Debentures), the Debentures will be distributed among you and the other holders
of the Corporate PIES, after any creditors of the Trust have been paid. Capital
Markets can dissolve the Trust at any time, subject to certain conditions.
References to Preferred Securities in this Prospectus Supplement include the
Debentures that have been delivered to the holders of the Preferred Securities
upon dissolution of the Trust, unless the context otherwise requires.
Payments to Corporate PIES Holders. As a holder of Corporate PIES, you will
be entitled to receive cash payments consisting of (1) payments under the
Purchase Contract and (2) distributions on the Preferred Security.
. Payments under the Purchase Contract. Industries will pay you quarterly
contract adjustment payments ("Contract Adjustment Payments") of $0.2313
(which is equal to 1.85% per annum of the $50 stated amount) on your
Purchase Contract. Industries will pay the Contract Adjustment Payments
on February 19, May 19, August 19 and November 19 of each year, with the
first payment being made on May 19, 1999 and the last payment being made
on February 19, 2003, unless your Purchase Contract is settled or
terminates before that date.
. Distributions on the Preferred Security. In addition, the Trust will pay
you quarterly cash distributions on your Preferred Security on the same
dates that Contract Adjustment Payments are made. You will receive a
distribution of $0.7375 each quarter (which is equal to 5.90% per annum
of the $50 stated liquidation amount). Distributions will accumulate from
February 16, 1999 and will continue until February 19, 2003. If you
continue to own your Preferred Security after that date, then the Trust
will pay you distributions on your Preferred Security, which will
accumulate from February 19, 2003 until February 19, 2005, at a reset
rate that is described in more detail starting on page S-45. The Trust
will pay distributions only when it has funds available for payment. The
Trust's sole source of funds for distributions are Capital Markets'
payments of interest on the Debentures that the Trust will hold.
Guarantee. Capital Markets will guarantee the payment of distributions on the
Preferred Securities and the payment of the redemption price of the Preferred
Securities, to the extent that the Trust has funds available for payment. Taken
together with Capital Markets' obligations under the Debentures and the related
Indenture, this guarantee effectively provides a full, irrevocable and
unconditional guarantee of the Preferred Securities. Capital Markets'
obligations under this guarantee are entitled to the benefit of Capital
Markets' Support Agreement with Industries. See "Description of the Support
Agreement" in the accompanying Prospectus. You can find more information about
this guarantee arrangement under the heading "Description of the Guarantee"
starting on page S-51.
Limited Voting Rights. As a holder of Corporate PIES, you will have limited
voting rights. You may vote only with respect to the modification of the
Preferred Securities, the exercise of the Trust's rights as holder of the
Debentures and, under certain circumstances, the removal and replacement of the
Property Trustee. You will not have any voting or other rights with respect to
the Common Shares until you pay the $50 purchase price and purchase the Common
Shares.
S-8
<PAGE>
Pledge Arrangement. When you purchase a Corporate PIES, the Preferred
Security that is a part of that Corporate PIES will be pledged as collateral to
secure your obligation to purchase Common Shares on February 19, 2003 under the
related Purchase Contract. Industries has entered into a pledge agreement (the
"Pledge Agreement") under which The First National Bank of Chicago will act as
collateral agent (the "Collateral Agent") and hold your Preferred Security
until the $50 purchase price has been paid. Even though your Preferred Security
will be pledged as collateral, you will be the beneficial owner of the
Preferred Security.
Relationship to Debentures
Interest Payments on the Debentures. The Trust will use all the proceeds from
the sale of its Common Securities and Preferred Securities (collectively, the
"Trust Securities") to purchase the Debentures from Capital Markets. The
Debentures will be the sole assets of the Trust. Capital Markets will pay
interest on the Debentures to the Trust on a quarterly basis. The Trust will
use those interest payments to pay distributions on the Preferred Securities.
If Capital Markets does not make its interest payments to the Trust, then the
Trust will not have any funds to pay distributions on the Preferred Securities.
Substitution of Treasury Portfolio upon Tax Event. If the tax laws change or
are interpreted in a way that adversely affects the tax treatment of the Trust
or the Debentures, then a "Tax Event" may occur. If a Tax Event occurs, Capital
Markets, as issuer of the Debentures, may redeem the Debentures held by the
Trust. If the Debentures are redeemed before February 19, 2003, the money
received from the redemption will be used to purchase a "Treasury Portfolio" of
zero-coupon U.S. treasury securities that mature on or prior to February 19,
2005, and the Trust will be dissolved. The Treasury Portfolio will replace the
Preferred Securities as the collateral securing your and the other holders'
obligations to purchase Common Shares under the Purchase Contracts. If the
Debentures are redeemed, then each Corporate PIES will consist of a Purchase
Contract for Industries' Common Shares and an ownership interest in the
Treasury Portfolio.
Distribution of the Debentures. Capital Markets may dissolve the Trust at any
time if certain conditions are met. If the Trust is dissolved (other than as a
result of the redemption of the Debentures), you will receive your pro rata
share of the Debentures held by the Trust (after any creditors of the Trust
have been paid). These Debentures will remain pledged as collateral to secure
your obligation to purchase Common Shares under your Purchase Contracts.
Treasury PIES
Once you own Corporate PIES, you may create Treasury PIES by substituting
treasury securities for the Preferred Securities that are a part of the
Corporate PIES. A Treasury PIES will be a unit consisting of:
. a Purchase Contract for Industries' Common Shares that is identical to
the Purchase Contract that is a part of the Corporate PIES; and
. a 1/20 undivided beneficial ownership interest in a zero-coupon U.S.
treasury security that has a principal amount at maturity of $1,000
(equivalent to $50 per Treasury PIES) and matures on or prior to the
business day prior to the Purchase Contract Settlement Date (the
"Treasury Security").
Terms of Substitution. You may substitute Treasury Securities for Preferred
Securities at any time on or prior to February 7, 2003 (the seventh business
day prior to the Purchase Contract Settlement Date). Because the Treasury
Security has a principal amount at maturity of $1,000, you must substitute
Treasury PIES for Corporate PIES in multiples of 20. In order to make a
substitution, you must:
. For each group of 20 Corporate PIES you wish to substitute, transfer a
Treasury Security to The First National Bank of Chicago, which is acting
as the securities intermediary (the "Securities Intermediary") under the
pledge arrangement. The Securities Intermediary then will deposit the
S-9
<PAGE>
Treasury Security in the collateral account maintained under the pledge
arrangement. The Treasury Security will become the collateral supporting
your obligation to purchase the Common Shares, and the Collateral Agent
will release 20 Preferred Securities from the pledge. Those Preferred
Securities then will be freely tradable and will not be a part of a
Corporate PIES or a Treasury PIES.
. Submit your Corporate PIES in multiples of 20. For each group of 20
Corporate PIES you submit, you will receive 20 Treasury PIES.
. Pay to the Collateral Agent any fees or expenses incurred in connection
with the substitution.
If the Treasury Portfolio has been substituted for the Preferred Securities,
then you may create Treasury PIES at any time on or prior to February 14, 2003
(the second business day prior to the Purchase Contract Settlement Date). In
this case, because of the composition of the Treasury Portfolio, any
substitution of Treasury PIES for Corporate PIES must be made in multiples of
160,000.
Payments to Treasury PIES Holders. If you substitute Treasury PIES for
Corporate PIES, you will continue to receive Purchase Contract Adjustment
Payments under your Purchase Contract, but you will not receive any other
distributions on the Treasury PIES. Instead, you will receive accrued original
issue discount ("OID") on the Treasury Securities that you deposited with the
Securities Intermediary. As long as you continue to own the Preferred
Securities that had been a part of your Corporate PIES, you will receive
distributions on them, separately from the Treasury PIES.
Recreating Corporate PIES
Once you have created Treasury PIES, you may subsequently recreate Corporate
PIES at any time on or prior to February 7, 2003 (the seventh business day
prior to the Purchase Contract Settlement Date). Because the Treasury Security
has a principal amount at maturity of $1,000, you must recreate Corporate PIES
from Treasury PIES in multiples of 20. In order to recreate Corporate PIES, you
must:
. For each group of 20 Corporate PIES to be recreated, transfer 20
Preferred Securities to the Securities Intermediary. The Securities
Intermediary then will deposit the Preferred Securities in the collateral
account maintained under the pledge arrangement. The 20 Preferred
Securities will become the collateral supporting your obligation to
purchase the Common Shares, and the Collateral Agent will release the
Treasury Security from the pledge. That Treasury Security then will be
freely tradable and will not be a part of any PIES.
. Submit your Treasury PIES in multiples of 20. For each group of 20
Treasury PIES you submit, you will receive 20 Corporate PIES.
. Pay to the Collateral Agent any fees or expenses incurred in connection
with the substitution.
If the Treasury Portfolio has been substituted for the Preferred Securities,
then you may recreate Corporate PIES at any time on or prior to February 14,
2003 (the second business day prior to the Purchase Contract Settlement Date),
but only in multiples of 160,000.
Settlement of Purchase Contracts; Remarketing
Corporate PIES. For each Purchase Contract that is a part of your Corporate
PIES, you will be obligated to pay, on February 19, 2003, $50 to purchase
Common Shares of Industries. You may choose to deliver a cash payment of $50,
or, if you do not, your Preferred Security held as collateral under the pledge
arrangement will be sold to the public for $50 ("remarketed") and the proceeds
will be used to pay the amount due under your Purchase Contract. Capital
Markets, as issuer of the Debentures, will be responsible for all costs and
expenses incurred in connection with the remarketing.
Remarketing of Corporate PIES. On February 13, 2003 (the third business day
prior to the Purchase Contract Settlement Date), Lehman Brothers Inc. (the
"Remarketing Agent") will remarket the Preferred Securities of those holders of
Corporate PIES who either elect to have their Preferred Securities remarketed
or
S-10
<PAGE>
fail to deliver cash payments for the Common Shares when those payments are
due, as well as those holders of separately traded Preferred Securities who
elect to have their Preferred Securities remarketed. After the Preferred
Securities have been remarketed, the distribution rate on the Preferred
Securities and the interest rate on the Debentures will be the rate determined
by the remarketing.
Remarketing Procedures.
. If you do not notify the Purchase Contract Agent that you will pay cash
for the Common Shares by 5:00 p.m., New York City time, on February 7,
2003 (the seventh business day prior to the Purchase Contract Settlement
Date), or if you notify the Purchase Contract Agent that you will pay
cash but you do not deliver the cash by 11:00 a.m., New York City time,
on or prior to February 11, 2003 (the fifth business day prior to the
Purchase Contract Settlement Date), your Preferred Securities will be
remarketed.
. On February 13, 2003 (the third business day prior to the Purchase
Contract Settlement Date), the Remarketing Agent will use commercially
reasonable efforts to sell your Preferred Securities, together with all
other Preferred Securities being remarketed, at a price of $50 per
Preferred Security.
. If the remarketing is successful, then:
. Your Preferred Securities will be sold, and the interest rate on the
Debentures and the distribution payment rate on the Preferred Securities
will be reset to be the lowest rate that the Remarketing Agent
determined was necessary to allow it to remarket the Preferred
Securities at a price of $50 per Preferred Security.
. The $50 per Preferred Security received from the sale will be delivered
to Industries as payment for the Common Shares.
. You will receive the Common Shares.
Failed Remarketing. If the Remarketing Agent cannot remarket the Preferred
Securities, then Industries will exercise its rights as a secured party and
take possession of your Preferred Securities. Your obligation to purchase the
Common Shares then will be fully satisfied, and you will receive the Common
Shares.
Cash Payment in Lieu of Remarketing. If you choose not to participate in the
remarketing and instead pay cash for your Common Shares, then:
. Industries will receive $50 in cash from you for each of your Purchase
Contracts.
. You will receive the Common Shares.
. Your Preferred Securities will be released from the pledge arrangement
and distributed to you. Starting on the date of settlement and
continuing until February 19, 2005, distributions on the Preferred
Securities will be payable at the new rate determined by the Remarketing
Agent in the remarketing.
Treasury Portfolio as Part of Corporate PIES. If the Preferred Securities are
redeemed due to a Tax Event and replaced with the Treasury Portfolio, then,
unless you notify the Purchase Contract Agent that you will pay for the Common
Shares with cash, your ownership interest in the Treasury Portfolio will be
applied toward the purchase price. Industries will receive the proceeds
attributable to your ownership interest in the Treasury Portfolio, your
obligation to purchase the Common Shares will be fully satisfied, and you will
receive the Common Shares.
Settlement of Treasury PIES. Unless you notify the Purchase Contract Agent
that you will pay for the Common Shares with cash, upon settlement of the
Treasury PIES, Industries will receive the proceeds of the Treasury Securities
being held as collateral under the pledge arrangement. This will satisfy your
obligation to deliver the purchase price for the Common Shares, and you will
receive the Common Shares.
S-11
<PAGE>
Number of Common Shares Purchased. Unless you elect to settle your Purchase
Contracts early (see "Description of the Purchase Contracts--Early Settlement"
starting on page S-37), the number of Common Shares you will receive under each
Purchase Contract will depend on the average of the closing price per share (or
the last reported sale price, if no closing price is reported) of the Common
Shares as reported on the New York Stock Exchange (the "NYSE") for a period of
20 trading days ending on February 13, 2003 (the third trading day prior to the
Purchase Contract Settlement Date). If, for any trading day, the trading of the
Common Shares is suspended, or if the Common Shares do not trade at least once
on the NYSE on that day, then that day will not be considered to be part of the
20-day period.
The number of Common Shares you will receive for each Corporate PIES will be
determined by one of the following settlement rates:
. If the average closing price equals or exceeds $31.0500, you will receive
1.6103 Common Shares.
. If the average closing price is less than $31.0500 but greater than
$26.3125, you will receive a number of Common Shares equal to $50 divided
by the average closing price (rounded upward or downward to the nearest
1/10,000th of a share).
. If the average closing price is less than or equal to $26.3125, you will
receive 1.9002 Common Shares.
In certain circumstances, the applicable settlement rate will be subject to
adjustment. You can find more information about the settlement rate starting on
page S-35.
Industries will not issue any fractional Common Shares. If, however, you are
settling more than one Purchase Contract, then any fractional Common Shares
will be aggregated. For any fractional share not issuable, Industries will pay
you the value of that fractional share in cash.
Early Settlement
You may satisfy your obligation to purchase Common Shares under your Purchase
Contract before February 19, 2003 (the Purchase Contract Settlement Date). If
you choose early settlement, you will pay $50 in cash on or prior to February
7, 2003 (the seventh business day prior to the Purchase Contract Settlement
Date), if you are settling a Corporate PIES, or February 14, 2003 (the second
business day prior to the Purchase Contract Settlement Date), if you are
settling Treasury PIES. To effect early settlement:
. You must deliver to the Purchase Contract Agent a notice indicating your
election to "settle early."
. You must deliver a cash payment of $50 for each Purchase Contract being
settled.
. You will receive, for each Corporate PIES or Treasury PIES you surrender,
both:
. 1.6103 Common Shares, regardless of the market price of the Common
Shares on the date of early settlement and subject to adjustment in
certain circumstances; and
. your Preferred Security or your ownership interest in the Treasury
Portfolio (if you are settling a Corporate PIES) or a 1/20 undivided
beneficial interest in a Treasury Security (if you are settling Treasury
PIES).
. You will not receive any further Contract Adjustment Payments from
Industries.
You may settle Treasury PIES early only in multiples of 20. If you elect
early settlement of a Corporate PIES that includes an ownership interest in the
Treasury Portfolio rather than a Preferred Security, then you may settle your
Corporate PIES early only in multiples of 160,000. In this case, you can settle
early at any time on or prior to February 14, 2003 (the second business day
prior to the Purchase Contract Settlement Date).
Termination of Purchase Contracts
The Purchase Contracts will terminate automatically if certain bankruptcy,
insolvency or reorganization events occur with respect to Industries. If the
Purchase Contracts terminate upon one of these events, then your
S-12
<PAGE>
rights and obligations under your Purchase Contracts also will terminate,
including your right to receive accrued Contract Adjustment Payments and your
obligation to pay for, and your right to receive, Common Shares. Upon
termination, you will receive your Preferred Security, your Treasury Security
or, if the Treasury Portfolio has been substituted as collateral under the
pledge arrangement, your ownership interest in the Treasury Portfolio (or cash
in an amount equal to the value of that interest). If Industries becomes the
subject of a bankruptcy case, then there may be a delay between the time the
Purchase Contracts terminate and the time you receive your pledged Preferred
Security, Treasury Security or ownership interest in the Treasury Portfolio, as
the case may be. You may find more information about how the Purchase Contracts
terminate on page S-41.
LISTING ON AN EXCHANGE
Industries' Common Shares are traded on the NYSE, the Chicago Stock Exchange
and the Pacific Exchange under the ticker symbol "NI." The Corporate PIES have
been approved for listing on the NYSE under the symbol "NIPr." Trading of the
Corporate PIES on the NYSE is expected to commence within five business days
after the date of this Prospectus Supplement. If either the Treasury PIES or
the Preferred Securities are traded at a volume that satisfies applicable
exchange listing requirements, then Industries and Capital Markets will try to
list those securities on the national securities exchanges or associations on
which the Corporate PIES are then listed or quoted.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
Because a Corporate PIES will consist of a Preferred Security and a Purchase
Contract, the purchase price of each Corporate PIES will be allocated between
the Purchase Contract and the related Preferred Security in proportion to their
relative fair market values at the time of purchase.
If you own Corporate PIES, you will include in gross income your
proportionate share of the interest income on the Debentures when such interest
income is paid or accrued in accordance with your regular method of tax
accounting.
If you own Treasury PIES, you will be required to include in gross income
your allocable share of any OID or market discount or amortize your allocable
share of any bond premium with respect to the Treasury Securities you own.
Industries intends to report the Contract Adjustment Payments as income to
you, but you may want to consult your tax advisor concerning alternative
characterizations. See "Certain United States Federal Income Tax Consequences"
starting on page S-52.
USE OF PROCEEDS
The estimated net proceeds from the sale of the Corporate PIES, after
deducting underwriting compensation payable by Capital Markets and estimated
fees and expenses, are expected to be approximately $290,350,000 ($334,000,000
if the underwriters' over-allotment option is exercised in full). These net
proceeds will be advanced to Industries and used to pay the cash portion of the
consideration payable in the Bay State acquisition and to repay short-term
indebtedness incurred to purchase Common Shares in anticipation of that
acquisition. See "Use of Proceeds" on page S-20.
S-13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(dollars in thousands, except per share amounts and ratios)
Industries
The following selected historical consolidated financial and operating
information of Industries is derived from, and should be read in conjunction
with, the consolidated audited financial statements contained in Industries'
Annual Report on Form 10-K for the fiscal year ended December 31, 1997 and
Current Report on Form 8-K dated February 8, 1999.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Operating Revenues
Gas.................... $ 681,909 $ 691,402 $ 799,395 $ 807,239 $ 637,098
Electric............... 994,492 1,030,923 1,022,231 1,186,331 1,429,986
Water.................. -- -- -- 60,743 83,979
Products and Services.. 91,628 46,983 166,322 532,228 781,715
----------- ----------- ----------- ----------- -----------
Total Operating
Revenues............. $ 1,768,029 $ 1,769,308 $ 1,987,948 $ 2,586,541 $ 2,932,778
Operating Margin........ $ 1,014,566 $ 1,074,820 $ 1,115,965 $ 1,210,927 $ 1,240,411
Operating Income........ $ 353,452 $ 381,877 $ 386,308 $ 410,553 $ 421,506
Net Income.............. $ 163,987 $ 175,465 $ 176,734 $ 190,849 $ 193,886
Weighted Average Common
Shares Outstanding..... 129,640,078 126,562,354 122,381,500 123,849,126 120,778,077
Basic Earnings per
Weighted Average Common
Share.................. $ 1.24 $ 1.36 $ 1.44 $ 1.54 $ 1.60
Diluted Earnings per
Weighted Average Common
Share.................. $ 1.23 $ 1.35 $ 1.43 $ 1.53 $ 1.59
Dividends Declared per
Share.................. $ 0.74 $ 0.80 $ 0.86 $ 0.92 $ 0.98
</TABLE>
<TABLE>
<CAPTION>
As of
December 31, 1998
------------------
<S> <C>
Balance Sheet Data:
Total Assets............................................... $4,986,503
==========
Short-term Borrowings (including current portion of long-
term debt)................................................ $ 417,830
==========
Common Shareholders' Equity................................ $1,149,708
Cumulative Preferred Stocks
Series without Mandatory Redemption Provisions............ 85,613
Series with Mandatory Redemption Provisions............... 56,435
Long-term Debt (excluding amounts due within one year)..... 1,667,965
----------
Total Capitalization....................................... $2,959,721
==========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Other Data:
Ratio of Earnings to Fixed
Charges(1)....................... 3.14 3.28 3.21 3.10 2.87
Utility Construction Expenditures
(including allowance for funds
used during construction)........ $202,545 $192,966 $207,881 $218,931 $245,825
</TABLE>
- --------
(1) For the purpose of calculating this ratio, "earnings" consist of income
from continuing operations before income taxes plus fixed charges. "Fixed
charges" consist of interest on all indebtedness, amortization of debt
expense, the portion of rental expenses on operating leases deemed to be
representative of the interest factor and preferred stock dividend
requirements of consolidated subsidiaries.
S-14
<PAGE>
Bay State
The following selected historical consolidated financial and operating
information of Bay State is derived from, and should be read in conjunction
with, the consolidated audited financial statements contained in Bay State's
Annual Report on Form 10-K for the fiscal year ended September 30, 1998.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------
1996 1997(1) 1998(2)
-------- -------- --------
<S> <C> <C> <C>
Operating Revenues............................. $428,843 $473,581 $450,032
Operating Income............................... $ 56,215 $ 41,704 $ 20,665
Net Income..................................... $ 27,072 $ 26,062 $ 6,634
</TABLE>
- --------
(1) Net income decreased $1.0 million in 1997 due to weather that was 4.9%
warmer than 1996 and the write-off of restructuring costs. This decrease
was partially offset by the sale of a subsidiary for an after-tax gain of
$7.8 million.
(2) In 1998, net income was $6.6 million compared to $26.1 million in 1997. Net
income for 1998 decreased due to the effects of weather, the incurrence of
merger and merger-related costs of $8.4 million, the write-off of certain
assets totaling $9.9 million, the recovery of which was no longer probable,
and operating losses in non-regulated energy products and services. Net
income was positively impacted by the receipt of $5.7 million in
environmental recovery cost insurance settlements and by a change in a
benefit plan accounting principle. The sale of a subsidiary for a $7.8
million after-tax gain improved 1997 earnings. Weather during 1998 was 9.1%
warmer than normal and 7.8% warmer than 1997.
S-15
<PAGE>
RISK FACTORS
An investment in PIES involves a number of risks. Before deciding to buy any
PIES, you should carefully consider the following information, together with
the other information in this Prospectus Supplement, the accompanying
Prospectus and the documents that are incorporated by reference in the
accompanying Prospectus about risks concerning an investment in PIES.
The Corporate PIES consist of Preferred Securities issued by the Trust and
Purchase Contracts to acquire Industries' Common Shares. Because the Trust will
use the payments it receives on the Debentures from Capital Markets to fund all
payments on the Preferred Securities, and because the Trust may distribute the
Debentures in exchange for the Preferred Securities, when considering an
investment in Corporate PIES, you are making an investment decision with regard
to the Common Shares, the Preferred Securities and the Debentures as well as
the Corporate PIES. You should carefully review the information in this
Prospectus Supplement and the accompanying Prospectus about all of these
securities.
Risk Factors Relating to the PIES
Number of Common Shares Receivable under Purchase Contract Will Depend on
Future Common Share Price; Risk of Decline in Equity Value
The terms of the PIES differ from those of ordinary convertible securities.
The number of Common Shares that you will receive upon the settlement of a
Purchase Contract is not fixed, but rather will depend on the market value of
the Common Shares near the time of settlement. Because the price of the Common
Shares fluctuates, the aggregate market value of the Common Shares receivable
upon settlement of the Purchase Contract may be more or less than the stated
amount of $50 per PIES. If the market value of the Common Shares near the time
of settlement is less than $26.3125, the aggregate market value of the Common
Shares issuable upon settlement generally will be less than the stated amount
of the Purchase Contract, and the investment in the PIES will result in a loss.
Therefore, you will bear the full risk of a decline in the market value of the
Common Shares prior to settlement of the Purchase Contracts.
Opportunity for Equity Appreciation Less Than Common Share Ownership
The market value of the Common Shares receivable upon settlement of a
Purchase Contract generally will exceed the stated amount of $50 only if the
average closing price of the Common Shares over the 20-day period preceding
settlement equals or exceeds the "Threshold Appreciation Price" of $31.0500
(which represents an appreciation of 18.00% over the current market price).
Therefore, during the period prior to settlement, an investment in the PIES
affords less opportunity for equity appreciation than a direct investment in
the Common Shares. If the applicable average closing price exceeds the
Reference Price of $26.3125 but falls below the Threshold Appreciation Price of
$31.0500, you will realize no equity appreciation on the Common Shares for the
period during which you own the Purchase Contracts. Furthermore, if the
applicable average closing price equals or exceeds the Threshold Appreciation
Price, you will realize only 84.74% of the equity appreciation for that period
above the Threshold Appreciation Price. See "Description of the Purchase
Contracts--General" starting on page S-35 for an illustration of the number of
Common Shares that you would receive at various average market prices.
Unpredictability of Market Price for the Common Shares
It is impossible to predict whether the market price of the Common Shares
will rise or fall. Numerous factors influence the trading prices of the Common
Shares. These factors include changes in Industries' financial condition,
results of operations and prospects and complex and interrelated political,
economic, financial and other factors that can affect the capital markets
generally, the stock exchanges on which the Common Shares are traded and the
market segments of which Industries is a part.
S-16
<PAGE>
The market for the Common Shares likely will influence, and be influenced by,
any market that develops for the PIES. For example, investors' anticipation of
the distribution into the market of substantial amounts of Common Shares
(including the additional Common Shares issuable upon settlement of the
Purchase Contracts) could depress the price of the Common Shares and increase
their volatility. If the underwriters' over-allotment option is exercised in
full, the largest number of Common Shares issuable upon settlement of the
Purchase Contracts would constitute approximately 11.16% of the Common Shares
outstanding as of December 31, 1998. The price of the Common Shares also could
be affected by possible sales of the Common Shares by investors who view the
PIES as a more attractive means of equity participation in Industries and by
hedging or arbitrage trading activity that may develop involving the PIES and
the Common Shares. See "--Arbitrage Opportunities May Affect Market Prices of
PIES, Preferred Securities and Common Shares" below.
Potential Dilution of Common Shares Issuable upon Settlement of Purchase
Contracts
The number of Common Shares issuable upon settlement of each Purchase
Contract is subject to adjustment only for stock splits and combinations, stock
dividends and certain other specified transactions involving Industries. See
"Description of the Purchase Contracts--Anti-Dilution Adjustments" starting on
page S-39. The number of Common Shares issuable upon settlement of each
Purchase Contract is not subject to adjustment for other events, such as
employee stock option grants, offerings of Common Shares for cash or in
connection with acquisitions or certain other transactions involving
Industries, which may adversely affect the price of the Common Shares. The
terms of the PIES do not restrict Industries' ability to offer Common Shares in
the future or to engage in other transactions that could dilute the Common
Shares. Industries has no obligation to consider the interests of the holders
of the PIES for any reason.
No Rights as Common Shareholders
Until you acquire Common Shares upon settlement of your Purchase Contract,
you will have no rights with respect to the Common Shares, including voting
rights, rights to respond to tender offers and rights to receive any dividends
or other distributions on the Common Shares. Upon settlement of your Purchase
Contract, you will be entitled to exercise the rights of a holder of Common
Shares only as to actions for which the applicable record date occurs after the
settlement date.
Fixed Yield
There can be no assurance that the yield on the PIES will remain higher than
the dividend yield on the Common Shares. You will be entitled to receive
aggregate quarterly cash distributions at the rate of 7.75% of the $50 purchase
price of the Corporate PIES per annum, consisting of Contract Adjustment
Payments of $0.9250 and cash distributions on the related Preferred Securities
(or on your interest in the Treasury Portfolio, if the Treasury Portfolio is
substituted for the Preferred Securities) of $2.9500. Industries currently pays
cash dividends at the rate of $1.02 per share per annum (equivalent to 3.88% of
the $26.3125 Reference Price per annum).
Limited Voting Rights of Preferred Securities
You will not be entitled to vote to appoint, remove, replace or change the
number of the trustees of the Trust, and generally will have no voting rights,
except in the limited circumstances described under "Description of the
Preferred Securities--Voting Rights; Amendment of Declaration" in the
accompanying Prospectus.
No Prior Market for Securities
It is impossible to predict how the Corporate PIES, the Treasury PIES and the
Preferred Securities will trade in the secondary market or whether the market
for any of these securities will be liquid or illiquid. The Corporate PIES and
the Treasury PIES are novel securities. There currently is no secondary market
for either
S-17
<PAGE>
of them or for the Preferred Securities, and there can be no assurance as to
the liquidity of any trading market that may develop, the ability of holders to
sell their securities in that market or whether any such market will continue.
The Corporate PIES have been approved for listing on the NYSE, and trading is
expected to commence within five business days after the date of this
Prospectus Supplement. However, listing on the NYSE does not guarantee the
depth or liquidity of the market for the Corporate PIES. If holders of the
Corporate PIES convert their Corporate PIES into Treasury PIES (substituting
Treasury Securities for the Preferred Securities), the liquidity of the
Corporate PIES could be adversely affected. Moreover, if the number of
Corporate PIES falls below the NYSE's requirement for continued listing
(whether as a result of the conversion of Corporate PIES into Treasury PIES or
otherwise), the Corporate PIES could be delisted from the NYSE, or trading in
the Corporate PIES could be suspended.
If the Treasury PIES and the Preferred Securities are separately traded to a
sufficient extent to meet applicable exchange listing requirements, Industries
and Capital Markets will try to list those securities on the same stock
exchange as the Corporate PIES. The underwriters have advised Industries,
Capital Markets and the Trust that they presently intend to make a market for
the Corporate PIES, the Treasury PIES and the Preferred Securities. However,
they are not obligated to do so, and they may discontinue any market making at
any time.
Arbitrage Opportunities May Affect Market Prices of PIES, Preferred Securities
and Common Shares
Fluctuations in interest rates may create opportunities for arbitrage based
upon changes in the relative value of the Common Shares underlying the Purchase
Contracts and of the components of the PIES. Any arbitrage could affect, in
turn, the trading prices of the PIES, the Preferred Securities and the Common
Shares.
Delivery of Securities Subject to Potential Delay
Notwithstanding the automatic termination of the Purchase Contracts, if
Industries becomes the subject of a case under the Bankruptcy Code, imposition
of an automatic stay under Section 362 of the Bankruptcy Code may delay the
delivery to you of your securities being held as collateral under the pledge
arrangement.
Tax Event Redemption
Capital Markets may redeem the Debentures (and thereby cause the redemption
of the Trust Securities) in whole at any time upon the occurrence and
continuation of a Tax Event. See "Description of the Debentures--Tax Event
Redemption" starting on page S-49. A Tax Event redemption constitutes a taxable
event to the beneficial owners of the Preferred Securities. If a Tax Event
redemption occurs prior to settlement under the Purchase Contracts, the Trust
will distribute the applicable redemption price to the Securities Intermediary,
in liquidation of the Corporate PIES holders' interests in the Trust. The
Securities Intermediary will use the redemption amount to purchase the Treasury
Portfolio as substitute collateral on behalf of the holders of the Corporate
PIES. It is impossible to predict the impact that the substitution of the
Treasury Portfolio as collateral for the redeemed Preferred Securities will
have on the market price of the Corporate PIES. See "Certain United States
Federal Income Tax Consequences--Tax Event Redemption" starting on page S-57.
Limited Obligations of Purchase Contract Agent
The Purchase Contract Agreement is not an indenture under the Trust Indenture
Act. Therefore, the Purchase Contract Agent will not qualify as a trustee under
the Trust Indenture Act, and you will not benefit from the protections of that
law, such as disqualification of an indenture trustee for "conflicting
interests," provisions preventing an indenture trustee from improving its own
position at the expense of the security holders and the requirement that an
indenture trustee deliver reports at least annually with respect to the
indenture trustee and the securities. Under the terms of the Purchase Contract
Agreement, the Purchase Contract Agent will have only limited obligations to
you as a holder of the PIES. See "Certain Provisions of the Purchase Contracts,
the Purchase Contract Agreement and the Pledge Agreement--Information
Concerning the Purchase Contract Agent" on page S-43.
S-18
<PAGE>
Rights under the Guarantee
Under the guarantee to be executed by Capital Markets for the benefit of the
holders from time to time of the Trust Securities (the "Guarantee"), Capital
Markets will irrevocably guarantee the payment of various amounts payable with
respect to the Preferred Securities, including accumulated distributions, the
redemption price and amounts payable upon dissolution of the Trust, but only to
the extent that the Trust has funds available for those payments. The Trust
depends for its source of funds on Capital Markets making payments of principal
of and interest on the Debentures when due. If Capital Markets were to default
on its obligations to pay principal of or interest on the Debentures, the Trust
would not have sufficient funds to pay distributions or other amounts on the
Preferred Securities, and you would not be able to rely upon the Guarantee for
payment of these amounts. Instead, you would have to (1) rely on the Property
Trustee enforcing its rights as the registered holder of the Debentures or (2)
enforce the rights of the Property Trustee or assert your own right to bring an
action directly against Capital Markets to enforce payments on the Debentures.
See "--Enforcement of Certain Rights by Holders of the Preferred Securities"
below and "Description of the Debentures" and "Description of the Guarantee" in
the accompanying Prospectus. The Declaration provides that, by acceptance of
the Preferred Securities, you agree to the provisions of the Guarantee and the
indenture under which the Debentures will be issued.
Enforcement of Certain Rights by Holders of the Preferred Securities
In the event of a default with respect to the Debentures, you must rely on
the enforcement of the rights of the Property Trustee, as registered holder of
the Debentures, against Capital Markets. The holders of a majority in
liquidation amount of the Preferred Securities may direct the Property Trustee
to exercise any power conferred upon it under the Declaration, including the
power to exercise any remedy available to it as the holder of the Debentures,
and may direct the time, method and place of conducting any proceeding for such
remedy. The trustee under the indenture must give the holders of the Debentures
notice of all events of default within 30 days after occurrence.
If the Property Trustee fails to enforce its rights under the Debentures in
respect of an event of default after you make a written request, you may, to
the extent permitted by applicable law, institute a legal proceeding against
Capital Markets to enforce the Property Trustee's rights under the Debentures.
In addition, if Capital Markets fails to pay principal of or interest on the
Debentures when due, you may institute a proceeding directly against Capital
Markets for payment to you of the principal of or interest on the Debentures
having a principal amount equal to the stated liquidation amount of your
Preferred Securities. You may not exercise directly any other remedy available
to the holders of the Debentures. See "Description of the Preferred
Securities--Trust Enforcement Events; Notice" in the accompanying Prospectus.
Subordination Resulting from Holding Company Structure
Industries is a holding company whose earnings consist of dividends paid to
it by its subsidiaries. If any subsidiary liquidates, reorganizes or otherwise
distributes its assets, Industries' right to participate in any such
distribution of assets would be subject to the prior claims of the creditors
and preferred stockholders, if any, of that subsidiary. As a result,
Industries' obligations to provide funds to Capital Markets under the Support
Agreement, including funds for Capital Markets to pay the principal of or
interest on the Debentures, effectively will be subordinated to all existing
and future creditors and preferred stockholders, if any, of Industries'
subsidiaries, including Northern Indiana. During the next few years Industries
expects that the funds that Capital Markets will use to pay the principal of
and interest on the Debentures will come primarily from dividends paid to
Industries by Northern Indiana. Northern Indiana's ability to pay dividends to
Industries will depend on Northern Indiana's retained earnings, future earnings
and any adverse developments that might affect those earnings. Northern
Indiana's mortgage indenture and charter limit the amount of dividends that
Northern Indiana may pay to Industries. See "Price Range of Common Shares and
Dividend Policy" on page S-21 and "Description of the Support Agreement" in the
accompanying Prospectus.
S-19
<PAGE>
Risk Factors Relating to Industries
Regulatory Matters Relating to Bay State Acquisition
Industries has applied to the Securities and Exchange Commission for approval
under the federal Public Utility Holding Company Act of 1935 of its acquisition
of Bay State. There is no assurance that the SEC will grant the necessary
approval. If such approval is not granted, Industries will need to adopt an
alternative structure in order to complete the Bay State acquisition. An
alternative structure could entail additional costs which could adversely
affect Industries' future results of operations.
Industries also has filed a request with the SEC for an order confirming
that, following its acquisition of Bay State, Industries will continue to be
exempt from the requirement to register as a holding company under the Public
Utility Holding Company Act. If the SEC fails to grant the order, or if it
subsequently revokes the order, Industries will be required to adopt an
alternative structure or to register as a holding company under the Public
Utility Holding Company Act. Such registration would subject Industries'
activities to additional regulatory supervision, limitations and restrictions.
This additional regulation could adversely affect Industries' operations and
ability to grow and diversify its non-utility businesses.
Deregulation
The regulatory frameworks applicable to Industries' regulated subsidiaries,
at both the state and federal levels, are in the midst of a period of
fundamental change. These changes have had and will continue to have an impact
on the operation, structure and profitability of Industries. Legislators and
regulators have been considering various proposals designed to reduce rates and
promote economic growth through competition and deregulation of energy
generation assets. Industries cannot predict whether any of these proposals
will be adopted in its service territories. Operating in a competitive
environment will place added pressures on utility profit margins and credit
quality and could adversely affect Industries' results of operations.
Dependence on Weather
Weather patterns have a material impact on the operating performance of all
three of Industries' utility businesses. Because a significant portion of
Industries' sales of natural gas and electricity to residential and commercial
customers is for purposes of climate control, the demand for natural gas and
electricity depend to a great extent on the need for heating in the winter and
air conditioning in the summer. As a result, unseasonably warm winters or cool
summers negatively affect Industries' results of operations.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Corporate PIES, after
deducting the underwriters compensation to be paid by Capital Markets and
estimated fees and expenses, will be approximately $290,350,000, or
approximately $334,000,000 if the underwriters' over-allotment option is
exercised in full. See "Underwriting" starting on page S-61. The Trust will use
all of the proceeds received from the sale of the Trust Securities to purchase
the Debentures from Capital Markets, and Capital Markets will advance the net
proceeds from the sale of the Debentures to Industries. Industries will use up
to $272.0 million of such proceeds to fund the cash portion of the
consideration payable in Industries' acquisition of Bay State and the balance
of the net proceeds to repay short-term indebtedness incurred to purchase
Common Shares in anticipation of its acquisition of Bay State. At January 31,
1999, such short-term indebtedness had a weighted average interest rate of
5.31% per annum. Pending application of the net proceeds for specific purposes,
those proceeds may be invested in short-term or marketable securities.
S-20
<PAGE>
PRICE RANGE OF COMMON SHARES AND DIVIDEND POLICY
Industries' Common Shares are listed on the NYSE, the Chicago Stock Exchange
and the Pacific Exchange under the symbol "NI." The following table sets forth
the range of intra-day high and low sale prices, as reported on the NYSE
Composite Tape, and the cash dividends declared on the Common Shares for the
periods indicated.
<TABLE>
<CAPTION>
Price
Range
-------------
High Low Dividends
---- --- ---------
<S> <C> <C> <C>
1997
First Quarter................................... $20 1/8 $19 $.225
Second Quarter.................................. 21 1/8 19 7/16 .225
Third Quarter................................... 21 9/32 20 11/32 .225
Fourth Quarter.................................. 24 15/16 21 1/16 .225
1998
First Quarter................................... 28 1/2 24 21/32 .240
Second Quarter.................................. 28 3/8 25 11/16 .240
Third Quarter................................... 32 7/8 26 5/8 .240
Fourth Quarter.................................. 33 3/4 28 .240
1999
First Quarter (through February 9, 1999)........ 30 15/16 25 3/4 .255
</TABLE>
On February 9, 1999, the last reported sale price of the Common Shares on the
NYSE was $26 5/16 share.
After any dividends on outstanding shares of Industries' preferred or
preference stock have been fully paid, holders of Industries' Common Shares are
entitled to dividends when and as declared by Industries' Board of Directors.
Industries' current dividend policy is to declare dividends on a quarterly
basis on or about the 20th day of February, May, August and November in each
year.
During the next few years, Industries expects that the majority of earnings
available for the distribution of dividends on the Common Shares will depend
upon dividends paid to Industries by Northern Indiana. Northern Indiana's
mortgage indenture provides that when any bonds are outstanding under that
indenture, Northern Indiana may not declare or pay cash dividends on its
capital stock (other than preferred or preference stock) except out of earned
surplus or net profits of Northern Indiana. At December 31, 1998, Northern
Indiana had approximately $146.1 million of retained earnings (earned surplus)
available for the payment of dividends.
Furthermore, as long as any shares of Northern Indiana's cumulative preferred
stock are outstanding, Northern Indiana may not declare or pay cash dividends
on its common shares in excess of 75% of its net income, provided that Northern
Indiana may declare and pay cash dividends if the sum of (1) Northern Indiana's
capital applicable to stock junior to the cumulative preferred stock plus (2)
the surplus, after giving effect to such dividends, is at least 25% of the sum
of (a) all of Northern Indiana's obligations under any outstanding bonds,
notes, debentures or other securities plus (b) Northern Indiana's total capital
and surplus.
CAPITALIZATION
The following table shows the capitalization and short-term indebtedness of
Industries at December 31, 1998 (1) on a consolidated basis, (2) as adjusted to
reflect the acquisition of Bay State and (3) as further adjusted to reflect the
offering of the Corporate PIES and the use of the net proceeds from the
offering as set forth under "Use of Proceeds" on page S-20. This table should
be read in conjunction with the consolidated financial statements of Industries
and the notes thereto included in Industries' Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 and in Industries' Current Report on
Form 8-K dated February 8,
S-21
<PAGE>
1999, incorporated by reference in the accompanying Prospectus, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" starting on page S-26.
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------
As Further
As Adjusted for Adjusted
Actual Acquisition(1) for Offering
---------- --------------- ------------
(in thousands)
<S> <C> <C> <C>
Common shareholders' equity............ $1,149,708 $1,431,031 $1,402,106
Cumulative preferred stocks
Series without mandatory redemption
provisions.......................... 85,613 85,613 85,613
Series with mandatory redemption
provisions.......................... 56,435 56,435 56,435
Company-obligated mandatorily
redeemable security of trust holding
solely parent company debentures...... -- -- 300,000
Long-term debt (excluding amounts due
within one year)...................... 1,667,965 1,907,307 1,907,307
---------- ---------- ----------
Total capitalization............... $2,959,721 $3,480,386 $3,751,461
========== ========== ==========
Short-term borrowings (including
current portion
of long-term debt).................... $ 417,830 $ 805,414 $ 505,414
========== ========== ==========
</TABLE>
- --------
(1) Reflects the issuance of 9.8 million Common Shares and the payment of
$272.0 million in cash as consideration for the purchase of all of the
outstanding common stock of Bay State. This assumes that the Bay State
shareholders elect to receive cash for 50% of the outstanding shares, the
maximum percentage allowable under the acquisition agreement.
ACCOUNTING TREATMENT
The financial statements of the Trust will be reflected in Industries'
consolidated financial statements, with the Preferred Securities shown on
Industries' balance sheet under the caption "Company-obligated mandatorily
redeemable security of trust holding solely parent company debentures." The
financial statement footnotes to Industries' consolidated financial statements
will reflect that the sole asset of the Trust will be the Debentures.
Distributions on the Preferred Securities will be reflected as a charge to
Industries' consolidated income, identified as "Minority interest on Company-
obligated, mandatorily redeemable security of trust holding solely parent
company debentures," whether paid or accumulated.
The Purchase Contracts are forward transactions in Industries' Common Shares.
Upon settlement of a Purchase Contract, Industries will receive the stated
amount of $50 on the Purchase Contract and will issue the requisite number of
Common Shares. The stated amount received will be credited to shareholders'
equity and allocated between the Common Shares and paid-in capital accounts.
The present value of the Contract Adjustment Payments will initially be charged
to equity, with an offsetting credit to liabilities.
Prior to the issuance of Common Shares upon settlement of the Purchase
Contracts, Industries expects that the PIES will be reflected in Industries'
earnings per share calculations using the treasury stock method. Under this
method, the number of Common Shares used in calculating 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 Industries in the market (at the average market price during
the period) using the proceeds receivable upon settlement. Consequently,
Industries expects there will be no dilutive effect on its earnings per share
except during periods when the average market price of the Common Shares is
above the Threshold Appreciation Price.
S-22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fiscal Year Ended December 31, 1998 Compared with Fiscal Year Ended December
31, 1997 and
Fiscal Year Ended December 31, 1997 Compared with Fiscal Year Ended December
31, 1996
Net Income. For 1998, net income of Industries increased to $193.9 million,
or basic earnings of $1.60 per average Common Share, compared to $190.8
million, or basic earnings of $1.54 per average Common Share, for 1997. There
were approximately 3.1 million fewer average Common Shares outstanding in 1998
than in 1997. In 1996, net income was $176.6 million, or basic earnings of
$1.44 per average Common Share. See "Selected Supplemental Information" in
Industries' Current Report on Form 8-K dated February 8, 1999, incorporated by
reference in the accompanying Prospectus, regarding revenue and costs
associated with delivering gas, electricity and water and providing products
and services.
Operating Revenues. In 1998, operating revenues increased $346.2 million, or
13.4%, over 1997. Operating revenues in 1997 increased $598.6 million, or
30.1%, from 1996.
Gas revenues were $637.1 million in 1998, a decrease of $170.1 million from
1997. The decrease in gas revenues was mainly due to decreased deliveries to
residential and commercial customers, decreased gas costs per dekatherm ("dth")
and decreased gas transition costs. During 1998, gas deliveries in dth, which
include transportation services, decreased 1.8%. Gas deliveries to residential
and commercial customers decreased 20.4% and 23.3%, respectively, reflecting
heating degree-days 21.3% lower than 1997. This decrease in deliveries was
partially offset by increased deliveries to industrial customers of 3.9% and
sales to other utilities. Northern Indiana, Kokomo Gas and NIFL (together with
Crossroads, the "Energy Utilities") had 739,400 gas customers at December 31,
1998.
Gas revenues were $807.2 million in 1997, an increase of $7.8 million from
1996. The increase in gas revenues was mainly due to increased gas costs per
dth and increased deliveries of gas transported for others, partially offset by
decreased sales to residential and commercial customers and decreased gas
transition costs. During 1997 gas deliveries in dth, which include
transportation services, increased 2.9% over 1996. Gas deliveries to
residential and commercial customers decreased 5.1% and 1.6% respectively, due
to a warmer heating season than 1996. Gas transportation services increased
4.2% mainly due to increased deliveries of gas transported for industrial
customers. The large commercial and industrial customers continue to utilize
transportation services provided by the Energy Utilities. Gas transportation
customers purchase much of their gas directly from producers and marketers and
then pay a transportation fee to have their gas delivered over the Energy
Utilities' systems. The Energy Utilities transported 216.5 million, 203.7
million and 194.4 million dth for others in 1998, 1997 and 1996, respectively.
In 1998, electric revenues were $1.430 billion, an increase of $243.7 million
from 1997. Sales of electricity in kilowatt-hours ("kwh") increased 25.5% from
1997. The increase in electric revenue was mainly due to increased sales to
residential and commercial customers (increases of 7.8% and 6.3% in kwh,
respectively), reflecting a significantly warmer summer in 1998. Wholesale
power transactions also increased significantly in a rapidly developing market.
The increases were partially offset by a 2.0% kwh reduction in sales to
industrial customers, reflecting a full year of operations at two cogeneration
projects located at major industrial customers' facilities. At December 31,
1998, Industries had 420,955 electric customers.
In 1997, electric revenues were $1.186 billion, an increase of $164.1 million
from 1996. The increase was mainly due to increased sales to residential and
commercial customers and to increased revenues related to wholesale power
marketing transactions. Industrial sales decreased during the period as a
result of the two cogeneration projects located at major industrial customers'
facilities coming on line during the period. Electric sales increased from 1996
reflecting increased wholesale power marketing transactions partially offset by
decreased sales to industrial customers.
S-23
<PAGE>
Water revenues for 1998 were $84.0 million. Water sales to residential and
commercial customers accounted for $75.2 million of 1998 revenues. IWC and
Harbour (the "Water Utilities") had sales in millions of gallons (m.g.) of
40,822 during 1998 and served 253,664 customers at December 31, 1998. Water
revenues for the period April 1997 through December 1997 were $60.7 million, of
which water sales to residential and commercial customers accounted for $54.4
million. The Water Utilities had sales of 32,504 m.g. during the last nine
months of 1997 and served 246,643 customers at December 31, 1997.
In 1998, revenues of Industries' non-regulated subsidiaries ("Products and
Services") were $781.7 million, an increase of $249.5 million from 1997.
Approximately $205.0 million of this increase is attributable to increased gas
marketing activity associated with customer growth and additional sales to
existing customers. Miller and SM&P's operating revenues increased $31.7
million reflecting a full year of operations included in 1998. Products and
Services revenues in 1997 increased $366.0 million from 1996. The increase was
mainly due to an additional $275.4 million in gas marketing revenues resulting
from increased sales to existing customers and customer growth and the addition
of Miller and SM&P revenues for the last nine months of 1997.
The basic steel industry accounted for 36% of natural gas delivered
(including volumes transported) and 16% of electric sales during 1998.
The components of the changes in operating revenues are shown in the
following table:
<TABLE>
<CAPTION>
1998 1997
Compared to Compared to
1997 1996
----------- -----------
(In millions)
<S> <C> <C>
Gas Revenue Changes
Pass through of net changes in purchased gas costs,
gas storage and storage transportation costs........ $ (60.6) $ 14.8
Gas transition costs................................. (22.4) (4.3)
Changes in sales levels.............................. (95.5) (6.6)
Gas transported...................................... 8.4 3.9
------- ------
Total Gas Revenue Change............................... (170.1) 7.8
------- ------
Electric Revenue Changes
Pass through of net changes in fuel costs............ (4.8) 4.0
Changes in sales levels.............................. 63.9 (9.1)
Wholesale electric marketing......................... 184.6 169.2
------- ------
Total Electric Revenue Change.......................... 243.7 164.1
------- ------
Total Water Revenue Change............................. 23.2 60.7
------- ------
Products and Services Revenue Changes
Gas marketing........................................ 205.0 275.4
Pipeline construction................................ 14.4 47.2
Locate and marking................................... 17.3 48.4
Other................................................ 12.7 (5.0)
------- ------
Total Products and Services Revenue Change............. 249.4 366.0
------- ------
Total Operating Revenue Change..................... $ 346.2 $598.6
======= ======
</TABLE>
See "Summary of Significant Accounting Policies--Gas Cost Adjustment Clause"
in the Notes to Consolidated Financial Statements in Industries' Current Report
on Form 8-K dated February 8, 1999, incorporated by reference in the
accompanying Prospectus, for a discussion of a gas cost incentive mechanism.
S-24
<PAGE>
In addition, see "FERC Order No. 636" in the Notes to Consolidated Financial
Statements regarding Federal Energy Regulatory Commission ("FERC") Order No.
636 transition costs.
Gas Costs. The Energy Utilities' gas costs decreased $137.3 million (27.7%)
in 1998 due to decreased gas purchases, decreased gas transition costs and
decreased gas costs per dth. The average cost for the Energy Utilities'
purchased gas in 1998, after adjustment for gas transition costs billed to
transport customers, was $2.60 per dth as compared to $3.15 per dth in 1997.
Gas costs increased $11.5 million (2.4%) in 1997 due to increased gas costs per
dth, which were partially offset by decreased gas transition costs. The average
cost for the Energy Utilities' purchased gas in 1997, after adjustment for gas
transition costs billed to transport customers, was $3.15 per dth as compared
to $3.06 per dth in 1996.
Fuel and Purchased Power. Cost of fuel for electric generation in 1998
increased mainly as a result of increased production. The average cost per kwh
generated decreased 2.7% from 1997 to 1.50 cents per kwh. The cost of fuel for
electric generation in 1997 increased mainly as a result of increased
production. The average cost per kwh generated decreased 2.3% from 1996 to 1.54
cents per kwh.
Power purchased increased $207.9 million in 1998 as a result of increased
bulk power purchases and wholesale power marketing activities. Power purchased
increased $151.3 million in 1997 as a result of increased wholesale power
marketing activities.
Cost of Sales: Products and Services. The cost of sales for Products and
Services increased $234.1 million mainly due to increased purchases of gas of
$212.0 million related to gas marketing transactions and the cost of sales for
IWCR's non-regulated subsidiaries (including Miller and SM&P) being included
for twelve months in 1998 compared to nine months in 1997.
In 1997 cost of sales for Products and Services increased $335.5 million
mainly due to increased purchases of gas related to gas marketing transactions
and the inclusion of nine months of operations at IWCR's non-regulated
subsidiaries.
Operating Margins. Operating margins increased $29.5 million in 1998 to
$1.240 billion. Gas operating margin decreased $32.8 million in 1998 due to
decreased deliveries to residential and commercial customers reflecting the
warmer heating season, partially offset by increased sales to wholesale
customers and increased deliveries of gas transported for others. Operating
margin from electric sales increased $23.6 million due to increased sales to
residential and commercial customers, reflecting a significantly warmer summer
in 1998 than in 1997, and increased wholesale transactions, partially offset by
decreased sales to industrial customers. The Water Utilities' operating margin
increased $23.2 million reflecting the inclusion of a full year of operating
results in 1998. Additionally, Miller and SM&P increased Products and Services
operating margin $6.7 million during 1998, reflecting the inclusion of a full
year of operations.
Operating margins increased $95.0 million in 1997 to $1.211 billion. Gas
operating margin decreased $3.7 million in 1997 due to decreased sales to
residential and commercial customers reflecting mild weather, partially offset
by increased sales to wholesale customers and increased deliveries of gas
transported for others. Operating margin from electric sales increased $7.5
million in 1997 due to increased sales to residential and commercial customers
and increased wholesale transactions partially offset by decreased sales to
industrial customers. The Water Utilities contributed $60.7 million to
operating margin in 1997, reflecting the March 1997 acquisition of IWCR.
Additionally, inclusion of nine months of operating margins for Miller and SM&P
increased Products and Services operating margin $28.4 million during 1997.
Operating Expenses and Taxes. Operating expenses and taxes (except income) in
1998 increased 2.3% from 1997 to $818.9 million and in 1997 increased 9.7% from
1996 to $800.4 million.
Operation expenses include an increase of $21.9 million reflecting a full
year of operations at IWCR and its subsidiaries. New operations at Primary
Energy's subsidiaries increased lease expenses by approximately
S-25
<PAGE>
$10.2 million. These increases were partially offset by decreased operation
expenses at Northern Indiana of $23.4 million, mainly due to decreased employee
related costs of $11.7 million, decreased sales and marketing activities of
$5.7 million and decreased electric production operating costs of $4.3 million.
Operation expenses increased $44.2 million in 1997 over 1996. The inclusion of
nine months of operations at IWCR and its subsidiaries increased operation
expenses $44.1 million in 1997. Additionally, new operations at Primary Energy
and NESI increased operation expenses $8.4 million in 1997. These increases
were partially offset by reduced pension costs, reduced environmental costs of
$4.2 million and reduced pollution control facility costs of $4.1 million at
Northern Indiana.
Maintenance expenses decreased $1.9 million in 1998 from 1997 mainly
reflecting decreased maintenance activity for electric production and
distribution facilities. Maintenance expenses increased $2.5 million in 1997
from 1996 mainly reflecting the inclusion of nine months of maintenance at the
Water Utilities.
Depreciation and amortization expense increased $6.7 million in 1998 from
1997 as a result of plant additions and the inclusion of twelve months of
depreciation and amortization at IWCR. Depreciation and amortization expense
increased $15.8 million in 1997 from 1996 resulting from utility plant
additions and the inclusion of nine months of depreciation expenses and
amortization of plant acquisition adjustments and intangible assets at IWCR.
Other Income (Deductions). Other Income (Deductions) decreased $5.2 million
in 1998 from 1997 mainly reflecting a loss on the disposition of properties as
compared to gains on disposition of properties in the same period a year
earlier. Other Income (Deductions) increased $4.5 million in 1997 from 1996
mainly resulting from the disposition of certain oil and natural gas properties
during the first quarter of 1997.
Interest and Other Charges. Interest and other charges increased $8.0 million
and $14.9 million in 1998 and 1997, respectively. The 1998 increase reflects
twelve months of $300 million of Capital Markets' medium-term notes, $75
million of Capital Markets' Junior Subordinated Deferrable Interest Debentures,
Series A, and the inclusion of twelve months of interest expense at IWCR. The
1997 increase reflects the issuance of $300 million of Capital Markets' medium-
term notes and the inclusion of nine months of interest expense at IWCR.
See Notes to Consolidated Financial Statements in Industries' Current Report
on Form 8-K dated February 8, 1999, incorporated by reference in the
accompanying Prospectus, for a discussion of accounting policies and
transactions impacting this analysis.
Environmental Matters. The operations of Industries are subject to extensive
and evolving federal, state and local environmental laws and regulations
intended to protect the public health and the environment. Such environmental
laws and regulations affect Industries' operations as they relate to impacts on
air, water and land.
See "Environmental Matters" in the Notes to Consolidated Financial Statements
in Industries' Current Report on Form 8-K dated February 8, 1999, incorporated
by reference in the accompanying Prospectus, for information regarding certain
environmental issues.
Liquidity and Capital Resources
During the next few years, it is anticipated that the great majority of
earnings available for distribution of dividends will depend upon dividends
paid to Industries by Northern Indiana. See Notes to Consolidated Financial
Statements in Industries' Current Report on Form 8-K dated February 8, 1999,
incorporated by reference in the accompanying Prospectus, and "Price Range of
Common Shares and Dividend Policy" on page S-21 of this Prospectus Supplement
for a discussion of the Common Share dividend.
Cash flow from operations at Northern Indiana has provided sufficient
liquidity to meet current operating requirements. Because of the seasonal
nature of the utility business and the construction program, Northern
S-26
<PAGE>
Indiana makes use of commercial paper intermittently as short-term financing.
At December 31, 1998 and December 31, 1997, Northern Indiana had $85.6 million
and $71.5 million of commercial paper outstanding, respectively. At December
31, 1998, the weighted average interest rate of commercial paper outstanding
was 5.62%.
In September 1998, Northern Indiana entered into a five-year $100 million
revolving credit agreement and a 364-day $100 million revolving credit
agreement with several banks. These agreements terminate on September 23, 2003
and September 23, 1999, respectively. The 364-day agreement may be extended at
expiration for additional periods of 364 days upon the request of Northern
Indiana and agreement by the banks. Under these agreements, Northern Indiana
may borrow funds at a floating rate of interest or, at Northern Indiana's
request under certain circumstances, a fixed rate of interest for short-term
periods. These agreements provide financing flexibility to Northern Indiana and
may be used to support the issuance of commercial paper.
At December 31, 1998, there were no borrowings outstanding under either of
these agreements. Concurrently with entering into such agreements, Northern
Indiana terminated its then existing revolving credit agreement which would
otherwise have terminated on August 19, 1999.
In addition, Northern Indiana has $14.2 million in lines of credit. The
credit pricing of each of the lines varies from either the lending banks'
commercial prime or market rates. Northern Indiana has agreed to compensate the
participating banks with arrangements that vary from no commitment fees to a
combination of fees which are mutually satisfactory to both parties. As of
December 31, 1998, there were no borrowings under these lines of credit. The
lines of credit are also available to support the issuance of commercial paper.
Northern Indiana also has $273.5 million of money market lines of credit. At
December 31, 1998, there was $40.5 million outstanding under these lines of
credit. At December 31, 1997, there was $47.5 million outstanding under these
lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At December
31, 1998, there were no borrowings outstanding under this facility.
Capital Markets provides financing for Industries' subsidiaries other than
Northern Indiana and, in certain respects, IWCR and its subsidiaries. As of
December 31, 1998 and December 31, 1997, Capital Markets had $108.1 million and
$17.0 million, respectively, of commercial paper outstanding. The weighted
average interest rate of commercial paper outstanding was 5.99% at December 31,
1998.
In September, 1998, Capital Markets entered into a five-year $100 million
revolving credit agreement and a 364-day $100 million revolving credit
agreement with several banks. These agreements terminate on September 23, 2003
and September 23, 1999, respectively. The 364-day agreement may be extended at
expiration for additional periods of 364 days upon the request of Capital
Markets and agreement by the banks. Under these agreements, Capital Markets may
borrow, repay and reborrow funds at a floating rate of interest or, at Capital
Market's request under certain circumstances, at a fixed rate of interest for
short-term periods. These agreements provide financing flexibility to Capital
Markets and may be used to support the issuance of commercial paper. At
December 31, 1998, there were no borrowings outstanding under either of these
agreements. Concurrently with entering into such agreements, Capital Markets
terminated its then existing revolving credit agreement which would otherwise
have terminated on August 19, 1999.
Capital Markets also has $130 million of money market lines of credit. As of
December 31, 1998 and December 31, 1997, $86.8 million and $20.1 million of
borrowings were outstanding, respectively, under these lines of credit.
The financial obligations of Capital Markets are subject to a Support
Agreement between Industries and Capital Markets, under which Industries has
committed to make payments of interest and principal on Capital Markets'
obligations in the event of a failure to pay by Capital Markets. Restrictions
in the Support Agreement prohibit recourse on the part of Capital Markets'
creditors against the stock and assets of Northern Indiana
S-27
<PAGE>
which are owned by Industries. Under the terms of the Support Agreement, in
addition to the cash flow of cash dividends paid to Industries by any of its
consolidated subsidiaries, the assets of Industries, other than the stock and
assets of Northern Indiana, are available as recourse for the benefit of
Capital Markets' creditors. The carrying value of the assets of Industries,
other than the assets of Northern Indiana as reflected in the consolidated
financial statements of Industries, was approximately $1.3 billion at December
31, 1998. See "Description of the Support Agreement" in the accompanying
Prospectus.
IWCR and its subsidiaries have lines of credit with banks aggregating $92.4
million. At December 31, 1998, and December 31, 1997, $84.1 million and $48.9
million were outstanding under these lines of credit, respectively.
IWC issued Refunding Revenue Bonds, Series 1998, on July 15, 1998, in the
amount of $40 million. The proceeds from the Series 1998 Bonds were used to
redeem the City of Indianapolis, Indiana 7 7/8% Economic Development Water
Facilities Revenue Bonds and the Town of Fishers, Indiana 7 7/8% Economic
Development Water Facilities Revenue Bonds. The Series 1998 Bonds bear interest
at 5.05% per annum and mature on July 15, 2028. In February 1999, IWC issued
$35 million of ten-year medium term notes at a rate of 5.99% and $45 million of
twenty-year medium term notes at a rate of 6.61%. The majority of the proceeds
will be used to reduce IWC's existing credit facilities and the remaining
proceeds will be used for general corporate purposes.
Bay State has access to $95.0 million in bank lines of credit. At September
30, 1998, $12.7 million of borrowings were outstanding under these lines of
credit.
Industries' utility construction expenditures for 1998, 1997 and 1996 were
approximately $245 million, $219 million and $208 million, respectively.
Industries' total utility plant investment on December 31, 1998, was $6.6
billion. During recent years, Industries has been able to finance its
construction program with internally generated funds and expects to be able to
meet future commitments through such funds.
The Energy Utilities do not anticipate the need to file for retail gas and
electric base rate increases in the near future. IWC has agreed to a moratorium
on water rate increases until 2002.
During 1998, Industries' non-utility subsidiaries acquired interests in other
properties and investments totaling approximately $43 million.
Year 2000 Costs
Risks. Year 2000 issues address the ability of electronic processing
equipment to process date sensitive information and recognize the last two
digits of a date as occurring in or after the year 2000. Any failure in one of
Industries' systems may result in material operational and financial risks.
Possible scenarios include a system failure in one of Industries' generating
plants, an operating disruption or delay in transmission or distribution, or an
inability to interconnect with the systems of other utilities. In addition,
while Industries currently anticipates that its own mission-critical systems
will be year 2000 compliant in a timely fashion, it cannot guarantee the
compliance of systems operated by other companies upon which it depends. For
example, the ability of an electric company to provide electricity to its
customers depends upon a regional electric transmission grid, which connects
the systems of neighboring utilities to support the reliability of electric
power within the region. If one company's system is not year 2000 compliant,
then a failure could affect the reliability of all providers within the grid,
including Industries. Similarly, Industries' gas operations depend on natural
gas pipelines that it does not own or control, and any non-compliance by a
company owning or controlling those pipelines may affect Industries' ability to
provide gas to its customers. Failure to achieve year 2000 readiness could have
a material adverse affect on Industries' results of operations, financial
position and cash flows.
Industries is continuing its program to address risks associated with the
year 2000. Industries' year 2000 program focuses on both its information
technology ("IT") and non-IT systems, and Industries has been making
substantial progress in preparing these systems for proper functioning in the
year 2000.
S-28
<PAGE>
State of Readiness. Industries' year 2000 program consists of four phases:
inventory (identifying systems potentially affected by the year 2000),
assessment (testing identified systems), remediations (correcting or replacing
non-compliant systems) and validation (evaluating and testing remediated
systems to confirm compliance). By the second quarter of 1997, Industries had
completed the inventory and assessment phases for all of its mission-critical
IT systems. Industries also has completed the remediation and validation phases
for four of its six major IT components. The remediation and validation phases
for the remaining two components are expected to be completed within the next
few months, so that Industries expects to conclude the year 2000 program for
its mission-critical systems by the first quarter of 1999. Industries has
completed the inventory and assessment phases for all of its non-IT mission-
critical systems. Industries has scheduled remediation (including replacement)
and validation for its non-IT mission-critical systems throughout 1999.
Industries expects to substantially complete its mission-critical year 2000
efforts by June 30, 1999, and to conclude the year 2000 program in the fourth
quarter of 1999.
Because Industries depends on outside suppliers and vendors with similar year
2000 issues, Industries is assessing the ability of those suppliers and vendors
to provide it with an uninterrupted supply of goods and services. Industries
has contacted its critical vendors and suppliers in order to investigate their
year 2000 efforts. In addition, Industries is working with electricity and gas
industry groups such as the North American Electric Reliability Council,
Electric Power Research Institute and American Gas Association to discuss and
evaluate the potential impact of year 2000 problems upon the electric grid
systems and pipeline networks that interconnect within each of those
industries.
Costs. Industries currently estimates that the total cost of its year 2000
program will be between $17 million and $26 million. These costs have been, and
will continue to be, funded from operations. Costs related to the maintenance
or modification of Industries' existing systems are expensed as incurred. Costs
related to the acquisition of replacement systems are capitalized in accordance
with Industries' accounting policies. Industries does not anticipate these
costs to have a material impact on its results of operations.
Contingency Plans. Industries currently is in the process of structuring its
contingency plans to address the possibility that any mission-critical system
upon which it depends, including those controlled by outside parties, will be
non-compliant. This includes identifying alternate suppliers and vendors,
conducting staff training and developing communication plans. In addition,
Industries is evaluating both its ability to maintain or restore service in the
event of a power failure or operating disruption or delay, and its limited
ability to mitigate the
effects of a network failure by isolating its own network from the non-
compliant segments of the greater network. Industries expects to complete these
contingency plans during the second quarter of 1999; however, the contingency
plans will be under review during the third and fourth quarters of 1999.
Bay State. Bay State has underway a program to prepare its computer systems
and other applications for proper functioning in the year 2000. The program
consists of four phases: assessment, remediation, testing and certification.
The assessment phase, which involved determining the full scope of potential
problems with respect to hardware, software and embedded chips, assisting in
the development of a framework and timetable for addressing all potential year
2000 problems and providing an estimate of the cost of remediating and/or
replacing computer systems and other applications, has been completed. Based on
this assessment, it has been determined that all computer systems and other
applications will be replaced/upgraded with the exception of one computer
system which will be remediated.
Currently, the program is in the remediation and testing phases. It is
anticipated that replacements/ upgrades and remediations will be completed by
July 1999. Testing plans are being developed to ensure that computer systems
and other applications potentially affected by the year 2000 are compliant. It
is anticipated that the testing and certification phases will be completed by
September 1999.
A vendor management program has been undertaken to determine the readiness of
important vendors, with the goal of obtaining reasonable assurances that there
will not be any interruptions in the supply of goods and services due to year
2000 issues. Additionally, electronic data interchanges with other companies
are being reviewed to identify potential year 2000 issues.
S-29
<PAGE>
Approximately $1.5 million was expensed in fiscal 1998 for year 2000 related
work. The assessment phase analysis indicated that total program expense will
exceed $4.0 million (including the $1.5 million spent in 1998). Where the
replacement of certain systems was the recommended course of action, the cost
of those replacement systems will be recorded as assets and depreciated or
amortized. All other costs associated with year 2000 issues will be expensed
and funded through operating cash flows.
Due to the complexity of the problem and the reliance on certain important
vendors and suppliers, there can be no guarantee that year 2000 compliance for
all computer systems and other applications will be achieved or that critical
and important vendors and suppliers will achieve compliance. As a result, the
development of contingency plans are included as part of the program in an
effort to mitigate the risks of non-compliance. It is anticipated that
contingency plans will be completed by September 1999. As an additional
measure, independent parties are being utilized to verify the reliability of
risk and cost estimates for the program.
Despite adequate program efforts, contingency planning and independent
reviews, a year 2000 computer system or application failure, either by Bay
State's systems or a critical vendor or supplier, could be encountered.
Management believes the worst case scenario would include service interruptions
to some communities and customers, which would be expected to be restored in a
reasonably short time frame. With respect to other interruptions to operations,
such as customer service, business operations, supplies and emergency response
capabilities, such scenarios would likely cause minor disruptions of services
and processes followed by rapid recovery and that essential information or data
would not be impaired.
Competition and Regulatory Changes
The regulatory frameworks applicable to the Energy Utilities, at both the
state and federal levels, are in the midst of a period of fundamental change.
These changes have and will continue to impact the operation, structure and
profitability of Industries. At the same time, competition within the electric
and gas industries will create opportunities for Industries' subsidiaries to
compete for new customers and revenues. Industries' management has taken steps
to make the company more competitive and profitable in this changing
environment, including partnering on energy projects with major industrial
customers, converting some of its generating units to allow use of lower cost,
low sulfur coal, providing its gas customers with increased customer choice for
new products and services throughout Northern Indiana's service territory, and
establishing subsidiaries which provide gas and develop new energy-related
products for residential, commercial and industrial customers.
The Electric Industry. At the federal level, FERC issued Order No. 888-A in
1996, which required all public utilities owning, controlling or operating
transmission lines to file non-discriminatory open-access tariffs and offer
wholesale electricity suppliers and marketers the same transmission service
they provide themselves. In 1997, FERC approved Northern Indiana's open-access
transmission tariff. Although wholesale customers currently represent a small
portion of Northern Indiana's electricity sales, Northern Indiana intends to
continue its efforts to retain and add wholesale customers by offering
competitive rates and also intends to expand the customer base for which it
provides transmission services.
At the state level, Industries announced in 1997 that if consensus could be
reached regarding electric utility restructuring legislation, Industries would
support a restructuring bill during the 1999 session of the Indiana General
Assembly. During 1998, Northern Indiana held discussions with the other
investor-owned utilities in Indiana regarding the technical and economic
aspects of possible legislation leading to greater customer choice. A consensus
was not reached. Therefore, Industries does not anticipate that it will support
any legislation regarding electric restructuring during the 1999 session of the
Indiana General Assembly. However, during 1999, Northern Indiana anticipates
continued discussions with all segments of the Indiana electric industry in an
attempt to reach a consensus on electric restructuring legislation for
introduction during the 2000 session of the Indiana General Assembly.
S-30
<PAGE>
The Gas Industry. At the federal level, gas industry deregulation began in
the mid 1980s when FERC required interstate pipelines to provide
nondiscriminatory transportation services pursuant to unbundled rates. This
regulatory change permitted large industrial and commercial customers to
purchase their gas supplies either from the Energy Utilities or directly from
competing producers and marketers which would then use the Energy Utilities'
facilities to transport the gas. More recently, the focus of deregulation in
the gas industry has shifted to the states.
At the state level, the Indiana Utility Regulatory Commission ("IURC")
approved in 1997 Northern Indiana's Alternative Regulatory Plan which
implemented new rates and services that included, among other things,
unbundling of services for additional customer classes (primarily residential
and commercial users), negotiated services and prices, a gas cost incentive
mechanism and a price protection program. The gas cost incentive mechanism
allows Northern Indiana to share any cost savings or cost increases with its
customers based upon a comparison of Northern Indiana's actual gas supply
portfolio cost to a market-based benchmark price. Phase I of Northern Indiana's
Customer Choice Pilot Program will end March 31, 1999. This pilot program
offered a limited number of residential and commercial customers within the
South Bend metropolitan area the right to choose alternative gas suppliers.
Phase II of Northern Indiana's Customer Choice Pilot Program will commence
April 1, 1999 and continue for a one-year period. During this phase, Northern
Indiana plans to offer customer choice to a significantly expanded eligible
customer base throughout its gas service
territory. The IURC order allows Industries' natural gas marketing subsidiary
to participate as a supplier of choice to Northern Indiana customers. In
addition, as Northern Indiana has allowed residential and commercial customers
to designate alternative gas suppliers, it has also offered new services to all
classes of customers including, but not limited to, price protection,
negotiated sales and services, gas lending and parking, and new storage
services.
To date, the Energy Utilities have not been materially affected by
competition and management does not foresee substantial adverse affects in the
near future unless the current regulatory structure is substantially altered.
Industries believes the steps that it has taken to deal with increased
competition has had and will continue to have significant positive effects in
the next few years.
DESCRIPTION OF THE PIES
The following description sets forth certain terms of the PIES. It
supplements the description of the Stock Purchase Units in the accompanying
Prospectus and, to the extent it is inconsistent with the Prospectus, replaces
the description in the Prospectus. The terms of the PIES will include those
stated in the Purchase Contract Agreement between Industries and the Purchase
Contract Agent. The following description of certain terms of the PIES and the
descriptions of certain terms of the Purchase Contract Agreement, the Purchase
Contracts and the Pledge Agreement under the captions "Description of the
Purchase Contracts" and "Certain Provisions of the Purchase Contracts, the
Purchase Contract Agreement and the Pledge Agreement" in this Prospectus
Supplement contain a description of all of their material terms but do not
purport to be complete, and reference is hereby made to the forms of the
Purchase Contract Agreement (including the forms of the PIES) and the Pledge
Agreement (including definitions of certain terms used therein) that will be
filed as exhibits to the Registration Statement.
Corporate PIES
Each Corporate PIES offered hereby is a unit initially consisting of:
. a Purchase Contract under which (1) the holder (including an Underwriter)
will purchase from Industries on February 19, 2003 (the "Purchase
Contract Settlement Date") or upon early settlement, for $50, a number of
newly issued Common Shares equal to the Settlement Rate described below
under "Description of the Purchase Contracts--General" and (2) Industries
will pay Contract Adjustment Payments to the holder; and
S-31
<PAGE>
. a Preferred Security, having a stated liquidation amount of $50,
representing an undivided beneficial ownership interest in the assets of
the Trust, which assets will consist solely of the Debentures.
The Preferred Security will be pledged under the Pledge Agreement to secure the
holder's obligation to purchase Common Shares under the Purchase Contract.
Capital Markets will have the right at any time to dissolve the Trust and,
after satisfaction of liabilities to creditors of the Trust, if any, to cause
the Debentures to be distributed to the holders of the Trust Securities. Prior
to the distribution of the Debentures, Capital Markets will be required to
obtain an opinion of counsel that the distribution of the Debentures will not
be taxable to the holders of the Preferred Securities for United States federal
income tax purposes. References herein to Preferred Securities, unless the
context otherwise requires, include the Debentures that have been delivered to
the holders of the Preferred Securities upon dissolution of the Trust.
In addition, if a Tax Event occurs prior to the Purchase Contract Settlement
Date, Capital Markets may cause the Debentures (and, thus, the Preferred
Securities) to be redeemed (a "Tax Event Redemption"). Upon a Tax Event
Redemption, the Securities Intermediary will use the proceeds from the Tax
Event Redemption to purchase a portfolio of zero-coupon U.S. treasury
securities that mature on the Purchase Contract Settlement Date and on the
various dates upon which payments would have been due on the Debentures. The
Treasury Portfolio will be substituted for the redeemed Preferred Securities as
the collateral securing the holders' obligations under the related Purchase
Contracts as described under "Description of the Debentures--Tax Event
Redemption" starting on page S-49, and the Trust will be dissolved.
If the Trust is dissolved at a time when the Preferred Securities are a part
of the Corporate PIES, each Corporate PIES thereafter will consist of a
Purchase Contract plus either a Debenture having a principal amount of $50 or
the Applicable Ownership Interest of the Treasury Portfolio, as applicable, in
lieu of a Preferred Security. An "Applicable Ownership Interest" means, with
respect to a Corporate PIES and the Treasury Portfolio, (1) a 1/20, or 5%,
undivided beneficial ownership interest in a $1,000 face amount of a principal
or interest strip in a U.S. treasury security included in the Treasury
Portfolio that matures on or prior to February 19, 2003 and (2) for each
scheduled interest payment date on the Debentures that occurs after the date
upon which the Debentures are redeemed due to a Tax Event, a 1/20, or 5%,
undivided beneficial ownership interest in a $1,000 face amount of a U.S.
treasury security that is a principal or interest strip maturing on or prior to
such date. Unless otherwise specified, references in this Prospectus Supplement
to the "Applicable Ownership Interest of the Treasury Portfolio" have the
meaning specified in clause (1) of this definition.
The purchase price of each Corporate PIES will be allocated between the
Purchase Contract and the Preferred Security comprising such Corporate PIES in
proportion to their respective fair market values at the time of purchase.
Capital Markets expects that, at the time of issuance, the fair market value of
each Purchase Contract will be $0 and the fair market value of each Preferred
Security will be $50. Such position generally will be binding on each
beneficial owner of a Corporate PIES (but not on the Internal Revenue Service
(the "IRS")). See "Certain United States Federal Income Tax Consequences--
Corporate PIES--Allocation of Purchase Price" on page S-53.
So long as the PIES are in the form of Corporate PIES, either the related
Preferred Securities or the Applicable Ownership Interest of the Treasury
Portfolio, as applicable, will be pledged to the Collateral Agent to secure the
holders' obligations to purchase Common Shares under the related Purchase
Contracts.
Creating Treasury PIES by Substituting Treasury Securities
Each holder (including an Underwriter) of Corporate PIES may create Treasury
PIES by substituting for the Preferred Securities that are a part of the
Corporate PIES Treasury Securities having an aggregate principal amount at
maturity equal to the aggregate stated liquidation amount of such Preferred
Securities. If a Tax Event Redemption has occurred and the Treasury Portfolio
has been substituted for the Preferred Securities, then each holder (including
an Underwriter) of Corporate PIES may create Treasury PIES by substituting for
the
S-32
<PAGE>
Applicable Ownership Interest of the Treasury Portfolio Treasury Securities
having an aggregate principal amount at maturity equal to the Applicable
Ownership Interest of the Treasury Portfolio.
Each Treasury PIES will be a unit consisting of:
. a Purchase Contract under which (1) the holder (including an Underwriter)
will purchase from Industries on the Purchase Contract Settlement Date,
or upon early settlement, for $50, a number of newly issued Common Shares
equal to the Settlement Rate and (2) Industries will pay Contract
Adjustment Payments to the holder; and
. a 1/20 undivided beneficial ownership interest in a related Treasury
Security having a principal amount at maturity equal to $1,000 and
maturing on or prior to the Business Day preceding the Purchase Contract
Settlement Date.
"Business Day" means any day other than Saturday or Sunday or a day on which
banking institutions in New York City are authorized or required by law or
executive order to remain closed or a day on which The Chase Manhattan Bank,
acting as indenture trustee with respect to the Debentures (the "Indenture
Trustee"), or the principal office of the Property Trustee under the
Declaration, is closed for business.
The Treasury Security will be pledged under the Pledge Agreement to secure
the holder's obligation to purchase Common Shares under the Purchase Contract.
Holders of Corporate PIES may create Treasury PIES at any time on or prior to
the seventh Business Day preceding the Purchase Contract Settlement Date,
unless the Treasury Portfolio has become a part of the Corporate PIES. In that
case, Treasury PIES may be created at any time on or prior to the second
Business Day preceding the Purchase Contract Settlement Date. Because Treasury
Securities are issued in integral multiples of $1,000, holders of Corporate
PIES may create Treasury PIES only in integral multiples of 20 (unless the
Treasury Portfolio has become a part of the Corporate PIES, in which case
holders may create Treasury PIES only in integral multiples of 160,000).
To create 20 Treasury PIES, a Corporate PIES holder is required to (1)
deposit with the Securities Intermediary a Treasury Security having an
aggregate principal amount at maturity of $1,000 and (2) transfer to the
Purchase Contract Agent 20 Corporate PIES, accompanied by a notice stating that
the Corporate PIES holder has deposited a Treasury Security with the Securities
Intermediary and requesting that the Purchase Contract Agent instruct the
Collateral Agent to release the related 20 Preferred Securities. Upon receiving
instructions from the Purchase Contract Agent and confirmation of receipt of
the Treasury Security by the Securities Intermediary, the Collateral Agent will
cause the Securities Intermediary to release the related 20 Preferred
Securities from the pledge and deliver them to the Purchase Contract Agent, on
behalf of the holder, free and clear of Industries' security interest. The
Purchase Contract Agent then will (1) cancel the 20 Corporate PIES, (2)
transfer the related 20 Preferred Securities to the holder and (3) deliver 20
Treasury PIES to the holder. The Treasury Security will be substituted for the
Preferred Securities and will be pledged to the Collateral Agent to secure the
holder's obligation to purchase Common Shares under the related Purchase
Contracts. Such Preferred Securities thereafter will trade separately from the
Treasury PIES. If a Tax Event Redemption has occurred, Treasury Securities may
be substituted for the Applicable Ownership Interest of the Treasury Portfolio
in a similar manner, except that such substitutions may be made only in
integral multiples of 160,000 Corporate PIES.
Holders who create Treasury PIES or recreate Corporate PIES (as discussed
below) will be responsible for any fees or expenses payable to the Collateral
Agent in connection with substitutions of collateral. See "Certain Provisions
of the Purchase Contracts, the Purchase Contract Agreement and the Pledge
Agreement--Miscellaneous" on page S-44.
Recreating Corporate PIES
Each holder of Treasury PIES may recreate Corporate PIES by (1) depositing
with the Securities Intermediary 20 Preferred Securities and (2) transferring
to the Purchase Contract Agent 20 Treasury PIES,
S-33
<PAGE>
accompanied by a notice stating that such holder has deposited 20 Preferred
Securities with the Securities Intermediary and requesting that the Purchase
Contract Agent instruct the Collateral Agent to release the related Treasury
Security. Upon receiving instructions from the Purchase Contract Agent and
confirmation of receipt of the Preferred Securities by the Securities
Intermediary, the Collateral Agent will cause the Securities Intermediary to
release the related Treasury Security from the pledge and deliver it to the
Purchase Contract Agent, on behalf of the holder, free and clear of Industries'
security interest therein. The Purchase Contract Agent then will (1) cancel the
20 Treasury PIES, (2) transfer the related Treasury Security to the holder and
(3) deliver 20 Corporate PIES to the holder. If, however, the Treasury
Portfolio has become a part of the Corporate PIES, holders of Treasury PIES may
recreate Corporate PIES by substituting the Applicable Ownership Interests of
the Treasury Portfolio (rather than the Preferred Securities) for the Treasury
Securities in a similar manner, except that such substitutions may be made only
in integral multiples of 160,000 Treasury PIES.
Holders of Treasury PIES may recreate Corporate PIES at any time on or prior
to the seventh Business Day preceding the Purchase Contract Settlement Date or,
if a Tax Event Redemption has occurred, at any time on or prior to the second
Business Day preceding the Purchase Contract Settlement Date.
Current Payments
Holders of Corporate PIES will be entitled to receive aggregate cash
distributions at a rate of 7.75% of the $50 purchase price per annum from and
after February 16, 1999, payable quarterly in arrears, subject to increase as
described under "Description of the Purchase Contracts--Contract Adjustment
Payments" starting on page S-38. The quarterly payments on the Corporate PIES
will consist of (1) cumulative cash distributions payable on the related
Preferred Securities by the Trust or amounts payable in respect of the Treasury
Portfolio, as applicable, payable at the rate of 5.90% of the stated
liquidation or principal amount per annum and (2) Contract Adjustment Payments
payable by Industries at the rate of 1.85% of the stated amount per annum until
February 19, 2003. The ability of the Trust to pay the quarterly distributions
on the Preferred Securities will depend solely upon its receipt of
corresponding interest payments from Capital Markets on the Debentures.
If a holder of Corporate PIES creates Treasury PIES by substituting Treasury
Securities for the Preferred Securities or the Applicable Ownership Interest of
the Treasury Portfolio, as the case may be, the only payments that such holder
will receive will be the quarterly Contract Adjustment Payments. In lieu of
payments with respect to any Preferred Securities or the Treasury Portfolio,
OID will accrue on the related Treasury Securities.
Listing of the Corporate PIES, the Treasury PIES and the Preferred Securities
The Corporate PIES have been approved for listing on the NYSE under the
trading symbol "NIPr." Trading of the Corporate PIES on the NYSE is expected to
commence within five business days after the date of this Prospectus
Supplement. If the Treasury PIES and the Preferred Securities are separately
traded to a sufficient extent that applicable exchange listing requirements are
met, Industries, Capital Markets and the Trust will try to cause them to be
listed on the same national securities exchange as the Corporate PIES are
listed.
Miscellaneous
Industries or its affiliates may purchase from time to time any of the PIES
offered hereby that are then outstanding by tender, in the open market or by
private agreement.
S-34
<PAGE>
DESCRIPTION OF THE PURCHASE CONTRACTS
General
Each Purchase Contract that is a part of a PIES will obligate its holder to
purchase, and Industries to sell, on the Purchase Contract Settlement Date
(unless the Purchase Contract terminates prior to such date or is settled early
at the holder's option), a number of newly issued Common Shares equal to the
Settlement Rate, for $50 in cash. The number of Common Shares issuable upon
settlement of each Purchase Contract on the Purchase Contract Settlement Date
will be determined as follows (subject to adjustment as described under "--
Anti-Dilution Adjustments" below):
. If the Applicable Market Value is equal to or greater than the Threshold
Appreciation Price of $31.0500, then each Purchase Contract will be
settled for 1.6103 Common Shares. (The Threshold Appreciation Price
represents an appreciation of 18.00% above the Reference Price of
$26.3125.)
. If the Applicable Market Value is less than the Threshold Appreciation
Price but greater than the Reference Price, then each Purchase Contract
will be settled for a number of Common Shares determined by dividing the
stated amount of $50 by the Applicable Market Value.
. If the Applicable Market Value is less than or equal to the Reference
Price, then each Purchase Contract will be settled for 1.9002 Common
Shares.
For illustrative purposes only, the following table shows the number of
Common Shares issuable upon settlement of each Purchase Contract at various
assumed Applicable Market Values. The table assumes that there will be no
adjustments to the Settlement Rate described under "--Anti-Dilution
Adjustments" below. There can be no assurance that the actual Applicable Market
Value will be within the range set forth below. Given the Reference Price of
$26.3125 and the Threshold Appreciation Price of $31.0500, a holder of PIES
would receive on the Purchase Contract Settlement Date the following number of
Common Shares:
<TABLE>
<CAPTION>
Number
Applicable of
Market Common
Value Shares
---------- ------
<S> <C> <C>
$32.0000 1.6103
$31.0500 1.6103
$28.0000 1.7857
$26.3125 1.9002
$24.0000 1.9002
</TABLE>
As the foregoing table illustrates, if, on the Purchase Contract Settlement
Date, the Applicable Market Value is greater than or equal to $31.0500,
Industries will be obligated to deliver 1.6103 Common Shares for each Purchase
Contract. As a result, the holder would receive 84.74% of the appreciation in
the market value of the Common Shares above $31.0500. If, on the Purchase
Contract Settlement Date, the Applicable Market Value is less than $31.0500 but
greater than $26.3125, Industries will be obligated to deliver a number of
Common Shares equal to $50 divided by the Applicable Market Value, and
Industries would retain all appreciation in the market value of the Common
Shares for that period. If, on the Purchase Contract Settlement Date, the
Applicable Market Value is less than or equal to $26.3125, Industries will be
obligated to deliver 1.9002 Common Shares for each Purchase Contract,
regardless of the market price of the Common Shares. As a result, the holder
would realize the entire loss on the decline in market value of the Common
Shares for that period.
The "Applicable Market Value" means the average of the Closing Prices of the
Common Shares on each of the 20 consecutive Trading Days ending on the third
Trading Day preceding the Purchase Contract Settlement Date.
S-35
<PAGE>
The "Closing Price" of the Common Shares, on any date of determination, means
(1) the closing sale price (or, if no closing sale price is reported, the last
reported sale price) of the Common Shares on the NYSE on such date or, if the
Common Shares are 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 Shares are so listed, or if the Common
Shares are not so listed on a United States national or regional securities
exchange, as reported by the Nasdaq Stock Market, Inc., or (2) if the Common
Shares are not so reported, the last quoted bid price for the Common Shares in
the over-the-counter market as reported by the National Quotation Bureau or a
similar organization, or, if such bid price is not available, the average of
the mid-point of the last bid and ask prices of the Common Shares on such date
from at least three nationally recognized independent investment banking firms
retained for this purpose by Industries.
"Trading Day" means a day on which the Common Shares (1) are 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) have 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
Shares.
No fractional Common Shares will be issued by Industries upon settlement of a
Purchase Contract. In lieu of a fractional share, the holder will receive an
amount of cash equal to such fraction multiplied by the Applicable Market
Value. If, however, a holder surrenders for settlement at one time more than
one Purchase Contract, then the number of Common Shares issuable pursuant to
such Purchase Contracts will be computed based upon the aggregate number of
Purchase Contracts surrendered.
Prior to the settlement of a Purchase Contract, the Common Shares underlying
the Purchase Contract will not be outstanding for any purpose, and the holder
of the Purchase Contract will not have any voting rights, rights to dividends
or other distributions or other rights or privileges of a shareholder of
Industries by virtue of holding such Purchase Contract.
By accepting a Corporate PIES or a Treasury PIES, a holder will be deemed to
have (1) irrevocably authorized the Purchase Contract Agent as attorney-in-fact
to enter into and perform the related Purchase Contract on behalf of such
holder, (2) agreed to be bound by, and to have consented to, the terms and
provisions of the related Purchase Contract, (3) irrevocably authorized the
Purchase Contract Agent as attorney-in-fact to enter into and perform the
Pledge Agreement on behalf of such holder and (4) agreed to be bound by the
pledge arrangement contained therein. In addition, each such holder will be
deemed to have agreed to treat itself as the owner of the related Preferred
Securities, the Applicable Ownership Interest of the Treasury Portfolio or the
Treasury Securities, as the case may be, and to treat the Debentures as
indebtedness of Capital Markets, in each case for United States federal, state
and local income and franchise tax purposes.
Settlement through Remarketing
Holders of Corporate PIES who fail to notify the Purchase Contract Agent, on
or prior to the seventh Business Day preceding the Purchase Contract Settlement
Date, of their intention to effect settlement of the related Purchase Contracts
with separate cash in the manner described under "--Notice to Settle with
Cash," or who so notify the Purchase Contract Agent but fail to deliver such
separate cash on or prior to the fifth Business Day preceding the Purchase
Contract Settlement Date, will have their Preferred Securities remarketed on
the third Business Day preceding the Purchase Contract Settlement Date.
Pursuant to the remarketing agreement among Industries, Capital Markets, the
Trust and the Remarketing Agent (the "Remarketing Agreement"), the Remarketing
Agent will use its commercially reasonable efforts to remarket such Preferred
Securities, together with any Preferred Securities not then a part of the
Corporate PIES as to which the holders have requested remarketing, on such date
at a price of 100% of the aggregate stated liquidation amount of such Preferred
Securities. The proceeds from the remarketing of the Preferred Securities that
are a part of the Corporate PIES will automatically be applied to satisfy in
full such Corporate PIES holders' obligations to purchase Common Shares under
the related Purchase Contracts. Capital Markets will pay the remarketing fee to
S-36
<PAGE>
the Remarketing Agent for such remarketing. See "Description of the Preferred
Securities--Market Rate Reset by Remarketing" starting on page S-45.
If the Remarketing Agent cannot remarket the Preferred Securities, a "Failed
Remarketing" will occur, and Industries will be entitled to exercise its rights
as a secured party and, subject to applicable law, retain the Preferred
Securities pledged as collateral under the Pledge Agreement or sell them in one
or more private sales. In either case, the obligations of the holders under the
related Purchase Contracts would be satisfied in full. If Industries exercises
its rights as a secured creditor, any accrued and unpaid distributions on such
Preferred Securities will be paid in cash by Industries to the Purchase
Contract Agent for payment to the holders of the Corporate PIES of which such
Preferred Securities are a part. Industries will cause a notice of such Failed
Remarketing to be published on the second Business Day preceding the Purchase
Contract Settlement Date in a daily newspaper in the English language of
general circulation in New York City, which is expected to be The Wall Street
Journal.
As long as the PIES or the Preferred Securities are evidenced by one or more
global security certificates deposited with The Depository Trust Company
("DTC"), Capital Markets will request, not later than 15 nor more than 30
calendar days prior to the remarketing date, that DTC notify its participants
holding Preferred Securities or Corporate PIES of such remarketing and of the
procedures to be followed for settlement with separate cash. See "--Book-Entry
System" below and "Book-Entry Issuance" in the accompanying Prospectus.
Industries, Capital Markets and the Trust will try to have in effect a
registration statement covering the Preferred Securities to be remarketed in a
form that the Remarketing Agent may use in connection with the remarketing
process.
Notice to Settle with Cash
A holder of a Corporate PIES or a Treasury PIES wishing to settle the related
Purchase Contract with separate cash must notify the Purchase Contract Agent by
delivering a "Notice to Settle by Separate Cash" on or prior to 5:00 p.m., New
York City time, (1) on the seventh Business Day preceding the Purchase Contract
Settlement Date, in the case of a Corporate PIES (unless a Tax Event Redemption
has occurred), and (2) on the second Business Day preceding the Purchase
Contract Settlement Date, in the case of a Treasury PIES or a Corporate PIES
(if a Tax Event Redemption has occurred). Such holder must deliver to the
Securities Intermediary cash payment in the form of a certified or cashier's
check or by wire transfer, in each case in immediately available funds payable
to or upon the order of the Securities Intermediary. Such payment must be
delivered prior to 11:00 a.m., New York City time, on the fifth Business Day
prior to the Purchase Contract Settlement Date, in the case of a Corporate PIES
(unless a Tax Event Redemption has occurred), or on the Business Day prior to
the Purchase Contract Settlement Date, in the case of Treasury PIES or a
Corporate PIES (if a Tax Event Redemption has occurred). Upon receipt of such
cash payment, the related Preferred Securities, Applicable Ownership Interest
of the Treasury Portfolio or Treasury Securities, as the case may be, will be
released from the pledge arrangement and transferred to the Purchase Contract
Agent for distribution to the holder of the related Corporate PIES. If the
payment is not delivered by such time and date, then the related Preferred
Securities will be remarketed or Industries will receive at maturity the
principal amount of the related Treasury Securities or Applicable Ownership
Interest of the Treasury Portfolio, as the case may be, in full satisfaction of
such holder's obligations under the related Purchase Contract.
Any cash received by the Securities Intermediary upon separate cash
settlement will be invested promptly in permitted investments and paid to
Industries on the Purchase Contract Settlement Date. Any funds received by the
Securities Intermediary in respect of the investment earnings from such
investments will be distributed to the Purchase Contract Agent for payment to
the holders who settled with cash.
Early Settlement
A holder of Corporate PIES or Treasury PIES may settle the related Purchase
Contracts prior to the Purchase Contract Settlement Date by delivering to the
Purchase Contract Agent (1) a completed "Election to
S-37
<PAGE>
Settle Early" form and (2) payment (payable to Industries in immediately
available funds) in an amount equal to $50 multiplied by the number of Purchase
Contracts being settled. A holder of Corporate PIES may settle early the
related Purchase Contracts at any time on or prior to the seventh Business Day
preceding the Purchase Contract Settlement Date, unless a Tax Event Redemption
has occurred. If a Tax Event Redemption has occurred, a holder of Corporate
PIES may settle early at any time on or prior to the second Business Day
preceding the Purchase Contract Settlement Date, but only in integral multiples
of 160,000 Corporate PIES. A holder of Treasury PIES also may settle early at
any time prior to the second Business Day preceding the Purchase Contract
Settlement Date, but only in integral multiples of 20 Treasury PIES.
Upon early settlement, Industries will issue, and the holder will be entitled
to receive, 1.6103 newly issued Common Shares for each Corporate PIES or
Treasury PIES (regardless of the market price of the Common Shares on the date
of early settlement), subject to adjustment under the circumstances described
under "--Anti-Dilution Adjustments" below. The holder's right to receive future
Contract Adjustment Payments will terminate. Industries will cause (1) the
Common Shares to be issued and (2) the related Preferred Securities, Applicable
Ownership Interest of the Treasury Portfolio or Treasury Securities, as the
case may be, securing such Purchase Contracts to be released from the pledge
under the Pledge Agreement, and, within three Business Days following the
settlement date, each will be transferred to the Purchase Contract Agent for
delivery to the holder or the holder's designee.
If the Purchase Contract Agent receives a completed "Election to Settle
Early" and payment of $50 for each PIES being settled early by 5:00 p.m., New
York City time, on any Business Day, then that day will be considered the
settlement date. If the Purchase Contract Agent receives the foregoing after
5:00 p.m., New York City time, on any Business Day or at any time on a day that
is not a Business Day, then the next Business Day will be considered the
settlement date. As long as the PIES are evidenced by one or more global
security certificates deposited with DTC, procedures for early settlement also
will be governed by standing arrangements between DTC and the Purchase Contract
Agent.
Contract Adjustment Payments
Contract Adjustment Payments will be fixed at a rate per annum of 1.85% of
the $50 stated amount per Purchase Contract, subject to increase as described
below. Contract Adjustment Payments payable for any period will be computed (1)
for any full quarterly period on the basis of a 360-day year of twelve 30-day
months and (2) for any period shorter than a full quarterly period, on the
basis of a 30-day month and, for periods of less than a month, on the basis of
the actual number of days elapsed per 30-day month. Contract Adjustment
Payments will accrue from February 16, 1999 and will be payable quarterly in
arrears on February 19, May 19, August 19 and November 19 of each year,
commencing May 19, 1999.
If a Reset Transaction (as defined below) occurs, the rate at which the
Contract Adjustment Payments accrue will be adjusted to equal the Adjusted
Contract Adjustment Payment Rate (as defined below) from the effective date of
such Reset Transaction to, but not including, the earlier of (1) the effective
date of any succeeding Reset Transaction or (2) the Purchase Contract
Settlement Date. "Reset Transaction" means a merger, consolidation or statutory
share exchange to which Industries is a party, a sale of all or substantially
all the assets of Industries, a recapitalization of the Common Shares or a
distribution described in clause (4) of the first paragraph under "--Anti-
Dilution Adjustments" below, after the effective date of which transaction or
distribution the Purchase Contracts are then to be settled for (a) shares of an
entity the common stock of which had a Dividend Yield for the four fiscal
quarters of such entity preceding the public announcement of such transaction
or distribution that was more than 250 basis points higher than the Dividend
Yield on the Common Shares (or other common stock then issuable upon settlement
of the Purchase Contracts) for the four fiscal quarters preceding the public
announcement of such transaction or distribution, or (b) shares of an entity
that announces a dividend policy prior to the effective date of such
transaction or distribution which policy, if implemented, would result in a
Dividend Yield on such entity's common stock for the next four fiscal quarters
that would result in such a 250 basis point increase.
S-38
<PAGE>
The "Adjusted Contract Adjustment Payment Rate," with respect to any Reset
Transaction, will be the rate per annum that is the arithmetic average of the
rates quoted by two Reference Dealers selected by Industries or its successor
as the rate at which Contract Adjustment Payments should accrue so that the
fair market value, expressed in dollars, of a Corporate PIES immediately after
the later of (1) the public announcement of such Reset Transaction or (2) the
public announcement of a change in dividend policy in connection with such
Reset Transaction, will equal the average Trading Price of a Corporate PIES for
the 20 Trading Days preceding the date of public announcement of such Reset
Transaction; provided that the Adjusted Contract Adjustment Payment Rate will
not be less than 1.85% per annum.
The "Dividend Yield" on any security for any period means the dividends paid
or proposed to be paid pursuant to an announced dividend policy on such
security for such period divided by, if with respect to dividends paid on such
security, the average Closing Price of such security during such period and, if
with respect to dividends proposed to be paid on such security, the Closing
Price of such security on the effective date of the related Reset Transaction.
"Reference Dealer" means a dealer engaged in the trading of convertible
securities. "Trading Price" of a security on any date of determination means
(1) the closing sale price (or, if no closing sale price is reported, the last
reported sale price) of a security (regular way) on the NYSE on such date, (2)
if such security is not listed for trading on the NYSE on any such date, the
closing sale price as reported in the composite transactions for the principal
United States securities exchange on which such security is so listed, (3) if
such security is not so listed on a United States national or regional
securities exchange, the closing sale price as reported by the Nasdaq Stock
Market, Inc.; (4) if such security is not so reported, the price quoted by
Interactive Data Corporation for such security or, if Interactive Data
Corporation is not quoting such price, a similar quotation service selected by
Industries; (5) if such security is not so quoted, the average of the mid-point
of the last bid and ask prices for such security from at least two dealers
recognized as market-makers for such security; or (6) if such security is not
so quoted, the average of the last bid and ask prices for such a security from
a Reference Dealer.
Contract Adjustment Payments will be payable to the holders of Purchase
Contracts as they are registered on the books and records of the Purchase
Contract Agent on the relevant record dates, which, so long as the PIES remain
in book-entry only form, will be the Business Day preceding the relevant
payment dates. Contract Adjustment Payments will be paid through the Purchase
Contract Agent, which will hold amounts received in respect of the Contract
Adjustment Payments for the benefit of the holders of the Purchase Contracts
that are a part of such PIES. Subject to any applicable laws and regulations,
each such payment will be made as described under "Book-Entry Issuance" in the
accompanying Prospectus. If the PIES do not remain in book-entry only form, the
relevant record dates will be the fifteenth Business Day prior to the relevant
payment dates. If any date on which Contract Adjustment Payments are to be made
is not a Business Day, then payment of the Contract Adjustment Payments payable
on such date will be made on the next day that is a Business Day (and without
any interest in respect of any such delay), except that, if such Business Day
is in the next calendar year, such payment will be made on the preceding
Business Day.
Anti-Dilution Adjustments
The formula for determining the Settlement Rate will be subject to adjustment
upon the occurrence of certain events, including:
(1) the payment of dividends (and other distributions) on the Common
Shares made in Common Shares;
(2) the issuance to all holders of Common Shares of rights, options or
warrants entitling them, for a period of up to 45 days, to subscribe for or
purchase Common Shares at less than their Current Market Price (as defined
below);
(3) subdivisions, splits or combinations of Common Shares;
S-39
<PAGE>
(4) distributions to all holders of Common Shares of evidences of
indebtedness or assets (including securities but 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
Shares in an aggregate amount that, together with (a) other all-cash
distributions made within the preceding 12 months and (b) any cash plus the
fair market value (as of the expiration of the tender or exchange offer
referred to below) of consideration payable in respect of any tender or
exchange offer by Industries or any of its subsidiaries for the Common
Shares concluded within the preceding 12 months, exceeds 15% of Industries'
aggregate market capitalization (such aggregate market capitalization being
the product of the Current Market Price of the Common Shares multiplied by
the number of Common Shares then outstanding) on the date of such
distribution; and
(6) the successful completion of a tender or exchange offer made by
Industries or any of its subsidiaries for the Common Shares that involves
an aggregate consideration having a fair market value that, together with
(a) any cash and the fair market value of other consideration payable in
respect of any tender or exchange offer by Industries or any of its
subsidiaries for the Common Shares concluded within the preceding 12 months
and (b) the aggregate amount of any all-cash distributions to all holders
of Industries' Common Shares made within the preceding 12 months, exceeds
15% of Industries' aggregate market capitalization on the expiration of
such tender or exchange offer.
"Current Market Price" per Common Share on any day means the average of the
daily Closing Prices for the five consecutive Trading Days selected by
Industries commencing not more than 30 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, will mean the first date on which the Common Shares
trade on the applicable exchange or in the applicable market without the right
to receive such issuance or distribution.
In the case of certain reclassifications, consolidations, mergers, sales or
transfers of assets or other transactions pursuant to which the Common Shares
are converted into the right to receive other securities, cash or property,
each Purchase Contract then outstanding would become, without the consent of
the holder of the related Corporate PIES or Treasury PIES, as the case may be,
a contract to purchase only the kind and amount of securities, cash and other
property receivable upon consummation of the transaction by a holder of the
number of Common Shares that would have been received by the holder of the
related Corporate PIES or Treasury PIES immediately prior to the date of
consummation of such transaction if such holder had then settled such Purchase
Contract.
If at any time Industries makes a distribution of property to its
shareholders that would be taxable to such shareholders as a dividend for
United States federal income tax purposes (i.e., distributions of evidences of
indebtedness or assets of Industries, but generally not stock dividends or
rights to subscribe to capital stock) and, pursuant to the Settlement Rate
adjustment provisions of the Purchase Contract Agreement, the Settlement Rate
is increased, such increase may give rise to a taxable dividend to holders of
the PIES. See "Certain United States Federal Income Tax Consequences--Corporate
PIES--Purchase Contracts--Adjustment to Settlement Rate" on page S-56.
In addition, Industries may make such increases in the Settlement Rate as it
deems advisable in order to avoid or diminish any income tax to holders of its
capital stock resulting from any dividend or distribution of capital stock (or
rights to acquire capital stock) or from any event treated as such for income
tax purposes or for any other reason.
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 1% in
the Settlement Rate; provided that any adjustments not made by reason of the
foregoing will be carried forward and taken into account in any subsequent
adjustment.
S-40
<PAGE>
Whenever the Settlement Rate is adjusted, Industries must deliver to the
Purchase Contract Agent a certificate setting forth the Settlement Rate,
detailing the calculation of the Settlement Rate and describing the facts upon
which the adjustment is based. In addition, Industries must notify the holders
of the PIES of the adjustment within ten Business Days of any event requiring
such adjustment and describe in reasonable detail the method by which the
Settlement Rate was adjusted.
Each adjustment to the Settlement Rate will result in a corresponding
adjustment to the number of Common Shares issuable upon early settlement of a
Purchase Contract.
If an adjustment is made to the Settlement Rate, an adjustment also will be
made to the Applicable Market Value solely to determine which Settlement Rate
will be applicable on the Purchase Contract Settlement Date.
Termination
The Purchase Contracts and the obligations and rights of Industries and of
the holders of the PIES thereunder (including the holders' right to receive
accrued Contract Adjustment Payments and the obligation and right to purchase
and receive Common Shares) will terminate automatically upon the occurrence of
certain events of bankruptcy, insolvency or reorganization with respect to
Industries. Upon such termination, the Collateral Agent will release the
related Preferred Securities, Applicable Ownership Interest of the Treasury
Portfolio or Treasury Securities, as the case may be, from the pledge
arrangement and cause the Securities Intermediary to transfer such Preferred
Securities, Applicable Ownership Interest of the Treasury Portfolio or Treasury
Securities to the Purchase Contract Agent for distribution to the PIES holders,
subject, in the case of the Applicable Ownership Interest of the Treasury
Portfolio, to the Purchase Contract Agent's disposition of the subject
securities for cash and the payment of such cash to the holders to the extent
that the holders otherwise would have been entitled to receive less than $1,000
of any such security. Upon such termination, however, such release and
distribution may be subject to a delay. In the event that Industries 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. Industries expects any such delay to be
limited.
Pledged Securities and Pledge Agreement
The Preferred Securities that are a part of the Corporate PIES (or the
Applicable Ownership Interest of the Treasury Portfolio that are a part of the
Corporate PIES, if a Tax Event Redemption has occurred) or, if substituted, the
Treasury Securities that are a part of the Treasury PIES (collectively, the
"Pledged Securities") will be pledged to the Collateral Agent for the benefit
of Industries pursuant to the Pledge Agreement to secure the obligations of the
holders of the PIES to purchase Common Shares under the related Purchase
Contracts. The rights of the holders of the PIES with respect to such Pledged
Securities will be subject to Industries' security interest therein. No holder
of Corporate PIES or Treasury PIES will be permitted to withdraw the Pledged
Securities related to such Corporate PIES or Treasury PIES from the pledge
arrangement except (1) to substitute Treasury Securities for the related
Preferred Securities or Applicable Ownership Interest of the Treasury
Portfolio, as the case may be, (2) to substitute Preferred Securities or the
Applicable Ownership Interest of the Treasury Portfolio, as the case may be,
for the related Treasury Securities (for both (1) and (2), as provided for
under "Description of the PIES--Creating Treasury PIES by Substituting Treasury
Securities" and "--Recreating Corporate PIES" on pages S-32 and S-33), and (3)
upon early settlement, settlement for separate cash or termination of the
related Purchase Contracts. Subject to such security interest and the terms of
the Purchase Contract Agreement and the Pledge Agreement, each holder of
Corporate PIES (unless a Tax Event Redemption has occurred) will be entitled,
through the Purchase Contract Agent and the Collateral Agent, to all of the
proportional rights and preferences of the related Preferred Securities
(including distribution, voting, redemption, repayment and liquidation rights),
and each holder of Treasury PIES or Corporate PIES (if a Tax Event Redemption
has occurred) will retain beneficial ownership of the related Treasury
Securities or Applicable Ownership Interest of the Treasury Portfolio, as
applicable, pledged in respect of the related Purchase Contracts. Industries
will have no interest in the Pledged Securities other than its security
interest.
S-41
<PAGE>
The Securities Intermediary will distribute, upon receipt of distributions on
the Pledged Securities, such payments to the Purchase Contract Agent, which in
turn will distribute those payments, together with Contract Adjustment Payments
received from Industries, to the holders in whose names the PIES are registered
at the close of business on the record date preceding the date of such
distribution.
Book-Entry Issuance
The depositary for the PIES will be DTC. The PIES will be issued only as
fully-registered securities registered in the name of Cede & Co., DTC's
nominee. The PIES will be issued in accordance with the procedures set forth in
the accompanying Prospectus under "Book-Entry Issuance."
CERTAIN PROVISIONS OF THE PURCHASE CONTRACTS,
THE PURCHASE CONTRACT AGREEMENT AND THE PLEDGE AGREEMENT
General
Distributions on the PIES will be payable, the Purchase Contracts (and
documents related thereto) will be settled and transfers of the PIES will be
registrable at the office of the Purchase Contract Agent in the Borough of
Manhattan, New York City. In addition, if the PIES do not remain in book-entry
form, Industries has the option to pay distributions on the PIES by check
mailed to the address of the person entitled thereto as shown on the Trust's
security register.
No service charge will be made for any registration of transfer or exchange
of the PIES, except for any tax or other governmental charge that may be
imposed in connection therewith.
Modification
Subject to certain limited exceptions, Industries and the Purchase Contract
Agent may not modify the terms of the Purchase Contracts or the Purchase
Contract Agreement without the consent of the holders of not less than a
majority of the outstanding Purchase Contracts, except that no such
modification may, without the consent of the holder of each outstanding
Purchase Contract affected thereby, (1) change any payment date, (2) change the
amount or type of collateral required to be pledged to secure a holder's
obligations under the Purchase Contract, impair the right of the holder of any
Purchase Contract to receive distributions on such collateral (except for the
right of a holder of Corporate PIES to substitute Treasury Securities for the
pledged Preferred Securities or Applicable Ownership Interest of the Treasury
Portfolio, as the case may be, or the right of a holder of Treasury PIES to
substitute Preferred Securities or the Applicable Ownership Interest of the
Treasury Portfolio, as the case may be, for the pledged Treasury Securities) or
otherwise adversely affect the holder's rights in or to such collateral, (3)
reduce any Contract Adjustment Payments or change the place or currency of
payment, (4) impair the right to institute suit for the enforcement of a
Purchase Contract, (5) reduce the number of Common Shares purchasable under a
Purchase Contract, increase the purchase price of the Common Shares on
settlement of any Purchase Contract, change the Purchase Contract Settlement
Date or otherwise adversely affect the holder's rights under a Purchase
Contract or (6) reduce the above-stated percentage of outstanding Purchase
Contracts whose holders' consent is required for the modification or amendment
of the provisions of the Purchase Contracts, the Purchase Contract Agreement or
the Pledge Agreement; provided that if any amendment or proposal would
adversely affect only the Corporate PIES or only the Treasury PIES, then only
the affected class of holders will be entitled to vote on such amendment or
proposal, and such amendment or proposal will not be effective except with the
consent of the holders of not less than a majority of such class or, if
referred to in (1) through (6) above, all of the holders of such class.
Subject to certain limited exceptions, Industries, the Collateral Agent, the
Securities Intermediary and the Purchase Contract Agent may not modify the
terms of the Pledge Agreement without the consent of the holders of not less
than a majority of the outstanding Purchase Contracts, except that no such
modification may,
S-42
<PAGE>
without the consent of the holder of each outstanding Purchase Contract
affected thereby, (1) change the amount or type of collateral required to be
pledged to secure a holder's obligations under the Purchase Contract (except
for the right of a holder of Corporate PIES to substitute Treasury Securities
for the pledged Preferred Securities or Applicable Ownership Interest of the
Treasury Portfolio, as the case may be, or the right of a holder of Treasury
PIES to substitute Preferred Securities or the Applicable Ownership Interest of
the Treasury Portfolio, as the case may be, for the pledged Treasury
Securities), impair the right of the holder of any Purchase Contract to receive
distributions on such collateral or otherwise adversely affect the holder's
rights in or to such collateral, (2) otherwise effect any action that, under
the Purchase Contract Agreement, would require the consent of the holders of
each outstanding Purchase Contract affected thereby or (3) reduce the above-
stated percentage of outstanding Purchase Contracts whose holders' consent is
required for the modification or amendment; provided that if any amendment or
proposal would adversely affect only the Corporate PIES or only the Treasury
PIES, then only the affected class of holders will be entitled to vote on such
amendment or proposal, and such amendment or proposal will not be effective
except with the consent of the holders of not less than a majority of such
class or, if referred to in (1) through (3) above, all of the holders of such
class.
No Consent to Assumption
Each holder of Corporate PIES or Treasury PIES will be deemed under the terms
of the Purchase Contract Agreement, by his or her acceptance of such PIES, to
have expressly withheld any consent to the assumption (i.e., affirmance) of the
related Purchase Contracts by Industries, its receiver, liquidator or trustee
in the event that Industries becomes the subject of a case under the Bankruptcy
Code or other similar state or federal law providing for reorganization or
liquidation.
Consolidation, Merger, Sale or Conveyance
Industries will covenant in the Purchase Contract Agreement that it will not
merge or consolidate with any other entity or sell, assign, transfer, lease or
convey all or substantially all of its properties and assets to any other
entity or group of affiliated entities unless (1) either Industries is the
continuing corporation or the successor corporation is a corporation organized
under the laws of the United States of America, a state thereof or the District
of Columbia and such corporation expressly assumes all the obligations of
Industries under the Purchase Contracts, the Purchase Contract Agreement and
the Pledge Agreement by one or more supplemental agreements in form reasonably
satisfactory to the Purchase Contract Agent and the Collateral Agent and (2)
Industries 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 thereunder.
Governing Law
The Purchase Contracts, the Purchase Contract Agreement and the Pledge
Agreement will be governed by and construed in accordance with the laws of the
State of New York.
Information Concerning the Purchase Contract Agent
The Chase Manhattan Bank will be the Purchase Contract Agent. The Purchase
Contract Agent will act as the agent for the holders of the PIES from time to
time. The Purchase Contract Agent will not be obligated to take any
discretionary action in connection with a default under the terms of the PIES
or the Purchase Contract Agreement.
The Purchase Contract Agreement will contain provisions limiting the
liability of the Purchase Contract Agent. The Purchase Contract Agreement also
will contain provisions under which the Purchase Contract Agent may resign or
be replaced. Such resignation or replacement would be effective upon the
appointment of a successor.
S-43
<PAGE>
Information Concerning the Collateral Agent
The First National Bank of Chicago will be the Collateral Agent. The
Collateral Agent will act solely as the agent of Industries and will not assume
any obligation or relationship of agency or trust for or with any of the
holders of the PIES 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 also 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.
Information Concerning the Securities Intermediary
The First National Bank of Chicago will be the Securities Intermediary. All
property delivered to the Securities Intermediary pursuant to the Purchase
Contract Agreement or the Pledge Agreement will be credited to a collateral
account established by the Securities Intermediary for the Collateral Agent.
The Securities Intermediary will treat the Purchase Contract Agent as entitled
to exercise all rights relating to any financial asset credited to such
collateral account, subject to the provisions of the Pledge Agreement.
Miscellaneous
The Purchase Contract Agreement will provide that Industries will pay all
fees and expenses related to (1) the retention of the Collateral Agent and the
Securities Intermediary and (2) the enforcement by the Purchase Contract Agent
of the rights of the holders of the PIES; provided that holders who elect to
substitute the related Pledged Securities, thereby creating Treasury PIES or
recreating Corporate PIES, will be responsible for any fees or expenses payable
in connection with such substitution, as well as for any commissions, fees or
other expenses incurred in acquiring the Pledged Securities to be substituted,
and Industries will not be responsible for any such fees or expenses.
DESCRIPTION OF THE PREFERRED SECURITIES
The following description sets forth certain terms of the Preferred
Securities. It supplements the description of the Preferred Securities in the
accompanying Prospectus and, to the extent it is inconsistent with the
Prospectus, replaces the description in the Prospectus. The Preferred
Securities, which form a part of the Corporate PIES and which, under certain
circumstances, will trade separately from the Purchase Contracts also forming a
part of the Corporate PIES, will be issued pursuant to the terms of the
Declaration. See "Description of the PIES--Creating Treasury PIES by
Substituting Treasury Securities" starting on page S-32. The terms of the
Preferred Securities will include those stated in the Declaration and those
made part of the Declaration by the Trust Indenture Act. The following
description of certain terms of the Preferred Securities and certain provisions
of the Declaration in this Prospectus Supplement and their description in the
accompanying Prospectus contain a description of their material terms but do
not purport to be complete, and reference is hereby made to the copy of the
Declaration (including the definitions of certain terms used therein) that is
filed as an exhibit to the Registration Statement, the Trust Act and the Trust
Indenture Act. Capitalized terms used in this section not otherwise defined in
this Prospectus Supplement have the meanings set forth in the Declaration.
Distributions
Distributions on each Preferred Security will accumulate and be payable at a
rate per annum of 5.90% of the stated liquidation amount of $50 per Preferred
Security until February 19, 2003 (the Purchase Contract Settlement Date), and
at the Reset Rate thereafter. See "--Market Rate Reset by Remarketing."
Distributions not paid on the scheduled payment date will accumulate and
compound quarterly at the rate of 5.90% per annum through and including the
Purchase Contract Settlement Date, and at the Reset Rate thereafter. The term
"Distribution," as used herein, includes any such distributions payable unless
otherwise stated. The amount of Distributions payable for any period will be
computed (1) for any full quarterly distribution period, on the basis
S-44
<PAGE>
of a 360-day year of twelve 30-day months, and (2) for any period shorter than
a full quarterly distribution period, on the basis of a 30-day month and, for
any period of less than one month, on the basis of the actual number of days
elapsed per 30-day month.
Distributions on the Preferred Securities will be cumulative, will accumulate
from February 16, 1999 and will be payable quarterly, in arrears, on February
19, May 19, August 19 and November 19 of each year, commencing May 19, 1999.
Distributions are payable only to the extent that payments are made to the
Trust in respect of the Debentures held by the Property Trustee and to the
extent the Trust has funds available for the payment of such Distributions.
Market Rate Reset by Remarketing
The interest rate on the Debentures and the related distribution rate on the
outstanding Preferred Securities will be reset on the third Business Day
preceding the Purchase Contract Settlement Date (the "Remarketing Date") to the
Reset Rate. The Reset Rate will be the rate per annum that results from the
remarketing of the Preferred Securities that are a part of the Corporate PIES
as to which the holders have not given notice of their election to settle the
related Purchase Contracts with cash, or have given such notice but failed to
deliver cash, and the Preferred Securities that are not a part of the Corporate
PIES as to which the holders have requested remarketing. On the Remarketing
Date, the Remarketing Agent will use commercially reasonable efforts to
remarket such Preferred Securities at a price equal to 100% of the aggregate
stated liquidation amount of the Preferred Securities.
Remarketing Procedures. Set forth below is a summary of the procedures to be
followed in connection with a remarketing of the Preferred Securities (or, if
the Debentures have been distributed to holders of the Preferred Securities in
liquidation of the Trust, a remarketing of the Debentures):
As long as the PIES or the Preferred Securities are evidenced by one or more
global security certificates deposited with DTC, Capital Markets will request,
not later than 15 nor more than 30 calendar days prior to the Remarketing Date,
that DTC notify its participants holding Preferred Securities or Corporate PIES
of the remarketing.
Not later than 5:00 p.m., New York City time, on the seventh Business Day
preceding the Purchase Contract Settlement Date (i.e., four Business Days prior
to the Remarketing Date), any holder of Preferred Securities that are a part of
the Corporate PIES may elect to have his or her Preferred Securities
remarketed. Holders of Corporate PIES that do not give notice prior to such
time of their intention to settle their related Purchase Contracts for separate
cash, and holders who give such notice but fail to deliver such cash prior to
11:00 a.m., New York City time, on the fifth Business Day prior to the Purchase
Contract Settlement Date, will be deemed to have consented to the disposition
of the Preferred Securities that are a part of their Corporate PIES in the
remarketing. Holders of Preferred Securities that are not a part of the
Corporate PIES who wish to have their Preferred Securities remarketed must give
notice of their election to the Property Trustee prior to 11:00 a.m., New York
City time, on such fifth Business Day. Any such notice will be irrevocable and
may not be conditioned upon the level at which the Reset Rate is established in
the remarketing.
If none of the holders elects to have Preferred Securities remarketed in the
remarketing, the Reset Rate will be the rate determined by the Remarketing
Agent, in its sole discretion, as the rate that would have been established had
a remarketing been held on the Remarketing Date.
If the Remarketing Agent determines that it will be able to remarket all the
Preferred Securities tendered or deemed tendered for purchase at a price of
100% of the aggregate stated liquidation amount of such Preferred Securities
prior to 4:00 p.m., New York City time, on the Remarketing Date, the
Remarketing Agent will determine the Reset Rate, which will be the rate
(rounded to the nearest one-thousandth (0.001) of one percent) per annum that
the Remarketing Agent determines, in its sole judgment, to be the lowest rate
per
S-45
<PAGE>
annum that will enable it to remarket all the Preferred Securities tendered or
deemed tendered for remarketing at such price.
If, by 4:00 p.m., New York City time, on the Remarketing Date, the
Remarketing Agent is unable to remarket all the Preferred Securities tendered
or deemed tendered for purchase, a Failed Remarketing will be deemed to have
occurred, and the Remarketing Agent will so advise DTC, the Property Trustee,
the Indenture Trustee, the Trust and Capital Markets. If a Failed Remarketing
occurs, the Reset Rate will be equal to (1) the Two-Year Benchmark Treasury
Rate plus (2) a spread ranging from 300 to 700 basis points based on the credit
ratings of the Preferred Securities at that time.
"Two-Year Benchmark Treasury Rate" means the bid side rate displayed at 10:00
a.m., New York City time, on the third Business Day preceding the Purchase
Contract Settlement Date for direct obligations of the United States having a
maturity comparable to the remaining term to maturity of the Preferred
Securities, as agreed upon by Industries and the Remarketing Agent. This rate
will be as displayed in the Telerate system or, if the Telerate system is no
longer available or, in the opinion of the Remarketing Agent (after
consultation with Industries), no longer an appropriate system from which to
obtain such rate, such other nationally recognized quotation system as, in the
opinion of the Remarketing Agent (after consultation with Industries) is
appropriate. If this rate is not so displayed, the Two-Year Benchmark Treasury
Rate will be calculated by the Remarketing Agent as the yield to maturity for
direct obligations of the United States having a maturity comparable to the
remaining term to maturity of the Preferred Securities, expressed as a bond
equivalent on the basis of a year of 365 or 366 days, as applicable, and
applied on a daily basis, and computed by taking the arithmetic mean of the
secondary market bid rates, as of 10:30 a.m., New York City time, on the third
Business Day preceding the Purchase Contract Settlement Date of three leading
United States government securities dealers selected by the Remarketing Agent
(after consultation with Industries) (which may include the Remarketing Agent
or an affiliate thereof).
By approximately 4:30 p.m., New York City time, on the Remarketing Date,
provided that there has not been a Failed Remarketing, the Remarketing Agent
will advise (1) DTC, the Property Trustee, the Indenture Trustee, the Trust and
Capital Markets of the Reset Rate determined in the remarketing and the number
of Preferred Securities sold in the remarketing, (2) each person purchasing
Preferred Securities in the remarketing (or the appropriate DTC participant) of
the Reset Rate and the number of Preferred Securities such person is to
purchase and (3) each such purchaser to give instructions to its DTC
participant to pay the purchase price on the Purchase Contract Settlement Date
in same day funds against delivery of the Preferred Securities purchased
through the facilities of DTC.
In accordance with DTC's normal procedures, on the Purchase Contract
Settlement Date, the transactions described above with respect to each
Preferred Security tendered for purchase and sold in the remarketing will be
executed through DTC, and the accounts of the respective DTC participants will
be debited and credited and such Preferred Securities delivered by book entry
as necessary to effect purchases and sales of such Preferred Securities. DTC
will make payment in accordance with its normal procedures.
If any holder selling Preferred Securities in the remarketing fails to
deliver such Preferred Securities, the direct or indirect DTC participant of
such selling holder and of any other person that was to have purchased
Preferred Securities in the remarketing may deliver to any such other person a
number of Preferred Securities that is less than the number of Preferred
Securities that otherwise was to be purchased by such person. In such event,
the number of Preferred Securities to be so delivered will be determined by
such direct or indirect participant, and delivery of such lesser number of
Preferred Securities will constitute good delivery.
The right of each holder to have Preferred Securities tendered for purchase
will be limited to the extent that (1) the Remarketing Agent conducts a
remarketing pursuant to the terms of the Remarketing Agreement, (2) Preferred
Securities tendered have not been called for redemption, (3) the Remarketing
Agent is able to find a purchaser or purchasers for tendered Preferred
Securities and (4) such purchaser or purchasers deliver the purchase price
therefor to the Remarketing Agent.
S-46
<PAGE>
The Remarketing Agent is not obligated to purchase any Preferred Securities
that would otherwise remain unsold in the remarketing. Neither the Trust, any
Trustee, Industries, Capital Markets nor the Remarketing Agent will be
obligated in any case to provide funds to make payment upon tender of Preferred
Securities for remarketing.
Capital Markets, in its capacity as issuer of the Debentures, will be liable
for any and all costs and expenses incurred in connection with the remarketing,
and the Trust will not have any liabilities for such costs and expenses.
Remarketing Agent. The Remarketing Agent will be Lehman Brothers Inc.
Industries, Capital Markets, the Trust and the Remarketing Agent will enter
into the Remarketing Agreement which provides, among other things, that Lehman
Brothers Inc., will act as the exclusive Remarketing Agent and will use
commercially reasonable efforts to remarket securities tendered or deemed
tendered for purchase in the remarketing at a price of 100% of the stated
liquidation amount. Under certain circumstances, some portion of the Preferred
Securities tendered in the remarketing may be purchased by the Remarketing
Agent.
The Remarketing Agreement provides that the Remarketing Agent will incur no
liability to Industries, Capital Markets or the Trust or to any holder of the
Corporate PIES or the Preferred Securities in its individual capacity or as
Remarketing Agent for any action or failure to act in connection with a
remarketing or otherwise, except as a result of the negligence or willful
misconduct on its part.
Each of Industries, Capital Markets and the Trust has agreed to indemnify the
Remarketing Agent against certain liabilities, including liabilities under the
Securities Act of 1933, arising out of or in connection with its duties under
the Remarketing Agreement.
The Remarketing Agreement also will provide that the Remarketing Agent may
resign and be discharged from its duties and obligations thereunder; provided
that no such resignation will become effective unless a nationally recognized
broker-dealer has been appointed by Capital Markets as successor remarketing
agent and such successor remarketing agent has entered into a remarketing
agreement with Industries, the Trust and Capital Markets. In such case, Capital
Markets will use reasonable efforts to appoint a successor remarketing agent
and enter into a remarketing agreement with such person as soon as reasonably
practicable.
Optional Redemption
Upon the occurrence and continuation of a Tax Event under the circumstances
described under "Description of the Debentures--Tax Event Redemption" starting
on page S-49, Capital Markets will have the right to redeem the Debentures. If
Capital Markets redeems the Debentures upon the occurrence of a Tax Event, the
proceeds from such redemption will be applied simultaneously to redeem Trust
Securities having an aggregate stated liquidation amount equal to the aggregate
principal amount of the Debentures so redeemed, at a price per Trust Security
equal to the Redemption Amount (as defined under "Description of the
Debentures--Tax Event Redemption") plus any accumulated and unpaid
Distributions thereon to the date of such redemption, and the Trust will be
dissolved. If the Tax Event Redemption occurs prior to the Purchase Contract
Settlement Date, the redemption price payable to the Securities Intermediary,
in liquidation of the Corporate PIES holders' interests in the Trust, will be
applied by the Securities Intermediary to purchase the Treasury Portfolio. See
"Description of the Debentures--Tax Event Redemption." The Applicable Ownership
Interest of the Treasury Portfolio will be pledged to the Collateral Agent to
secure the obligations of the holders of the Corporate PIES to purchase Common
Shares under the related Purchase Contracts.
Book-Entry Issuance
The depositary for the Preferred Securities will be DTC. The Preferred
Securities will be issued only as fully-registered securities registered in the
name of Cede & Co., DTC's nominee. The Preferred Securities will be issued in
accordance with the procedures set forth in the accompanying Prospectus under
"Book-Entry Issuance."
S-47
<PAGE>
DESCRIPTION OF THE DEBENTURES
The following description sets forth the specific terms of the Debentures. It
supplements the description of the Debentures in the accompanying Prospectus
and, to the extent it is inconsistent with the Prospectus, replaces the
description in the Prospectus. The Debentures will be issued under an indenture
dated as of February 14, 1997, as supplemented by a First Supplemental
Indenture relating to the Debentures, among Capital Markets, Industries and The
Chase Manhattan Bank, as Indenture Trustee (the "Indenture"). The descriptions
in this Prospectus Supplement and the accompanying Prospectus contain a
description of the material terms of the Debentures and the Indenture but do
not purport to be complete, and reference is hereby made to the Indenture and
the form of Debenture that are or will be filed as exhibits to the Registration
Statement and to the Trust Indenture Act. Capitalized terms used in this
section not otherwise defined in this Prospectus Supplement have the meanings
set forth in the Indenture.
General
The Debentures will be unsecured senior obligations of Capital Markets. The
Debentures will be limited in aggregate principal amount to $355,700,000, such
amount being the sum of the maximum aggregate stated liquidation amounts of the
Preferred Securities and the Common Securities.
The Debentures will not be subject to a sinking fund provision. Unless a Tax
Event Redemption occurs, the entire principal amount of the Debentures will
mature and become due and payable, together with any accrued and unpaid
interest thereon, on February 19, 2005.
Capital Markets will have the right at any time, subject to certain
conditions, to dissolve the Trust and cause the Debentures to be distributed to
the holders of the Trust Securities. If the Debentures are distributed to the
holders of the Trust Securities in liquidation of such holders' interests in
the Trust, the Debentures will initially be issued in the form of one or more
global certificates deposited with DTC. Under certain limited circumstances,
the Debentures may be issued in certificated form in exchange for the global
certificates. See "--Book-Entry Issuance" below. In the event that the
Debentures are issued in certificated form, the Debentures will be in
denominations of $50 and integral multiples thereof and may be transferred or
exchanged at the offices described below. Payments on Debentures issued as
global certificates will be made to DTC, a successor depositary or, in the
event that no depositary is used, to a paying agent for the Debentures. In the
event the Debentures are issued in certificated form, principal and interest
will be payable, the transfer of the Debentures will be registrable and the
Debentures will be exchangeable for Debentures of other denominations of a like
aggregate principal amount at the corporate trust office or agency of the
Indenture Trustee in New York City, provided that at the option of Capital
Markets, payment of interest may be made by check. Notwithstanding the
foregoing, so long as the holder of any Debentures is the Property Trustee,
Capital Markets will make payment of principal and interest on the Debentures
held by the Property Trustee at such place and to such account as may be
designated by the Property Trustee.
The Indenture does not contain provisions that afford holders of the
Debentures protection in the event of a highly leveraged transaction or other
similar transaction involving Capital Markets that may adversely affect such
holders.
Interest
Each Debenture will bear interest at the rate of 5.90% per annum from
February 16, 1999 until February 19, 2003, and at the Reset Rate thereafter,
payable quarterly in arrears on February 19, May 19, August 19 and November 19
of each year (each an "Interest Payment Date"), commencing May 19, 1999, to the
person in whose name such Debenture is registered, subject to certain
exceptions, at the close of business on the Business Day preceding such
Interest Payment Date. In the event the Debentures do not remain in book-entry
only form, the record dates will be 15 Business Days prior to each Interest
Payment Date.
S-48
<PAGE>
The interest rate on the Debentures (and, as a result, the distribution rate
on the Preferred Securities) outstanding on and after the Purchase Contract
Settlement Date will be reset on the third Business Day preceding the Purchase
Contract Settlement Date to the Reset Rate. The Reset Rate will be equal to the
rate per annum that results from the remarketing of the Preferred Securities as
described under "Description of the Preferred Securities--Market Rate Reset by
Remarketing" starting on page S-45, provided that if a Failed Remarketing
occurs, the Reset Rate will be equal to (1) the Two-Year Benchmark Treasury
Rate plus (2) a spread ranging from 300 to 700 basis points based on the credit
ratings of the Preferred Securities at that time.
The amount of interest payable on the Debentures for any period will be
computed (1) for any full quarterly period on the basis of a 360-day year of
twelve 30-day months and (2) for any period shorter than a full quarterly
period, on the basis of a 30-day month and, for any period less than a month,
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 Debentures is not a
Business Day, then payment of the interest payable on such date will be made on
the next 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
calendar year, then such payment will be made on the preceding Business Day.
Tax Event Redemption
If a Tax Event occurs and is continuing, Capital Markets may redeem, at its
option, the Debentures in whole (but not in part), at a price equal to, for
each Debenture, the Redemption Amount plus accrued and unpaid interest thereon
to the date of redemption (the "Tax Event Redemption Date"). Upon a Tax Event
Redemption, the Trust will use the proceeds of such Tax Event Redemption to
redeem Trust Securities having an aggregate liquidation amount equal to the
aggregate principal amount of the Debentures redeemed by distributing the
Redemption Amount plus any accumulated and unpaid distributions. If a Tax Event
Redemption occurs prior to the Purchase Contract Settlement Date, the
redemption price payable in liquidation of the Corporate PIES holders'
interests in the Trust will be distributed to the Securities Intermediary,
which in turn will apply an amount equal to the Redemption Amount of such
redemption price to purchase the Treasury Portfolio on behalf of the holders of
the Corporate PIES and remit the remaining portion, if any, of such redemption
price to the Purchase Contract Agent for payment to the holders of the
Corporate PIES. Thereafter, the Applicable Ownership Interest of the Treasury
Portfolio will be substituted for the Preferred Securities and will be pledged
to the Collateral Agent to secure the Corporate PIES holders' obligations to
purchase Common Shares under the related Purchase Contracts. If a Tax Event
Redemption occurs after the Purchase Contract Settlement Date, the Treasury
Portfolio will not be purchased and the proceeds will be distributed to the
Purchase Contract Agent for payment to the holders of the Corporate PIES.
"Tax Event" means the receipt by Capital Markets and the Trust of an opinion
of counsel, rendered by a law firm having a recognized national tax practice,
to the effect that, as a result of any amendment to, change in or announced
proposed change in the laws (or any regulations thereunder) of the United
States or any political subdivision or taxing authority thereof or therein, or
as a result of any official administrative decision, pronouncement, judicial
decision or action interpreting or applying such laws or regulations, which
amendment or change is effective or which proposed change, pronouncement,
action or decision is announced on or after the date of issuance of the
Preferred Securities, there is more than an insubstantial risk that (1) the
Trust is, or within 90 days of the date of such opinion will be, subject to
United States federal income tax with respect to income received or accrued on
the Debentures, (2) interest payable by Capital Markets on the Debentures is
not, or within 90 days of the date of such opinion, will not be, deductible by
Capital Markets, in whole or in part, for United States federal income tax
purposes, or (3) the Trust is, or within 90 days of the date of such opinion
will be, subject to more than a de minimis amount of other taxes, duties or
other governmental charges.
"Redemption Amount" means, for each Debenture, the product of the principal
amount of such Debenture and a fraction, the numerator of which is the Treasury
Portfolio Purchase Price and the denominator of which is the Applicable
Principal Amount.
S-49
<PAGE>
"Treasury Portfolio Purchase Price" means the lowest aggregate price quoted
by a primary U.S. government securities dealer in New York City (a "Primary
Treasury Dealer") to the Quotation Agent on the third Business Day preceding
the Tax Event Redemption Date for the purchase of the Treasury Portfolio for
settlement on the Tax Event Redemption Date.
"Applicable Principal Amount" means either (1) if the Tax Event Redemption
Date occurs prior to the Purchase Contract Settlement Date, the aggregate
principal amount of the Debentures corresponding to the aggregate stated
liquidation amount of the Preferred Securities that are part of the Corporate
PIES on the Tax Event Redemption Date or (2) if the Tax Event Redemption Date
occurs on or after the Purchase Contract Settlement Date, the aggregate
principal amount of the Debentures corresponding to the aggregate stated
liquidation amount of the Preferred Securities outstanding on the Tax Event
Redemption Date.
"Treasury Portfolio" means, with respect to the Applicable Principal Amount
of Debentures (1) if the Tax Event Redemption Date occurs prior to the Purchase
Contract Settlement Date, a portfolio of zero-coupon U.S. Treasury Securities
consisting of (a) principal or interest strips of U.S. Treasury Securities that
mature on or prior to the Purchase Contract Settlement Date in an aggregate
amount at maturity equal to the Applicable Principal Amount and (b) with
respect to each scheduled interest payment date on the Debentures that occurs
after the Tax Event Redemption Date, principal or interest strips of U.S.
Treasury Securities that mature on or prior to such date in an aggregate amount
at maturity equal to the aggregate interest payment that would be due on the
Applicable Principal Amount of the Debentures on such date and (2) if the Tax
Event Redemption Date occurs after the Purchase Contract Settlement Date, a
portfolio of zero-coupon U.S. Treasury Securities consisting of (a) principal
or interest strips of U.S. Treasury Securities that mature on or prior to
February 19, 2005, in an aggregate amount at maturity equal to the Applicable
Principal Amount and (b) with respect to each scheduled interest payment date
on the Debentures that occurs after the Tax Event Redemption Date, principal or
interest strips of such U.S. Treasury Securities that mature on or prior to
such date in an aggregate amount at maturity equal to the aggregate interest
payment that would be due on the Applicable Principal Amount of the Debentures
on such date.
"Quotation Agent" means (1) Lehman Brothers Inc. and its respective
successors, provided that if Lehman Brothers Inc. ceases to be a Primary
Treasury Dealer, Capital Markets will substitute another Primary Treasury
Dealer therefor, or (2) any other Primary Treasury Dealer selected by Capital
Markets.
Additional Indenture Provisions Applicable to the Debentures
As long as the Debentures are held by the Trust, it will be an event of
default with respect to the Debentures if the Trust voluntarily or
involuntarily dissolves, winds-up its business or otherwise terminates its
existence except in connection with (1) the distribution of the Debentures to
holders of Preferred Securities and Common Securities in liquidation of their
interests in the Trust, (2) the redemption of all of the outstanding Preferred
Securities and Common Securities, or (3) certain mergers, consolidations or
amalgamations, each as permitted by the Declaration.
Capital Markets and Industries will covenant that, so long as any Trust
Securities remain outstanding, if an event of default under the Indenture
occurs and written notice of such event has been given to Capital Markets and
Industries, then Capital Markets and Industries may not (1) declare or pay any
dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to any of Capital Markets' or Industries'
capital stock or (2) make any payment of principal, interest or premium, if
any, on or repay, repurchase or redeem any debt securities of Capital Markets
or Industries that rank on a parity with or junior in interest to the
Debentures or make any guarantee payments with respect to any guarantee by
Capital Markets or Industries of the debt securities of any subsidiary of
Capital Markets or Industries if such guarantee ranks on a parity with or
junior in interest to the Debentures (other than (a) purchases or acquisitions
of capital stock of Capital Markets or Industries in connection with the
satisfaction by Capital Markets or Industries of its obligations under any
employee benefit plans or the satisfaction by Capital Markets or Industries of
its
S-50
<PAGE>
obligations pursuant to any contract or security outstanding on the date of
such event requiring Capital Markets or Industries to purchase capital stock of
Capital Markets or Industries, (b) as a result of a reclassification of Capital
Markets' or Industries' capital stock for another class or series of Capital
Markets' or Industries' capital stock, (c) the purchase of fractional interests
in shares of Capital Markets' or Industries' capital stock pursuant to the
conversion or exchange provisions of such capital stock or the security being
converted or exchanged, (d) dividends or distributions in capital stock of
Capital Markets or Industries, (e) redemptions or repurchases of any rights
pursuant to a rights agreement and (f) payments under the Guarantee).
Book-Entry Issuance
If distributed to holders of Preferred Securities in connection with the
involuntary or voluntary dissolution of the Trust, the Debentures will be
issued as one or more global certificates registered in the name of DTC or its
nominee. The depositary for the Debentures will be DTC. The Debentures will be
issued only as fully-registered securities registered in the name of Cede &
Co., DTC's nominee. The Debentures will be issued in accordance with the
procedures set forth in the accompanying Prospectus under "Book-Entry
Issuance."
DESCRIPTION OF THE GUARANTEE
The following description sets forth certain terms of the Guarantee that will
be executed and delivered by Capital Markets for the benefit of the holders
from time to time of the Trust Securities. It supplements the description of
the Guarantee in the accompanying Prospectus and, to the extent it is
inconsistent with the Prospectus, replaces the description in the Prospectus.
The terms of the Guarantee will be those set forth in the Guarantee and those
made part of the Guarantee by the Trust Indenture Act. The descriptions
contained in this Prospectus Supplement and the accompanying Prospectus contain
a description of the material terms of the Guarantee, but do not purport to be
complete, and reference is hereby made to the form of Guarantee (including
definitions of certain terms used therein) that is filed as an exhibit to the
Registration Statement.
General
To the extent set forth in the Guarantee and except to the extent paid by the
Trust, Capital Markets will irrevocably and unconditionally agree, to the
extent set forth therein, to pay in full, to the holders of the Preferred
Securities, certain payments, as and when due, regardless of any defense, right
of set-off or counterclaim that the Trust may have or assert. The following
payments with respect to the Preferred Securities, to the extent not paid by or
on behalf of the Trust (the "Guarantee Payments"), will be subject to the
Guarantee:
(1) any accumulated and unpaid Distributions that are required to be paid
on the Preferred Securities, to the extent the Trust has funds available
therefor;
(2) the redemption price, including all accumulated and unpaid
Distributions to the date of redemption, of Preferred Securities upon
redemption of the Debentures upon the occurrence of a Tax Event Redemption
or upon repayment of the Debentures at the maturity thereof, to the extent
the Trust has funds available therefor; and
(3) upon a voluntary or involuntary dissolution, winding up or
termination of the Trust (other than following redemption of the Preferred
Securities or the distribution of Debentures to the holders of Preferred
Securities in exchange for the Preferred Securities), the lesser of (a) the
aggregate of the stated liquidation amount and all accumulated and unpaid
Distributions on such Preferred Securities to the date of payment, to the
extent the Trust has funds available therefor, and (b) the amount of assets
of the Trust remaining available for distribution to holders of the
Preferred Securities in liquidation of the Trust.
Capital Markets may satisfy its obligation to make a Guarantee Payment by
direct payment of the required amounts by Capital Markets to the holders of
Preferred Securities or by causing the Trust to pay such amounts to such
holders.
S-51
<PAGE>
The Guarantee will apply only to the extent the Trust has funds available
therefor. If Capital Markets does not make interest payments on the Debentures
purchased by the Trust, the Trust will not be able to pay Distributions on the
Preferred Securities and will not have funds available therefor.
Capital Markets has, through the Guarantee, the Debentures and the Indenture,
taken together, fully and unconditionally guaranteed all of the Trust's
obligations under the Trust 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 the documents that has the
effect of providing a full and unconditional guarantee of the Trust's
obligations under the Declaration. See "Relationship Among the Preferred
Securities, the Debentures and the Guarantee" in the accompanying Prospectus.
Capital Markets' obligation under the Guarantee constitutes "Debt" for
purposes of the Support Agreement between Capital Markets and Industries, and
the holders of the Trust Securities will be entitled to the benefits provided
to "Lenders" under the Support Agreement.
Termination
The Guarantee will terminate upon (1) Capital Markets' payment in full of the
redemption price of all of the Trust Securities, (2) distribution of the
Debentures held by the Trust to the holders of the Trust Securities or (3)
payment in full of the amounts payable in accordance with the Declaration upon
liquidation of the Trust. The Guarantee will continue to be effective or will
be reinstated, as the case may be, if at any time any holder of Trust
Securities must return payment of any sums paid under the Trust Securities or
the Guarantee.
CERTAIN UNITED STATES 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 PIES,
the Preferred Securities and the Common Shares acquired under a Purchase
Contract. Unless otherwise stated, this summary applies only to "U.S. Holders"
who purchase Corporate PIES upon original issuance for an amount equal to the
initial offering price. A "U.S. Holder" is (1) a person who is a citizen or
resident of the United States, (2) 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, (3) an estate the income of which is subject to United
States federal income taxation, regardless of its source, or (4) a trust if a
court within the United States is able 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. The tax treatment
of a holder may vary depending on such holder's particular situation. This
summary 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 PIES, the Preferred Securities or the Common Shares acquired
under a Purchase Contract as a position in a "straddle," as part of a
"synthetic security" or "hedge" or "constructive sale" transaction, as part of
a "conversion transaction" or other integrated investment, or as other than a
capital asset. This summary does not address the tax consequences to persons
that have a functional currency other than the U.S. dollar or the tax
consequences to shareholders, partners or beneficiaries of a holder of PIES,
Preferred Securities or Common Shares acquired pursuant to a Purchase Contract.
Further, it does not include any description of any alternative minimum tax
consequences or the tax laws of any state, local or foreign government that may
be applicable. Prospective investors that are not United States persons (within
the meaning of Section 7701 (a)(30) of the Internal Revenue Code of 1986, as
amended (the "Code")) are urged to consult their own tax advisors regarding the
United States federal income tax consequences of an investment in the PIES,
including the potential application of United States withholding taxes.
This summary is based upon the Code, Treasury regulations (including proposed
Treasury regulations) issued thereunder, IRS rulings and pronouncements and
judicial decisions now in effect, all of which are subject to change, possibly
on a retroactive basis. Any such changes may be applied retroactively in a
manner that could cause the tax consequences to vary substantially from the
consequences described below, possibly adversely affecting a U.S. Holder.
S-52
<PAGE>
No statutory, administrative or judicial authority directly addresses the
treatment of the PIES or instruments similar to the PIES for United States
federal income tax purposes. As a result, no assurance can be given that the
IRS will agree with the tax consequences described herein. Prospective
investors are urged to consult their own tax advisors with respect to the tax
consequences to them of the purchase, ownership and disposition of the PIES in
light of their own particular circumstances, 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.
Corporate PIES
Allocation of Purchase Price. A U.S. Holder's acquisition of a Corporate PIES
will be treated as an acquisition of a unit consisting of the Preferred
Security and the Purchase Contract that comprise the Corporate PIES. The
purchase price of each Corporate PIES will be allocated between the Preferred
Security and the Purchase Contract in proportion to their respective fair
market values at the time of purchase. Such allocation will establish the U.S.
Holder's initial tax bases in the Preferred Security and the Purchase Contract.
Capital Markets will report the fair market value of each Preferred Security as
$50 and the fair market value of each Purchase Contract as $0 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 States federal income tax return for the
taxable year in which a Corporate PIES is acquired. Thus, absent such
disclosure, a U.S. Holder should allocate the purchase price for a Corporate
PIES in accordance with the foregoing. The remainder of this discussion assumes
that this allocation of the purchase price will be respected for United States
federal income tax purposes.
Preferred Securities
Ownership of Preferred Securities. A U.S. Holder will be treated as owning
the Preferred Securities that are a part of the Corporate PIES. Capital
Markets, the Trust and, by acquiring PIES, 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 Preferred Securities that are a part of the
Corporate PIES beneficially owned by such U.S. Holder. The remainder of this
summary assumes that U.S. Holders of Corporate PIES will be treated as the
owners of the Preferred Securities that are a part of such Corporate PIES for
United States federal, state and local income and franchise tax purposes.
Classification of the Trust. In connection with the issuance of the Corporate
PIES, Schiff Hardin & Waite 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
Preferred Securities will be treated as owning an undivided beneficial
ownership interest in the Debentures held by the Trust. Accordingly, each U.S.
Holder of Preferred Securities will be required to include in its gross income
its pro rata share of the interest income or OID that is paid or accrued on the
Debentures. See "--Interest Income and Original Issue Discount."
Classification of the Debentures. Capital Markets, the Trust and, by
acquiring PIES, each U.S. Holder agree to treat the Debentures as indebtedness
of Capital Markets for all United States tax purposes. In connection with the
issuance of the Debentures, Schiff Hardin & Waite will deliver an opinion that,
under current law, and based on certain representations, facts and assumptions
set forth in such opinion, the Debentures will be classified as indebtedness
for United States federal income tax purposes.
Interest Income and Original Issue Discount. Generally, a U.S. Holder should
include stated interest on the Debentures in income as ordinary income when
paid to the Trust or accrued, in accordance with such U.S. Holder's regular
method of tax accounting. The Debentures should be treated as "reset bonds"
under applicable Treasury regulations, and interest on the Debentures should
not constitute contingent interest for purposes of the OID rules. Under the
Treasury regulations applicable to reset bonds, the Debentures should be
S-53
<PAGE>
treated, solely for purposes of calculating the accrual of OID, as maturing on
the day preceding the Purchase Contract Settlement Date for an amount equal to
100% of the stated amount (the "Reset Amount") and as having been reissued on
the Purchase Contract Settlement Date for the Reset Amount. If the amount of
the initial purchase price of the Corporate PIES allocated to the Preferred
Securities is less than the Reset Amount, the Debentures should be treated as
having been issued with OID equal to the difference between the Reset Amount
and the amount so allocated to the Preferred Securities, unless such difference
is less than three-fourths of one-percent of the Reset Amount. If the
Debentures were treated as issued with OID, a U.S. Holder would be required to
include such OID in income on an economic accrual basis over the period between
the issue date and the day preceding the Purchase Contract Settlement Date
regardless of such U.S. Holder's method of tax accounting. Consequently, each
U.S. Holder (including those using the cash basis of accounting) would be
required to include OID in its gross income even though Capital Markets will
not actually make current cash payments with respect to such OID. Any amount of
OID included in a U.S. Holder's gross income will increase such U.S. Holder's
tax basis in its Preferred Securities, and the amount of any Distribution
received by a U.S. Holder with respect to such Preferred Securities will reduce
its tax basis in such Preferred Securities.
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
Preferred Securities.
Distribution of Debentures to U.S. Holders of Preferred Securities. Under
current law, a distribution by the Trust of the Debentures generally will be
non-taxable to U.S. Holders. In such event, a U.S. Holder will have an
aggregate tax basis in the Debentures received in the liquidation equal to the
aggregate tax basis such U.S. Holder had in the Preferred Securities
surrendered therefor, and the holding period of such Debentures will include
the period during which such U.S. Holder held the Preferred Securities. A U.S.
Holder will continue to include interest (or OID) in respect of Debentures
received from the Trust in the manner described under "--Interest Income and
Original Issue Discount." Upon the occurrence of a Tax Event as described in
"Description of Debentures--Tax Event Redemption," Capital Markets will have
the option to redeem the Debentures which will result in a redemption of the
Preferred Securities and which will be a taxable event for U.S. Holders. See
"--Tax Event Redemption."
Sales, Exchanges or Other Dispositions of Preferred Securities. Gain or loss
will be recognized by a U.S. Holder on a sale, exchange, redemption or other
taxable disposition (collectively, a "disposition") of a Preferred Security
(including a redemption for cash or the remarketing thereof in satisfaction of
the U.S. Holder's obligations pursuant to a Purchase Contract) in an amount
equal to the difference between the amount realized by the U.S. Holder on the
disposition of the 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 Debentures that such U.S.
Holder has not included in gross income previously, which will be taxable as
such) and the U.S. Holder's adjusted tax basis in the 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 the sale,
exchange or other disposition of a Preferred Security. Gain or loss realized by
a U.S. Holder on a disposition of a Preferred Security may be long-term capital
gain depending on the holding period of the Preferred Security. Capital gains
of individuals are eligible for a maximum tax rate of 20% if the U.S. Holder
has held the Preferred Security for more than one year. The deductibility of
capital losses is subject to limitations.
Purchase Contracts
Income from Contract Adjustment Payments. There is no direct authority
addressing the treatment of the Contract Adjustment Payments under current law,
and such treatment is unclear. Contract Adjustment Payments may constitute
taxable income to a U.S. Holder when received or accrued, in accordance with
the U.S. Holder's method of tax accounting. To the extent Industries is
required to file information returns with respect to Contract Adjustment
Payments, it intends to report such payments as taxable income to each U.S.
Holder. U.S. Holders should consult their own tax advisors concerning the
treatment of Contract Adjustment
S-54
<PAGE>
Payments, including the possibility that any such 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. Industries
does not intend to deduct the Contract Adjustment Payments, because it views
them as a cost of issuing the Common Shares. The treatment of Contract
Adjustment Payments could affect a U.S. Holder's tax basis in a Purchase
Contract or in the Common Shares acquired under a Purchase Contract or the
amount realized by a U.S. Holder upon the sale or disposition of a PIES or the
termination of a Purchase Contract. See "--Acquisition of Common Shares under a
Purchase Contract," "--Termination of Purchase Contract" and "--Sale or
Disposition of PIES."
Acquisition of Common Shares under a Purchase Contract. A U.S. Holder
generally will not recognize gain or loss on the purchase of Common Shares
under a Purchase Contract, except with respect to any cash paid in lieu of a
fractional Common Share. Subject to the following discussion, a U.S. Holder's
aggregate initial tax basis in the Common Shares acquired under a Purchase
Contract generally should equal the purchase price paid for such Common Shares
plus such U.S. Holder's tax basis in the Purchase Contract (if any), less the
portion of such purchase price and tax basis allocable to the fractional share.
Payments of Contract Adjustment 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 tax basis in the Purchase Contract or in the Common Shares to be
received thereunder (see "--Income from Contract Adjustment Payments" above).
The holding period for Common Shares acquired under a Purchase Contract will
commence on the day of the acquisition of such Common Shares.
Ownership of Common Shares Acquired under the Purchase Contract. Any dividend
on Common Shares paid by Industries out of its current or accumulated earnings
and profits (as determined for United States federal income tax purposes) will
be includible in income by the 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 Shares, a U.S. Holder generally will 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 Shares. Such gain or loss
may be long-term capital gain or loss depending on the holding period of the
Common Shares. Capital gains of individuals are eligible for a maximum tax rate
of 20% if a U.S. Holder held Common Shares for more than one year. The
deductibility of capital losses is subject to limitations.
Early Settlement of Purchase Contract. A U.S. Holder will not recognize gain
or loss on the receipt of such U.S. Holder's proportionate share of the
Preferred Securities, Treasury Portfolio or Treasury Securities upon early
settlement of a Purchase Contract and will have the same tax basis in such
Preferred Securities, Treasury Portfolio or Treasury Securities as before such
early settlement.
Termination of Purchase Contract. If a Purchase Contract terminates, a U.S.
Holder 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 Adjustment 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 basis in the Purchase Contract or result in an amount realized on the
termination of the Purchase Contract. Any Contract Adjustment Payments included
in a U.S. Holder's income but not paid should increase such U.S. Holder's tax
basis in the Purchase Contract (see "--Income from Contract Adjustment
Payments" above). Any such gain or loss may be long-term capital gain or loss
depending upon the holding period of the Purchase Contract. Capital gains of
individuals are eligible for a maximum tax rate of 20% if a U.S. Holder held
the Purchase Contract for more than one year. 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 Preferred
Securities, Treasury Portfolio or Treasury Securities upon termination of the
Purchase Contract and will have the same tax basis in such Preferred
Securities, Treasury Portfolio or Treasury Securities as before such
distribution.
S-55
<PAGE>
Adjustment to Settlement Rate. U.S. Holders of PIES might be treated as
receiving a constructive distribution from Industries if (1) the Settlement
Rate is adjusted and as a result of such adjustment the proportionate interest
of U.S. Holders of PIES in the assets or earnings and profits of Industries is
increased and (2) the adjustment is not made pursuant to a bona fide,
reasonable anti-dilution formula. An adjustment in the Settlement Rate would
not be considered made pursuant to such a formula if the adjustment were made
to compensate a U.S. Holder for certain taxable distributions with respect to
the Common Shares. Thus, under certain circumstances, an increase in the
Settlement Rate might give rise to a taxable dividend to U.S. Holders of PIES
even though such U.S. Holders would not receive any cash related thereto.
Treasury PIES
Substitution of Treasury Securities to Create Treasury PIES
A U.S. Holder of Corporate PIES that delivers Treasury Securities to the
Securities Intermediary in substitution for Preferred Securities generally will
not recognize gain or loss upon the delivery of such Treasury Securities or the
release of the Preferred Securities to such U.S. Holder. Such U.S. Holder will
continue to include in income any interest on the Debentures allocable with
respect to the Preferred Securities, and such U.S. Holder's tax basis in the
Preferred Securities and the Purchase Contract will not be affected by such
delivery and release.
Ownership of Treasury Securities
A U.S. Holder will be treated as owning the Treasury Securities that are a
part of the Treasury PIES. Capital Markets, the Trust and, by acquiring PIES,
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
Treasury Securities that are a part of the Treasury PIES beneficially owned by
such U.S. Holder. Such U.S. Holder will include in income any interest, OID or
market discount or amortize any bond premium otherwise includible or
deductible, respectively, by such U.S. Holder with respect to such Treasury
Securities. The remainder of this summary assumes that U.S. Holders of Treasury
PIES will be treated as the owners of the Treasury Securities that are a part
of such Treasury PIES for United States federal, state and local income and
franchise tax purposes. U.S. Holders should consult their tax advisors
concerning the tax consequences of purchasing, owning and disposing of Treasury
Securities.
Substitution of Preferred Securities to Recreate Corporate PIES
A U.S. Holder of Treasury PIES that delivers Preferred Securities to the
Securities Intermediary to recreate Corporate PIES generally will not recognize
gain or loss upon the delivery of such Preferred Securities or the release of
the Treasury Securities to the U.S. Holder. Such U.S. Holder will continue to
include in income any interest, OID or market discount or amortize any bond
premium otherwise includible or deductible, respectively, by such U.S. Holder
with respect to such Treasury Securities and the Debentures allocable with
respect to the Preferred Securities, and such U.S. Holder's tax basis in the
Treasury Securities, the Preferred Securities and the Purchase Contract will
not be affected by such delivery and release.
Sale or Disposition of PIES
Upon a disposition of PIES, a U.S. Holder will be treated as having sold,
exchanged or disposed of the Purchase Contracts and the Preferred Securities,
Applicable Ownership Interest of the Treasury Portfolio (in the case of a Tax
Event Redemption) or, in the case of Treasury PIES, the Treasury Securities
that comprise such PIES and generally will have gain or loss equal to the
difference between the portion of the proceeds to such U.S. Holder allocable to
the Purchase Contracts and the Preferred Securities, Applicable Ownership
Interest of the Treasury Portfolio or Treasury Securities, as the case may be,
and such U.S. Holder's respective adjusted tax bases in the Purchase Contract
and the Preferred Securities, Applicable Ownership Interest of the Treasury
Portfolio or Treasury Securities. Such gain or loss generally will be capital
gain or loss, except to the extent
S-56
<PAGE>
that such U.S. Holder is treated as having received an amount with respect to
accrued and unpaid interest on the Debentures allocable with respect to the
Preferred Securities, which will be treated as ordinary interest income, or to
the extent such U.S. Holder is treated as having received an amount with
respect to accrued Contract Adjustment Payments, which Industries will treat as
ordinary income, in each case to the extent not previously included in income.
Such capital gain or loss may be long-term capital gain or loss depending on
the holding period of the PIES. Capital gains of individuals are eligible for a
maximum tax rate of 20% if a U.S. Holder held the PIES for more than one year.
The deductibility of capital losses is subject to limitations. If a disposition
of the PIES occurs when the Purchase Contract has negative value, the U.S.
Holder should be considered to have received additional consideration for the
Preferred Securities, Applicable Ownership Interest of the Treasury Portfolio
or Treasury Securities 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 PIES at a time when the Purchase Contract has negative
value.
Payments to a U.S. Holder of Contract Adjustment Payments that have not
previously been included in the income of such U.S. Holder should either reduce
such U.S. Holder's tax basis in the Purchase Contract or result in an increase
in the amount realized on the disposition of the Purchase Contract. Any
Contract Adjustment Payments included in a U.S. Holder's income but not paid
should increase such U.S. Holder's tax basis in the Purchase Contract (see "--
Corporate PIES--Purchase Contracts--Income from Contract Adjustment Payments"
above).
Tax Event Redemption
A Tax Event Redemption will be a taxable event for U.S. Holders of Preferred
Securities. Gain or loss will be recognized by a U.S. Holder in an amount equal
to the difference between (1) the redemption price of the Preferred Securities
(whether paid directly to such U.S. Holder or applied by the Securities
Intermediary to the purchase of the Treasury Portfolio on behalf of holders of
the Corporate PIES), except to the extent of amounts paid in respect of accrued
but unpaid interest not previously included in income, which will be taxable as
such, and (2) the U.S. Holder's adjusted tax basis in the Preferred Securities.
Gain or loss realized by a U.S. Holder upon a Tax Event Redemption will be
capital gain or loss and may be long-term capital gain or loss depending upon
the holding period of the Preferred Securities. Capital gains of individuals
are eligible for a maximum tax rate of 20% if a U.S. Holder held Preferred
Securities for more than one year. The deductibility of capital losses is
subject to limitations.
Ownership of Treasury Portfolio
Capital Markets, the Trust and, by acquiring a Corporate PIES, 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 that portion of the
Treasury Portfolio that is a part of the Corporate PIES beneficially owned by
such U.S. Holder. Based on such agreement, each U.S. Holder will include in
income any amount earned on such pro rata portion of the Treasury Portfolio for
all United States federal, state and local income and franchise tax purposes.
The remainder of this summary assumes that U.S. Holders of the Corporate PIES
will be treated as the owners of the Applicable Ownership Interest of the
Treasury Portfolio that are a part of their Corporate PIES for United States
federal, state and local income and franchise tax purposes.
Interest Income and Original Issue Discount
The Treasury Portfolio will consist of stripped treasury securities. A U.S.
Holder of Corporate PIES will be required to treat its pro rata portion of each
treasury security in the Treasury Portfolio as a bond that was originally
issued on the date the Securities Intermediary acquired the relevant treasury
securities and will include OID in income over the life of the treasury
securities in an amount equal to the U.S. Holder's pro rata portion of the
excess of the amounts payable on such treasury securities over the value of
such treasury securities at the time the Securities Intermediary acquired them
on behalf of holders of the Corporate PIES. The amount of such excess will
constitute only a portion of the total amount payable in respect of the
Treasury
S-57
<PAGE>
Portfolio. Consequently, a substantial portion of each scheduled interest
payment to U.S. Holders will be treated as a tax-free return of the U.S.
Holder's investment in the Treasury Portfolio and will not be considered
current taxable income for federal income tax purposes.
A U.S. Holder, whether on the cash or accrual method of tax accounting, will
be required to include OID (other than OID on short-term treasury securities,
as defined below) in income for federal income tax purposes as it accrues on a
constant-yield-to-maturity basis. In the case of any treasury security with a
maturity of one year or less from the date it is purchased (a "short-term
treasury security"), in general, only accrual basis taxpayers will be required
to include OID in income as it is accrued. Unless such an accrual basis U.S.
Holder elects to accrue the OID on a short-term treasury security according to
the constant-yield-to-maturity method, such OID will be accrued on a straight-
line basis.
Tax Basis of the Treasury Portfolio
A U.S. Holder's initial tax basis in its Applicable Ownership Interest of the
Treasury Portfolio will equal such U.S. Holder's pro rata portion of the amount
paid by the Securities Intermediary for the Treasury Portfolio. A U.S. Holder's
tax basis in its Applicable Ownership Interest of the Treasury Portfolio will
be increased by the amount of OID included in income with respect thereto and
decreased by the amount of cash received in respect thereof.
Non-United States Holders
A "Non-United States Holder" is a holder that is not a U.S. Holder. As
discussed above, the PIES will be treated as a unit consisting of a Purchase
Contract and a Preferred Security, Debenture, Applicable Ownership Interest of
the Treasury Portfolio or Treasury Security, as the case may be. Moreover, the
Preferred Securities represent beneficial ownership interests in the
Debentures. The following discussion is subject to the discussion below
concerning backup withholding.
Under present United States federal income tax laws, a Non-United States
Holder generally will not be subject to United States federal income tax
withholding on payments of principal, premium (if any) or interest (including
OID) on a Preferred Security, Debenture, Applicable Ownership Interest of the
Treasury Portfolio or Treasury Security owned by a Non-United States Holder,
provided that such Non-United States Holder provides the certification
contained on an IRS Form W-8 or a substantially similar form. If a Non-United
States Holder cannot satisfy the requirements of the "portfolio interest"
exception, payments of premium (if any) and interest made to such Non-United
States Holder generally will be subject to a 30% withholding tax.
Industries will generally withhold a 30% withholding tax on Contract
Adjustment Payments and dividends paid on the Common Shares acquired under a
Purchase Contract.
A Non-United States Holder may reduce or eliminate the 30% withholding tax on
interest, Contract Adjustment Payments or dividends discussed above if such
holder provides Capital Markets or Industries, or their respective paying
agents, as the case may be, with a properly executed (1) IRS Form 1001 (or
successor form) properly claiming an exemption from, or a reduction of, such
withholding tax under the benefit of an applicable tax treaty or (2) IRS Form
4224 (or successor form) stating that payment with respect to the PIES,
Preferred Securities, Debentures, Applicable Ownership Interest of the Treasury
Portfolio, Treasury Securities or Common Shares is not subject to withholding
tax because it is effectively connected with the beneficial owner's conduct of
a trade or business in the United States. Under future regulations, Non-United
States Holders will generally be required to provide an IRS Form W-8 in lieu of
IRS Form 1001 and IRS Form 4224, although alternative documentation may be
applicable in certain situations.
Generally, a Non-United States Holder will not be subject to United States
federal income taxes on any amount which constitutes gain upon sale, exchange,
retirement or other disposition of a PIES, Preferred Security, Debenture,
Applicable Ownership Interest of the Treasury Portfolio, Treasury Security or
Common Share, provided the gain is not effectively connected with the conduct
of a trade or business in the United States by the Non-United States Holder.
Certain other exceptions may be applicable, and a Non-United States Holder
should consult its tax advisor in this regard.
S-58
<PAGE>
Backup Withholding Tax and Information Reporting
Payments under the PIES, the Preferred Securities or the Common Shares
acquired under a Purchase Contract, the proceeds received with respect to a
fractional Common Share upon settlement of a Purchase Contract, and the sale of
the PIES, the Preferred Securities or the Common Shares acquired under a
Purchase Contract may be subject to information reporting and United States
federal backup withholding tax at the rate of 31% if the U.S. Holder thereof
fails to supply an accurate taxpayer identification number or otherwise fails
to comply with applicable United States information reporting or certification
requirements. No information reporting or backup withholding will be required
with respect to payments made by Capital Markets, Industries or any paying
agent to Non-United States Holders if a statement described above under "Non-
United States Holders" has been received (and the payor does not have actual
knowledge that the beneficial owner is a U.S. Holder). Any amounts so withheld
will be allowed as a credit against such U.S. Holder's United States federal
income tax liability.
ERISA CONSIDERATIONS
Generally, employee benefit plans that are subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), plans and individual
retirement accounts that are subject to Section 4975 of the Code and entities
whose assets are considered assets of such plans (collectively, "Plans") may
purchase Corporate PIES subject to the investing fiduciary's determination that
the investment satisfies ERISA's fiduciary standards and other requirements
applicable to investments by Plans. Accordingly, among other factors, the
fiduciary should consider whether the investment would satisfy the prudence and
diversification requirements of ERISA and would be consistent with the
documents and instruments governing the Plans.
Prohibited Transactions
General. Section 406 of ERISA and Section 4975 of the Code prohibit
fiduciaries from engaging in specified transactions involving Plan assets with
persons that are "parties in interest" under ERISA or "disqualified persons"
under the Code with respect to the Plan. A violation of these "prohibited
transaction" rules may generate excise tax and other liabilities under ERISA
and the Code. Thus, a Plan fiduciary considering an investment in Corporate
PIES also should consider whether such an investment might constitute or give
rise to a prohibited transaction under ERISA or the Code for which no exemption
is available. For example, regardless of whether the Trust were deemed to hold
"plan assets" (discussed below), the purchase and holding of Corporate PIES by
a Plan with respect to which Industries, the Trustees, the Underwriters or any
of their affiliates is a party in interest or disqualified person could
constitute a prohibited transaction under ERISA or the Code unless an exemption
were available for such purchase.
In this regard, the United States Department of Labor ("DOL") has issued
prohibited transaction class exemptions ("PTCEs") that may apply to the
acquisition and holding of the Corporate PIES. These class exemptions are PTCE
84-14 (respecting transactions determined by independent qualified professional
asset managers), PTCE 90-1 (respecting insurance company separate accounts),
PTCE 91-38 (respecting bank collective trust funds), PTCE 95-60 (respecting
insurance company general accounts) and PTCE 96-23 (respecting transactions
determined by in-house asset managers).
Plan Assets Regulation
General Rule. Certain transactions involving the operation of the Trust also
might be deemed to constitute prohibited transactions under ERISA and the Code
if assets of the Trust were deemed to be assets of an investing Plan. Pursuant
to a DOL regulation (the "Plan Assets Regulation"), in general when a Plan
acquires an equity interest in an entity such as the Trust (i.e., an entity
which is not an operating company or an investment company registered under the
Investment Company Act of 1940, as amended), the Plan's assets include both the
equity interest and an undivided interest in each of the underlying assets of
the entity unless it is established that one of several exceptions under the
Plan Assets Regulation applies. Certain of these exceptions, as may be
applicable here, are described below.
S-59
<PAGE>
Exception for Publicly Offered Securities. The Plan Assets Regulation
provides an exception to the "look through" treatment described above when a
Plan acquires a "publicly-offered security." A publicly-offered security is
defined under the Plan Assets Regulation as a security that is (1) freely
transferable, (2) part of a class of securities that is owned by 100 or more
investors independent of the issuer and of one another at the conclusion of the
initial offering and (3) either is (a) part of a class of securities registered
under Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), or (b) part of an offering of securities to the public
pursuant to an effective registration statement under the Securities Act and
the class of securities of which such security is a part is registered under
the Exchange Act within 120 days (or such later time as may be allowed by the
SEC) after the end of the fiscal year of the issuer during which the offering
of such securities to the public occurred. There are no material restrictions
imposed on the transfer of the Corporate PIES or, except for the pledge of
Preferred Securities that are a part of the Corporate PIES, the Preferred
Securities, and both the Corporate PIES and the Preferred Securities will be
registered under the Exchange Act. Although it is anticipated that the
Corporate PIES and the Preferred Securities may qualify as publicly-offered
securities within the meaning of the Plan Assets Regulation, no assurance can
be given, and no monitoring or other measures will be taken to ensure that such
criteria will be met.
Exception for Acquisition of Indebtedness. Although the Corporate PIES and
Preferred Securities may constitute publicly offered securities within the
meaning of the Plan Assets Regulation, upon a liquidation of the Trust the
Debentures may be distributed to the holders individually and without
registration under the Exchange Act.
The Plan Assets Regulation provides that an entity's assets will not be
deemed to be plan assets if equity participation in the entity by "benefit plan
investors" is not "significant." In general, an "equity interest" is defined
under the Plan Assets Regulation as any interest in an entity other than an
instrument which is treated as indebtedness under applicable local law and
which has no substantial equity features. Although there is little published
authority available, Capital Markets believes that the Debentures should be
treated as debt rather than equity interests under the Plan Assets Regulation
because the Debentures (1) should be treated as indebtedness under applicable
local law and as debt, rather than equity, for United States tax purposes (see
"Certain United States Federal Income Tax Consequences" starting on page S-52)
and (2) should not be deemed to have any "substantial equity features."
Consequences of Plan Asset Treatment
If the Corporate PIES, the Preferred Securities or the Debentures fail to
meet the criteria of any of the applicable exceptions discussed above, and an
investment by benefit plan investors is or becomes "significant," the assets of
the Trust (or, with respect to the Debentures, the assets of Capital Markets if
Capital Markets were held not to constitute an operating company within the
meaning of the Plan Assets Regulation) may be deemed to include plan assets
subject to regulation under ERISA and the Code. Accordingly, transactions
involving these assets and "parties in interest" or "disqualified persons" with
respect to investing Plans might be prohibited unless an exemption were
available. In general, equity participation in an entity by benefit plan
investors is not significant on any date if, immediately after the most recent
acquisition of any equity interests in the entity, less than 25% of the value
of each class of equity interests in the entity is held by benefit plan
investors. No monitoring or other measures will be taken to determine or ensure
that the requirements of this or any other exception under the Plan Assets
Regulation are met with respect to the Corporate PIES, the Preferred Securities
or the Debentures. Accordingly, no assurance can be given that an exception
will apply to all or any transactions involving such assets.
Any fiduciary proposing to acquire the Corporate PIES on behalf of a Plan
should consult with ERISA counsel for the Plan and should not acquire the
Corporate PIES unless it is determined that such acquisition and holding does
not and will not constitute a prohibited transaction and will satisfy the
applicable fiduciary requirements imposed under ERISA. Any such acquisition by
a Plan will be deemed a representation by the Plan and the fiduciary effecting
the investment on behalf of the Plan that such acquisition and holding
satisfies
S-60
<PAGE>
the applicable fiduciary requirements of ERISA and is entitled to exemption
relief from the prohibited transaction provisions of ERISA and the Code in
accordance with one or more of the foregoing PTCEs or another available
prohibited transaction exemption or otherwise will not result in a nonexempt
prohibited transaction.
UNDERWRITING
Industries, Capital Markets and the Trust have entered into an underwriting
agreement (the "Underwriting Agreement") with the underwriters named below (the
"Underwriters"), pursuant to which, and subject to its terms and conditions,
Industries and the Trust have agreed to sell to the Underwriters and the
Underwriters have agreed to purchase from them all of the Corporate PIES. Set
forth below is the total number of Corporate PIES that each of the Underwriters
will purchase.
<TABLE>
<CAPTION>
Number of
Underwriters Corporate PIES
------------ --------------
<S> <C>
Lehman Brothers Inc........................................ 3,300,000
Goldman, Sachs & Co........................................ 1,350,000
Morgan Stanley & Co. Incorporated.......................... 1,350,000
---------
Total.................................................. 6,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to purchase the Corporate PIES are subject to the satisfaction of certain
conditions, including the approval of certain legal matters by their counsel.
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters must purchase all of the Corporate PIES if they purchase any of
them.
The Underwriters will pay the Trust the offering price. Industries and the
Trust will not pay any underwriting commissions. Because the proceeds from the
sale of the Corporate PIES will be invested in the Debentures, Capital Markets
will pay to the Underwriters $1.50 for each Corporate PIES sold (or $10,350,000
in the aggregate, assuming the over-allotment option is exercised in full), as
compensation for arranging that investment. Industries and the Trust estimate
that their expenses in connection with the offering of the Corporate PIES will
be approximately $650,000.
The Underwriters have advised Industries and the Trust that they will offer
the Corporate PIES directly to the public initially at the offering price and
to certain dealers at the offering price less a selling concession not to
exceed $0.90 per Corporate PIES. The Underwriters may allow and these dealers
may reallow a concession not to exceed $0.10 per Corporate PIES to other
dealers. After the initial offering of the Corporate PIES, the Underwriters may
change the public offering price, the concession to selected dealers and the
reallowance to other dealers.
Industries and the Trust have granted to the Underwriters an option to
purchase an aggregate of up to an additional 900,000 Corporate PIES solely to
cover over-allotments, at the initial offering price to the public. Any or all
of such option may be exercised at any time on or before 30 days after the date
of the Underwriting Agreement. To the extent that the option is exercised, each
Underwriter will be committed, subject to certain conditions, to purchase a
number of the additional Corporate PIES proportionate to such Underwriter's
initial commitment as indicated in the preceding table.
Industries, Capital Markets and the Trust have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments which the Underwriters would be
required to make regarding any liabilities that they may have under the
Securities Act.
Prior to this offering, there has been no public market for the Corporate
PIES. The Corporate PIES have been approved for listing on the NYSE, and
trading is expected to commence within five business days after the date of
this Prospectus Supplement. In order to meet one of the requirements for
listing on the NYSE, the
S-61
<PAGE>
Underwriters have undertaken to sell the Corporate PIES to a minimum of 400
beneficial owners. The Underwriters have advised Industries and the Trust that
they presently intend to make a market in the Corporate PIES as permitted by
applicable laws and regulations. The Underwriters are not obligated to make a
market in the Corporate PIES, however, and they may discontinue this market
making at any time in their sole discretion. Accordingly, Industries and the
Trust cannot assure investors that there will be adequate liquidity or adequate
trading markets for the Corporate PIES.
In connection with the offering of the Corporate PIES, the Underwriters may
engage in certain transactions that stabilize the price of the Corporate PIES.
These transactions may consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of the Corporate PIES. If the Underwriters
create a short position in the Corporate PIES in connection with this offering,
by selling more Corporate PIES than are listed on the cover page of this
Prospectus Supplement, then the Underwriters may reduce that short position by
purchasing Corporate PIES in the open market. In general, the purchase of a
security for the purpose of stabilization or reducing a short position could
cause the price of that security to be higher than it might otherwise be in the
absence of those purchases.
None of Industries, Capital Markets, the Trust nor the Underwriters makes any
representation or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of the Corporate
PIES. In addition, none of Industries, Capital Markets, the Trust nor the
Underwriters makes any representation that anyone will engage in these
transactions or that these transactions, once commenced, will not be
discontinued without notice.
The Underwriters have, directly and indirectly, provided investment and
commercial banking or financial advisory services to NIPSCO and its affiliates,
for which they have received customary fees and commissions, and expect to
provide these services to Industries and its affiliates in the future, for
which they expect to receive customary fees and commissions.
LEGAL MATTERS
The legality of the Purchase Contracts, the Common Shares, the Debentures and
the Guarantee offered hereby will be passed upon for Industries, Capital
Markets and the Trust by Schiff Hardin & Waite, Chicago, Illinois. Certain
legal matters will be passed upon for the Underwriters by Simpson Thacher &
Bartlett, New York, New York. Certain matters of Delaware law relating to the
validity of the Preferred Securities, the enforceability of the Declaration and
the creation of the Trust will be passed upon by Richards, Layton & Finger,
P.A., Wilmington, Delaware.
EXPERTS
The consolidated financial statements and schedules of Industries and its
subsidiaries incorporated by reference in the accompanying Prospectus from
Industries' 1997 Annual Report on Form 10-K and Current Report on Form 8-K
dated February 8, 1999 have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
incorporated by reference in the accompanying Prospectus in reliance upon the
authority of such firm as experts in giving such reports.
The consolidated financial statements and schedule of Bay State and its
subsidiaries incorporated by reference in the accompanying Prospectus from Bay
State's 1998 Annual Report on Form 10-K have been audited by KPMG Peat Marwick
LLP, independent certified public accountants, as indicated in their reports
with respect thereto, and are incorporated by reference in the accompanying
Prospectus in reliance upon such reports and upon the authority of said firm as
experts in accounting and auditing. The report of KPMG Peat Marwick LLP
covering the September 30, 1998 consolidated financial statements refers to a
change in the method of accounting for postretirement benefit plans.
S-62
<PAGE>
PROSPECTUS
$850,000,000
NIPSCO Capital Markets, Inc.
Debentures
Medium-Term Notes
----------------
NIPSCO Capital Trust I
Preferred Securities
Guaranteed as set forth herein by
NIPSCO Capital Markets, Inc.
----------------
NIPSCO Industries, Inc.
Common Shares
Stock Purchase Contracts
Stock Purchase Units
Obligations Pursuant to Support Agreement
----------------
NIPSCO Capital Markets, Inc. may offer debentures and medium-term notes.
NIPSCO Capital Trust I may offer preferred securities that will be guaranteed
by NIPSCO Capital Markets, Inc. to the extent described in this Prospectus.
NIPSCO Industries, Inc. may offer stock purchase contracts, stock purchase
units and its Common Shares. In addition, any securities issued by NIPSCO
Capital Markets, Inc. will be entitled to the benefit of the Support Agreement
of NIPSCO Industries, Inc. described in this Prospectus.
These securities may be offered from time to time, in amounts, on terms and
at prices that will be determined at the time they are offered for sale. These
terms and prices will be described in more detail in one or more supplements to
this Prospectus, which will be distributed at the time the securities are
offered.
----------------
This Prospectus may not be used to sell any of the securities unless it is
accompanied by a Prospectus Supplement.
----------------
The Common Shares are listed on the New York Stock Exchange, the Chicago
Stock Exchange and the Pacific Exchange under the trading symbol "NI." Each
Prospectus Supplement offering any other securities will state whether those
securities are listed or will be listed on any national securities exchange.
----------------
The securities may be sold to or through underwriters, through dealers or
agents, directly to purchasers or through a combination of these methods. If an
offering of securities involves any underwriters, dealers or agents, then the
applicable Prospectus Supplement will name the underwriters, dealers or agents
and will provide information regarding any fee, commission or discount
arrangements made with those underwriters, dealers or agents.
----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this Prospectus is January 22, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary........................................................ 3
Available Information..................................................... 6
Incorporation of Certain Documents by Reference........................... 6
Forward-Looking Information............................................... 7
Industries................................................................ 7
Capital Markets........................................................... 8
The Trust................................................................. 9
Ratio of Earnings to Fixed Charges........................................ 10
Use of Proceeds........................................................... 10
Description of the Debentures............................................. 11
Description of the Preferred Securities................................... 18
Description of the Guarantee.............................................. 28
Relationship Among the Preferred Securities, the Debentures and the
Guarantee................................................................ 31
Description of the Common Shares.......................................... 32
Description of the Stock Purchase Contracts and the Stock Purchase Units.. 36
Description of Medium-Term Notes.......................................... 36
Description of the Support Agreement...................................... 54
Book-Entry Issuance....................................................... 55
Plan of Distribution...................................................... 58
Legal Matters............................................................. 59
Experts................................................................... 59
</TABLE>
2
<PAGE>
PROSPECTUS SUMMARY
Three related companies will be offering the securities described in this
Prospectus. These companies are NIPSCO Industries, Inc. and two of its wholly-
owned subsidiaries, NIPSCO Capital Markets, Inc. and NIPSCO Capital Trust I.
The following table lists the securities to be offered by each company:
<TABLE>
<C> <S>
NIPSCO Capital Markets, Inc. ("Capital Markets").. Debentures
Medium-Term Notes
NIPSCO Capital Trust I (the "Trust").............. Preferred Securities
(guaranteed as set forth
herein by Capital Markets)
NIPSCO Industries, Inc. ("Industries")............ Stock Purchase Contracts
Stock Purchase Units
Common Shares
Obligations under the
Support Agreement
</TABLE>
The Companies
Industries
NIPSCO Industries, Inc. is an energy and utility-based holding company that
provides electric energy, natural gas and water to the public through seven
wholly-owned regulated subsidiaries. Industries also provides utility-related
services through these and other subsidiaries, such as installing, repairing
and maintaining underground pipelines, and locating and marking utility lines.
In addition, Industries has a number of wholly-owned non-regulated subsidiaries
that provide energy and utility services, such as energy marketing and trading,
power generation, and gas transmission, supply and storage. In addition,
pursuant to a definitive merger agreement entered into on December 18, 1997,
Industries has agreed to acquire Bay State Gas Company ("Bay State"), which
provides natural gas distribution service in Massachusetts, New Hampshire and
Maine. Industries was incorporated under the laws of Indiana in 1987. Its
principal executive offices are located at 801 East 86th Avenue, Merrillville,
Indiana 46410, and its telephone number is (219) 853-5200.
Capital Markets
NIPSCO Capital Markets, Inc. is a wholly-owned subsidiary of Industries that
engages in financing activities to generate funds for Industries and for
certain of its subsidiaries. Capital Markets was incorporated under the laws of
Indiana in 1989. Its offices are located at 801 East 86th Avenue, Merrillville,
Indiana 46410. Its telephone number is (219) 853-5200.
The Trust
NIPSCO Capital Trust I is a business trust that was created in December 1998
under the laws of the State of Delaware. Capital Markets is the sponsor of the
Trust and owns all of the common securities of the Trust. The Trust is managed
by five trustees. Capital Markets may dissolve the Trust at any time. The
Trust's address is in care of Capital Markets, 801 East 86th Avenue,
Merrillville, Indiana 46410. Its telephone number is (219) 853-5200.
The Securities
The securities that may be sold pursuant to this Prospectus are: Industries'
Common Shares and Stock Purchase Contracts relating to Industries' Common
Shares; the Trust's Preferred Securities (which will be guaranteed by Capital
Markets); Stock Purchase Units (consisting of Stock Purchase Contracts and
Preferred
3
<PAGE>
Securities); and Capital Markets' Debentures and Medium-Term Notes, each of
which is described briefly below. In addition, any securities issued by Capital
Markets will be entitled to the benefit of a Support Agreement with Industries.
The aggregate initial offering price of all of the securities to be sold will
not exceed $850 million. At the time any of these securities are offered, a
Prospectus Supplement will be distributed that will describe in more detail the
specific terms and price of the securities being sold and whether those
securities will be sold to or through underwriters or by another means of
distribution.
Stock Purchase Contracts and Common Shares
Industries may offer stock purchase contracts ("Stock Purchase Contracts")
for the purchase of its common shares, without par value (the "Common Shares").
The Common Shares are listed on the New York Stock Exchange (the "NYSE"), the
Chicago Stock Exchange (the "CSE") and the Pacific Exchange (the "PE") under
the ticker symbol "NI." The price and terms of the Stock Purchase Contracts
will be determined at the time or times of offering. If Industries offers its
Stock Purchase Contracts, a Prospectus Supplement will provide information
about the terms of the offering, including the number of Common Shares to be
sold, the purchase price of the Common Shares, the date or dates on which the
Common Shares will be purchased and any amounts that Industries may be required
to pay to the holders of the Stock Purchase Contracts.
Preferred Securities
The Trust may offer its preferred securities (the "Preferred Securities"),
each of which will represent an undivided beneficial ownership interest in the
assets of the Trust. The price and terms of the Preferred Securities will be
determined at the time of offering. If the Trust offers its Preferred
Securities, a Prospectus Supplement will provide information about the terms of
the offering, including the specific title of the Preferred Securities, the
aggregate number of Preferred Securities to be sold, the stated liquidation
amount and information regarding the rights of holders of Preferred Securities
to receive cumulative cash distributions. This will include information
regarding the rate of payment, whether distributions can be extended or
deferred, and whether the Preferred Securities can be redeemed. Payments with
respect to the Preferred Securities will be fully and unconditionally
guaranteed by Capital Markets to the extent described in the Prospectus
Supplement.
In connection with any sale of the Preferred Securities, the Trust will sell
common securities (the "Common Securities") to Capital Markets, each of which
will represent an undivided beneficial ownership interest in the assets of the
Trust. The Trust expects to use the proceeds from the sale of any Preferred
Securities and Common Securities (collectively, the "Trust Securities") to
purchase Debentures from Capital Markets. The Debentures may give Capital
Markets the right to defer payments of interest on the Debentures. If Capital
Markets decides to defer interest payments on the Debentures, then any
distributions on the Preferred Securities would be similarly deferred. At any
time interest payments are being deferred, neither Capital Markets nor
Industries would be able to declare or pay any cash distributions with respect
to their respective capital stock or any debt securities ranking junior to the
Debentures. Holders of Preferred Securities would not lose their cash
distributions; rather, interest would continue to accrue on the Debentures,
and, as a result, distributions would continue to accumulate on the Preferred
Securities until paid. The Prospectus Supplement will provide more detailed
information about Capital Markets' right to defer interest payments on the
Debentures and the impact of deferral upon the holders of Preferred Securities.
Stock Purchase Units
Industries may offer stock purchase units ("Stock Purchase Units"), each of
which will consist of (i) a Stock Purchase Contract and (ii) a Preferred
Security or a U.S. Treasury security. The Preferred Security or the U.S.
Treasury security will be pledged as collateral to secure the holder's
obligation to purchase Common
4
<PAGE>
Shares under the Stock Purchase Contract. If Industries offers Stock Purchase
Units, a Prospectus Supplement will provide information about the terms of the
offering, including the specific terms of the Stock Purchase Contracts and
information about the security or obligation that will secure the holder's
obligation to purchase Common Shares.
Debentures
Capital Markets may offer and sell to the Trust a series of debentures (the
"Debentures"), which the Trust would purchase with the proceeds from the sale
of its Preferred Securities to the public and the sale of its Common Securities
to Capital Markets. The Debentures would be the sole assets of the Trust. If
Capital Markets sells Debentures to the Trust, a Prospectus Supplement will
provide specific information about the Debentures, including their specific
designation, aggregate principal amount, denominations, date of maturity,
interest rate (which may be fixed or variable), the dates upon which interest
will be paid and whether payments of interest may be deferred. The Prospectus
Supplement also will indicate whether the Debentures are redeemable or
convertible or exchangeable into other securities, and whether the Debentures
contain any sinking fund provisions or any other special terms.
As described above under "Preferred Securities," the Debentures may give
Capital Markets the right to defer payments of interest on the Debentures. If
so, the Prospectus Supplement will provide more detailed information about this
right.
Medium-Term Notes
Capital Markets may offer any series of medium-term notes (the "Medium-Term
Notes" or "Notes") that will be due nine months or more from the date of
issuance. The Medium-Term Notes may bear interest at fixed rates or floating
rates based upon the CD Rate, the CMT Rate, the Commercial Paper Rate, the
Eleventh District Cost of Funds Rate, the Federal Funds Rate, LIBOR, the Prime
Rate, the Treasury Rate or any formula using these rates. If Capital Markets
offers Medium-Term Notes, a Prospectus Supplement will provide specific
information about the Medium-Term Notes, such as their maturity date and
interest rate, including whether the notes will be regular floating rate notes,
floating rate/fixed rate notes or inverse floating rate notes, and which market
rate will serve as the reference for determining the interest rate.
5
<PAGE>
AVAILABLE INFORMATION
Industries files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). You may read and copy
any of these reports, proxy statements and other information at the
Commission's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. You may obtain information on the operation of the Public Reference Room
by calling the Commission at 1-800-SEC-0030. The Commission also maintains a
site on the World Wide Web that contains reports, proxy statements and other
information regarding Industries. The address of the Commission's Web site is
http://www.sec.gov. Information about Industries is also available at
http://www.nipsco.com; that information, however, is not a part of this
Prospectus except to the extent it is specifically incorporated by reference in
this Prospectus.
Industries, Capital Markets and the Trust together have filed with the
Commission a Registration Statement on Form S-3 (including any amendments
thereto, the "Registration Statement") under the Securities Act of 1933 (the
"Securities Act") with respect to the securities offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement. For
further information about Industries, Capital Markets, the Trust and the
securities offered hereby, reference is made to the Registration Statement and
the exhibits thereto, which may be inspected at the Commission's Public
Reference Room or through the Commission's Web site.
In a letter dated September 25, 1992, the staff of the Commission informed
Industries and Capital Markets that it would not recommend enforcement action
to the Commission if Capital Markets did not file periodic reports pursuant to
Sections 13 and 15(d) of the Securities Exchange Act of 1934 (the "Exchange
Act"), subject to Industries' compliance with the conditions set forth in the
letter. In reliance upon that letter, Capital Markets has not filed, and does
not intend to file, any documents under the Exchange Act. Furthermore, Capital
Markets does not intend to issue any periodic or other reports to holders of
any securities to be issued by Capital Markets. The Commission's staff also has
advised Capital Markets that Capital Markets does not need to include its
financial information in any registration statement on Form S-3 filed by
Capital Markets and Industries with respect to debt securities subject to the
Support Agreement.
This Prospectus does not include any separate financial statements of the
Trust. Capital Markets and the Trust do not consider that those financial
statements would be material to the holders of the Preferred Securities because
the Trust is a special purpose entity, with no operating history or independent
operations, that is not engaged in and does not propose to engage in any
activity other than holding, as trust assets, the Debentures of Capital Markets
and issuing its Trust Securities as described below. Furthermore, taken
together, Capital Markets' obligations under the Debentures, the related
Indenture, the Trust's Amended and Restated Declaration of Trust and the
related Guarantee provide, in the aggregate, a full, irrevocable and
unconditional guarantee of payment with respect to the Trust Securities. For
this reason, Capital Markets does not expect that the Trust will file reports
with the Commission pursuant to the Exchange Act.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by Industries and Bay State with the Commission
pursuant to the Exchange Act are incorporated by reference and made a part of
this Prospectus:
(a) Industries' Annual Report on Form 10-K for the fiscal year ended
December 31, 1997;
(b) Industries' Quarterly Reports on Form 10-Q for the fiscal quarters
ended March 31, 1998, June 30, 1998 and September 30, 1998;
(c) The description of Industries' Common Shares and associated preferred
share purchase rights, contained in Industries' registration statement
on Form 8-B filed pursuant to Section 12 of the Exchange Act and any
amendments and reports filed for the purpose of updating that
description;
(d) Bay State's Annual Report on Form 10-K for the year ended September 30,
1998;
6
<PAGE>
(e) Bay State's Current Reports on Form 8-K dated December 30, 1997 and
November 25, 1998; and
(f) All documents filed by Industries with the Commission 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 made by
this Prospectus.
Any statement contained in this Prospectus, or in a document filed after the
date of this Prospectus that becomes incorporated by reference in this
Prospectus, that modifies or supersedes any statement contained in a document
that is presently incorporated by reference in this Prospectus, will be
considered to be, for the purposes of this Prospectus, to be so modified or
superseded. Any statement that is considered to be modified or superseded only
will be considered to be a part of this Prospectus in its modified or
superseded form.
Each person who receives a copy of this Prospectus has the right to receive,
a copy of any or all of the information that has been incorporated by reference
in this Prospectus but not delivered with this Prospectus. Industries will
provide any copies without charge. If you would like any copies, please call or
write to Nina M. Rausch, Secretary, NIPSCO Industries, Inc., 5265 Hohman
Avenue, Hammond, Indiana 46320, (219) 853-5200.
FORWARD-LOOKING INFORMATION
Certain of the matters discussed in this Prospectus or in any accompanying
Prospectus Supplement and in the documents incorporated by reference herein or
therein contain forward-looking statements within the meaning of the securities
laws. Forward-looking statements include terms such as "may," "will," "expect,"
"believe," "plan" and other similar terms. Industries, Capital Markets and the
Trust each cautions that, while each of them believes those statements to be
based on reasonable assumptions and makes those statements in good faith, there
can be no assurance that the actual results will not differ materially from
such assumptions or that the expectations set forth in the forward-looking
statements derived from such assumptions will be realized. Investors should be
aware of important factors that could have a material impact on future results.
These factors include, but are not limited to: the weather; the federal and
state regulatory environment; year 2000 issues; the economic climate; regional,
commercial, industrial and residential growth in the service territories served
by Industries' subsidiaries; customers' usage patterns and preferences; the
speed and degree to which competition enters the utility industry; changing
conditions in the capital and equity markets; and other uncertainties, all of
which are difficult to predict, and many of which are beyond the control of
Industries, Capital Markets and the Trust.
INDUSTRIES
NIPSCO Industries, Inc. is an energy and utility-based holding company that
provides electric energy, natural gas and water for residential, commercial and
industrial uses in Indiana and Ohio through its seven wholly-owned regulated
subsidiaries. These subsidiaries are Crossroads Pipeline Company, Harbour Water
Corporation, Indianapolis Water Company, Kokomo Gas and Fuel Company, Liberty
Water Company, Northern Indiana Fuel and Light Company, Inc. and Northern
Indiana Public Service Company. In addition, Industries owns a number of non-
utility subsidiaries, including IWC Resources Corporation, Capital Markets,
NIPSCO Development Company, Inc., NI Energy Services, Inc. and Primary Energy,
Inc.
Northern Indiana Public Service Company ("Northern Indiana"), Industries'
largest and dominant subsidiary, is a public utility operating company that
supplies electricity and natural gas to the public. Northern Indiana operates
in 30 counties in northern Indiana, serving an area of about 12,000 square
miles with a population of approximately 2.2 million. At September 30, 1998,
Northern Indiana was supplying natural gas to approximately 659,725 customers
and electricity to approximately 418,754 customers. Kokomo Gas and Fuel Company
("Kokomo Gas") and Northern Indiana Fuel and Light Company, Inc. ("NIFL") are
public
7
<PAGE>
utility operating companies that supply natural gas to the public. Kokomo Gas
operates in the City of Kokomo, Indiana and the surrounding six counties, while
NIFL operates in five counties in the northeast corner of Indiana. At September
30, 1998, Kokomo Gas was serving approximately 33,138 customers in its service
territory, and NIFL was serving approximately 33,656 customers in its service
territory. Both of the Kokomo Gas and NIFL service territories are contiguous
to Northern Indiana's service territory. Crossroads Pipeline Company is an
interstate natural gas pipeline. Capital Markets handles financing for ventures
of Industries and its subsidiaries (excluding Northern Indiana). NIPSCO
Development Company makes various investments, including real estate and
venture capital investments. NI Energy Services, Inc. coordinates the energy-
related diversification ventures of Industries. Primary Energy, Inc. arranges
energy-related projects with large industrial customers.
IWC Resources Corporation ("IWCR") is a holding company that owns and
operates eight subsidiaries, including three regulated water utility companies,
Indianapolis Water Company, Harbour Water Corporation and Liberty Water
Company. These water companies supply water for residential, commercial and
industrial uses, and fire protection service in Indianapolis, Indiana and the
surrounding areas. Together, these water companies serve a territory covering
over 300 square miles in central Indiana. At September 30, 1998, these
companies were providing service to approximately 246,080 customers.
In addition to its water utility companies, IWCR has five other wholly-owned
subsidiaries. These subsidiaries are SM&P Utility Resources, Inc., Miller
Pipeline Corporation, Waterway Holdings, Inc., Utility Data Corporation and IWC
Services, Inc. SM&P Utility Resources, Inc. performs underground utility
locating and marking services in Indiana and other states. Miller Pipeline
Corporation ("MPC") installs underground pipelines for natural gas utilities.
In addition, MPC sells products and services related to infrastructure
preservation and replacement. IWCR, principally through Waterway Holdings,
Inc., owns real estate that it expects to sell or develop in the future.
Utility Data Corporation provides customer relations, customer billing and
other data processing services for IWCR's water companies and for other water
and sewer utilities. IWC Services, Inc. provides laboratory water testing
services, principally for water utilities. Through IWC Services, Inc., IWCR is
the majority (52%) partner in the White River Environmental Partnership, which
entered into a 10-year contract, effective January 1998, to operate and
maintain two advanced wastewater treatment facilities, as well as a collection
system, for the city of Indianapolis, Indiana. White River Environmental
Partnership actively is seeking new markets and opportunities for contract
management services pursuant to expanded governmental privatization efforts.
On December 18, 1997, Industries entered into a definitive merger agreement
with Bay State Gas Company ("Bay State"), under which Industries will acquire
all of the common stock of Bay State in a transaction valued at approximately
$551 million. Bay State, one of the largest natural gas utilities in New
England, provides natural gas distribution service to more than 300,000
customers in Massachusetts, New Hampshire and Maine. The merger is expected to
be completed in early 1999.
Industries was incorporated in 1987 under the laws of the State of Indiana.
Industries' principal executive offices are located at 801 East 86th Avenue,
Merrillville, Indiana 46410. Its telephone number is (219) 853-5200.
CAPITAL MARKETS
NIPSCO Capital Markets, Inc. is a wholly-owned subsidiary of Industries that
engages in financing activities to generate funds for the business operations
of Industries and its wholly-owned subsidiaries (excluding Northern Indiana).
On April 4, 1989, Capital Markets and Industries entered into a Support
Agreement, which subsequently was amended as of May 15, 1989, December 10,
1990, and February 14, 1991 (as so amended, the "Support Agreement"). Under the
Support Agreement, Industries has agreed, among other things, to ensure the
timely
8
<PAGE>
payment of principal and interest owed on any debt securities issued by Capital
Markets, including any premium payments, with the limitation that no holder of
such debt securities will have recourse to or against the stock or assets of
Northern Indiana, or against any interest of Industries or Capital Markets
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 (the "Investment Company Act") granting an
exemption to Capital Markets from all of the provisions of the Investment
Company Act, subject to Capital Markets' compliance with the conditions set
forth therein.
Capital Markets was incorporated in 1989 under the laws of the State of
Indiana. Capital Markets' principal executive offices are located at 801 East
86th Avenue, Merrillville, Indiana 46410. Its telephone number is (219) 853-
5200.
THE TRUST
NIPSCO Capital Trust I is a statutory business trust that was created in
December 1998 under the Delaware Business Trust Act (the "Trust Act"). The
Trust currently is governed by (i) a declaration of trust dated as of December
17, 1998, that was executed by Capital Markets, as sponsor of the Trust, and by
certain trustees of the Trust and (ii) a certificate of trust dated as of
December 17, 1998 filed with the Secretary of State of the State of Delaware.
Prior to the issuance of the Preferred Securities, the declaration of trust
will be amended and restated in its entirety (as so restated, the
"Declaration"), substantially in the form filed as an exhibit to the
Registration Statement.
At such time as the Trust issues and sells the Preferred Securities, Capital
Markets will purchase the Common Securities in an aggregate liquidation amount
equal to at least three percent of the total capital of the Trust. The Common
Securities will constitute all of the common securities of the Trust. Upon the
sale and issuance of the Trust Securities, the Trust will use all of the
proceeds to purchase the Debentures. The Trust exists for the exclusive
purposes of (i) selling and issuing the Trust Securities, which represent
undivided beneficial ownership interests in the assets of the Trust, (ii) using
the proceeds from such sale and issuance to purchase the Debentures and (iii)
except as otherwise limited in the Declaration, engaging in only those other
activities necessary or incidental thereto. The Trust has a term of
approximately seven years but may be dissolved earlier as provided in the
Declaration.
The Trust's business and affairs will be conducted initially by five trustees
(the "Trustees") appointed by Capital Markets, as sole holder of the Common
Securities. Three of the Trustees (the "Regular Trustees") are employees,
officers or persons affiliated with Capital Markets. Pursuant to the
Declaration, the fourth Trustee is The Chase Manhattan Bank, a financial
institution that is unaffiliated with Capital Markets, which serves as
institutional trustee under the Declaration (the "Property Trustee") and as
indenture trustee for the purposes of complying with the provisions of the
Trust Indenture Act of 1939 (the "Trust Indenture Act"). The fifth Trustee is
Chase Manhattan Bank Delaware, who will serve as trustee in the State of
Delaware (the "Delaware Trustee") for the purpose of complying with the
provisions of Trust Act. The Chase Manhattan Bank also will act as trustee (the
"Guarantee Trustee") under the Capital Markets' guarantee of the Trust
Securities for the purposes of complying with the Trust Indenture Act. See
"Description of the Guarantee" and "Description of the Preferred Securities--
Voting Rights; Amendment of Declaration."
The Property Trustee will own and hold legal title to the Debentures for the
benefit of the Trust and the holders of the Trust Securities. The Property
Trustee will have the legal power to exercise all of the rights, powers and
privileges of a holder of Debentures under the Indenture. In addition, the
Property Trustee will establish and maintain exclusive control of a segregated
non-interest bearing trust account (the "Property Account") to hold all
payments made in respect of the Debentures for the benefit of the holders of
the Trust Securities. The Property Trustee will use funds from the Property
Account to make distribution payments and any payments on liquidation,
redemption or otherwise to the holders of the Trust Securities.
9
<PAGE>
Capital Markets, as holder of all of the Trust's outstanding Common
Securities, will have the right to appoint, remove or replace any Trustee and
to increase or decrease the number of Trustees, provided that the Trust always
will have at least three Trustees. Furthermore, Capital Markets, as issuer of
the Debentures, will pay all fees and expenses related to the Trust's ongoing
affairs and operations (including any taxes, duties, assessments or
governmental charges of whatever nature (other than withholding taxes)),
including the offering of the Trust Securities. Capital Markets, as issuer of
the Debentures, also will be responsible for all of the Trust's obligations
(other than with respect to the Trust Securities). See "Description of the
Debentures--Payment of Fees and Expenses."
The rights of the holders of the Preferred Securities, including any economic
rights, rights to information and voting rights, are set forth in the
Declaration, the Trust Act and the Trust Indenture Act. See "Description of the
Preferred Securities."
The Delaware Trustee's offices are located at 1201 Market Street, Wilmington,
Delaware 19801. The Trust's principal place of business is in care of Capital
Markets, 801 East 86th Avenue, Merrillville, Indiana 46410. Its telephone
number is (219) 853-5200.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges of
Industries for the fiscal years ended December 31, 1993, 1994, 1995, 1996 and
1997, and for the twelve months ended September 30, 1998. For the purpose of
calculating this ratio, "earnings" consist of income from continuing operations
before income taxes plus fixed charges, and "fixed charges" consist of interest
on all indebtedness, amortization of debt expense, the portion of rental
expenses on operating leases deemed to be representative of the interest
factor, and preferred stock dividend requirements of consolidated subsidiaries.
<TABLE>
<CAPTION>
Year Ended December 31, Twelve Months
------------------------ Ended
1993 1994 1995 1996 1997 Sept. 30, 1998(1)
---- ---- ---- ---- ---- -----------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to
Fixed Charges.......... 3.00 3.14 3.28 3.21 3.10 2.90
</TABLE>
- --------
(1) Results for the twelve months ended September 30, 1998 are not necessarily
indicative of results for the fiscal year ended December 31, 1998.
USE OF PROCEEDS
Except as may be set forth in the applicable Prospectus Supplement, the net
proceeds from the sale of any securities offered by Capital Markets will be
advanced to Industries and, together with the net proceeds from the sale of any
securities offered by Industries, will be used by Industries (i) to pay the
cash portion of the consideration payable in Industries' acquisition of Bay
State and (ii) to repay short-term indebtedness incurred to purchase Common
Shares in anticipation of the acquisition of Bay State. Pending application of
such net proceeds for specific purposes, such proceeds may be invested in
short-term or marketable securities. Information about any short-term
indebtedness to be repaid, or any specific allocations of proceeds to a
particular purpose that have been made at the date of any Prospectus
Supplement, will be described in the Prospectus Supplement.
The Trust will use all of the proceeds received from the sale of its Trust
Securities to purchase the Debentures from Capital Markets. Unless otherwise
set forth in the applicable Prospectus Supplement, the net proceeds to Capital
Markets from the sale of the Debentures will be advanced to Industries and used
by Industries for the purposes described in the preceding paragraph.
10
<PAGE>
DESCRIPTION OF THE DEBENTURES
The following description sets forth certain general terms and provisions of
the Debentures to which any Prospectus Supplement may relate. The particular
terms and provisions of the Debentures offered by a Prospectus Supplement and
the application of these general terms and provisions thereto will be described
in the applicable Prospectus Supplement.
The Debentures will be issued under an indenture dated as of February 14,
1997 (the "Indenture"), among Capital Markets, Industries and The Chase
Manhattan Bank, as trustee (the "Indenture Trustee"), which acts as indenture
trustee for the purposes of the Trust Indenture Act. The following summaries of
certain terms and provisions of the Debentures and the Indenture do not purport
to be complete and are subject to, and qualified in their entirety by reference
to, the Indenture and the form of Debenture that are or will be filed as
exhibits to the Registration Statement, and to the Trust Indenture Act.
Capitalized terms used in this section not otherwise defined in this Prospectus
have the meanings set forth in the Indenture. Certain material United States
federal income tax consequences applicable to the offering of the Debentures
will be described in the applicable Prospectus Supplement.
General
The Indenture does not limit the incurrence or issuance of other secured or
unsecured debt of Capital Markets, whether under the Indenture or any other
indenture that Capital Markets may enter into in the future or otherwise.
The applicable Prospectus Supplement will describe the following terms of the
series of Debentures being offered:
(i) the title of the Debentures;
(ii) any limit upon the aggregate principal amount of the Debentures;
(iii) the date or dates on which the principal of the Debentures is
payable, or the method of determination thereof;
(iv) the rate or rates, if any, at which the Debentures will bear
interest (including any reset rates and the method by which any such rates
will be determined), the date or dates on which any such interest will be
payable and any right of Capital Markets to defer any interest payment;
(v) the place or places where, subject to the terms of the Indenture as
described below, the principal and any premium or interest on the
Debentures will be payable ("Place of Payment"), and where, subject to the
terms of the Indenture as described below under "--Denominations,
Registration and Transfer," Capital Markets will maintain an office or
agency where Debentures may be presented for registration of transfer or
exchange, and where notices and demands to or upon Capital Markets in
respect of the Debentures and the Indenture may be made;
(vi) any period or periods within, or date or dates on which, the price
or prices at which and the terms and conditions upon which Debentures may
be redeemed, in whole or in part, at the option of Capital Markets pursuant
to any sinking fund or otherwise;
(vii) any obligation of Capital Markets to redeem or purchase the
Debentures pursuant to any sinking fund or analogous provision or at the
option of a holder, and the period or periods within which, the price or
prices at which, the currency or currencies (including currency unit or
units) in which and the other terms and conditions upon which the
Debentures will be redeemed or purchased, in whole or in part, pursuant to
such obligation;
(viii) the denominations in which the Debentures will be issuable;
(ix) if other than in U.S. Dollars, the currency or currencies (including
currency unit or units) in which the principal of or any premium or
interest on the Debentures will be payable, or in which the Debentures will
be denominated;
11
<PAGE>
(x) if other than the principal amount thereof, the portion of the
principal amount of the Debentures that will be payable upon declaration of
acceleration of the maturity thereof;
(xi) any additional events of default or covenants of Capital Markets or
Industries pertaining to the Debentures;
(xii) any index or indices used to determine the amount of payments of
principal of and premium, if any, on the Debentures and the manner in which
such amounts will be determined;
(xiii) subject to the terms described below under "--Global Debentures,"
whether the Debentures will be issued in whole or in part in global form
and, in such case, the depositary for such global Debentures;
(xiv) the appointment of any trustee, registrar, paying agent or agents;
(xv) the terms and conditions of any obligation or right of Capital
Markets or any holder to convert or exchange Debentures into other
securities; and
(xvi) any other terms of the Debentures not inconsistent with the
provisions of the Indenture.
Denominations, Registration and Transfer
Unless otherwise specified in the applicable Prospectus Supplement, the
Debentures will be issuable only in registered form without coupons in
denominations of $25 and any integral multiple thereof.
When the Debentures have been issued, Capital Markets will keep at one of its
offices or agencies a register in which, subject to such reasonable regulations
as it may prescribe, Capital Markets will provide for the registration and
transfer of the Debentures. That office or agency will be appointed the
security registrar for the purpose of registering and transferring the
Debentures. Capital Markets will appoint the Indenture Trustee as securities
registrar under the Indenture.
The holder of any registered Debenture may exchange the Debenture, at its
option, for registered Debentures of the same series having the same stated
maturity date and original issue date, in any authorized denominations, in like
tenor and in the same aggregate principal amount. Such holder may exchange such
Debentures by surrendering them at the office or agency of Capital Markets that
has been appointed as security registrar for the Debentures. The Debentures may
be presented for exchange or for registration of transfer (with the form of
transfer endorsed thereon or a satisfactory and duly executed written
instrument of transfer), at the office of the securities registrar, without
service charge and upon payment of any taxes and other governmental charges as
described in the Indenture.
When a holder of a registered Debenture surrenders such Debenture to be
registered for transfer, Capital Markets will execute, and the Indenture
Trustee will authenticate and deliver to such holder, in the name of the
designated transferee or transferees, one or more new registered Debentures of
the same series having the same stated maturity date and original issue date,
in any authorized denominations and of like tenor and aggregate principal
amount.
If any Debentures of any series are redeemed, Capital Markets will not be
required to issue, register the transfer of or exchange any such Debentures
during the 15 business days immediately preceding the date upon which notice of
such redemption is given (which notice will identify the serial numbers of the
Debentures being redeemed). Furthermore, if any registered Debentures are
selected to be either partially or fully redeemed, then Capital Markets will
not be required to issue, register or exchange any such Debentures (except for
the unredeemed portion of any Debenture being redeemed in part).
Global Debentures
Unless otherwise specified in the applicable Prospectus Supplement, the
Debentures may be issued in whole or in part in global form ("Global
Debentures") that will be deposited with, or on behalf of, a
12
<PAGE>
depositary identified in the applicable Prospectus Supplement. Global
Debentures may be issued only in fully registered form and in either temporary
or permanent form. A Global Debenture will be exchangeable for Debentures
registered in the names of persons other than the depositary or its nominee
only if (i) the depositary notifies Capital Markets that it is unwilling or
unable to continue as a depositary for such Global Debenture and no successor
depositary will 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 will have been appointed, (iii) Capital Markets, in its
sole discretion, determines that such Global Debenture will be so exchangeable
or (iv) there will have occurred an event of default with respect to the
Debentures (an "Indenture Event of Default") with respect to such Debentures.
Any Global Debenture that is exchangeable pursuant to the preceding sentence
will be exchangeable for Debentures registered in such names as the depositary
will 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 Debenture.
Unless and until a Global Debenture is exchanged in whole or in part for the
individual Debentures represented thereby, the depositary holding such Global
Debenture may transfer such Global Debenture only to its nominee or successor
depositary (or vice versa) and only as a whole. Unless otherwise indicated in
the applicable Prospectus Supplement for the Debentures, the depositary for the
Global Debentures will be The Depository Trust Company. See "Book-Entry
Issuance." The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of such securities in certificated form. Such
limits and laws may impair the ability to transfer beneficial interests in
Global Debentures.
The specific terms of the depositary arrangement for the Debentures will be
described in the applicable Prospectus Supplement. Capital Markets anticipates
that the description of the depositary set forth below under "Book-Entry
Issuance" generally will apply to any depositary arrangements. Capital Markets
expects that the applicable depositary or its nominee, upon receipt of any
payment of principal, premium or interest in respect of a permanent Global
Debenture, immediately will credit the accounts of its participants
("Participants") with payments in amounts proportionate to their respective
beneficial interests in the aggregate principal amount of such Global Debenture
as shown on the records of the depositary or its nominee. Capital Markets also
expects that payments by Participants to owners of beneficial interests in a
Global Debenture held through such Participants ("Beneficial Owners") will be
governed by standing instructions and customary practices, as is now the case
with securities held for the accounts of customers in bearer form or registered
in "street name." Such payments will be the responsibility of such
Participants.
Unless otherwise specified in the applicable Prospectus Supplement, if at any
time the applicable depositary is unwilling, unable or ineligible to continue
as depositary for the Debentures, Capital Markets will appoint a successor
depositary with respect to the Debentures. If a successor depositary is not
appointed by Capital Markets within 90 days after Capital Markets receives such
notice or becomes aware of such ineligibility, Capital Markets will issue
individual Debentures of such series in exchange for the Global Debenture
representing such individual Debentures. In addition, unless otherwise
specified in the applicable Prospectus Supplement, Capital Markets may
determine at any time and in its sole discretion, subject to any limitations
described in the applicable Prospectus Supplement, to have the Debentures no
longer represented by one or more Global Debentures. In such event, Capital
Markets will issue individual Debentures of such series in exchange for such
Global Debenture or Global Debentures. Furthermore, if Capital Markets so
specifies with respect to the Debentures, a Beneficial Owner may receive, on
terms acceptable to Capital Markets, the Indenture Trustee and the depositary,
individual Debentures in exchange for such beneficial interests, subject to any
limitations described in the applicable Prospectus Supplement. In any such
instance, a Beneficial Owner will be entitled to physical delivery of
individual Debentures equal in principal amount to such beneficial interest and
to have such Debentures registered in such owner's name. Individual Debentures
so issued will be issued in denominations of $25 and integral multiples thereof
unless otherwise indicated in the applicable Prospectus Supplement or otherwise
specified by Capital Markets.
13
<PAGE>
Payment and Paying Agents
Unless otherwise indicated in the applicable Prospectus Supplement, payment
of principal of and any premium or interest on the Debentures will be made at
the office of the Indenture Trustee or at the office of such paying agent or
paying agents as Capital Markets may designate from time to time in the
applicable Prospectus Supplement. Capital Markets may at any time designate
additional paying agents or rescind the designation of any paying agent.
Unless otherwise indicated in the applicable Prospectus Supplement, payment
of any interest on a Debenture will be made to the person or entity in whose
name such Debenture is registered at the close of business on the Regular
Record Date for such interest, except in the case of interest which is payable,
but is not punctually paid or duly provided for, on any Interest Payment Date
("Defaulted Interest"). At its election, Capital Markets may make payment of
Defaulted Interest (i) to the persons in whose names the Debentures are
registered at the close of business on a Special Record Date for the payment of
such Defaulted Interest, which will be fixed as provided in the Indenture or
(ii) in any other lawful manner not inconsistent with the requirements of any
securities exchange on which such Debentures may be listed, and upon such
notice as may be required by such exchange, if, after Capital Markets notifies
the Indenture Trustee of the proposed payment, the Indenture Trustee deems such
manner of payment to be practicable.
Option to Defer Interest Payments
If so provided in the applicable Prospectus Supplement, so long as an
Indenture Event of Default has not occurred and is not continuing, Capital
Markets will have the right, at any time and from time to time during the term
of the Debentures, to defer the payment of interest for such number of
consecutive interest payment periods as may be specified in the applicable
Prospectus Supplement (each, an "Extension Period"), subject to the terms,
conditions and covenants, if any, specified in such Prospectus Supplement. At
the end of such Extension Period, Capital Markets will pay all interest accrued
and unpaid, together with interest thereon compounded quarterly at the rate
specified for the Debentures, to the extent permitted by applicable law. During
any Extension Period, Capital Markets and Industries may not (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to any of Capital Markets' or Industries'
capital stock or (ii) make any payment of principal, interest or premium, if
any, on or repay, repurchase or redeem any debt securities of Capital Markets
or Industries that rank on a parity with or junior in interest to the
Debentures or make any guarantee payments with respect to any guarantee by
Capital Markets or Industries of the debt securities of any subsidiary of
Capital Markets or Industries if such guarantee ranks on a parity with or
junior in interest to the Debentures (other than (a) purchases or acquisitions
of capital stock of Capital Markets or Industries in connection with the
satisfaction by Capital Markets or Industries of its obligations under any
employee benefit plans or pursuant to any contract or security outstanding on
the date of such event requiring Capital Markets or Industries to purchase
capital stock of Capital Markets or Industries, (b) as a result of a
reclassification of Capital Markets' or Industries' capital stock for another
class or series of Capital Markets' or Industries' capital stock, (c) the
purchase of fractional interests in shares of Capital Markets' or Industries'
capital stock pursuant to the conversion or exchange provisions of such capital
stock or the security being converted or exchanged, (d) dividends or
distributions in capital stock of Capital Markets or Industries, (e)
redemptions or repurchases of any rights pursuant to a rights agreement and (f)
payments under the Guarantee).
Prior to the termination of any Extension Period, Capital Markets may further
defer payments of interest by extending the Extension Period; provided that the
total duration of any Extension Period may not exceed 20 consecutive quarters
or extend beyond the stated maturity of the Debentures. Upon the termination of
any Extension Period and the payment of all amounts then due, Capital Markets
may commence a new Extension Period, subject to the terms set forth in this
section. No interest will be due and payable during an Extension Period. If the
Property Trustee is the sole holder of the Debentures, Capital Markets will
give the Regular Trustees and the Property Trustee notice of its selection of
such Extension Period one Business Day prior to the earlier of (i) the date
distributions on the Preferred Securities are payable or (ii) the date the
Regular Trustees
14
<PAGE>
are required to give notice, if applicable, to the NYSE (or other applicable
self-regulatory organization) or to holders of the Preferred Securities of the
record or payment date of such distribution. The Regular Trustees will give
notice of Capital Markets' selection of such Extension Period to the holders of
the Preferred Securities. If the Property Trustee is not the sole holder of the
Debentures, Capital Markets will give the holders of the Debentures notice of
its selection of such Extension Period ten Business Days prior to the earlier
of (i) the Interest Payment Date or (ii) the date upon which Capital Markets is
required to give notice, if applicable, to the NYSE (or other applicable self-
regulatory organization) or to holders of the Debentures as of the record or
payment date of such related interest payment.
Modification of Indenture
From time to time, Capital Markets, Industries and the Indenture Trustee may
modify the Indenture without the consent of any holders of Debentures with
respect to certain matters, including:
(i) to evidence the succession of another corporation to Capital Markets
or Industries and the assumption by any such successor of the covenants of
Capital Markets or Industries in the Indenture and the Debentures;
(ii) to add to the covenants of Capital Markets and Industries for the
benefit of the holders of the Debentures, or to surrender any right or
power therein conferred upon Capital Markets or Industries;
(iii) to cure any ambiguity or correct or supplement any provision that
may be defective or inconsistent with any other provision of the Indenture,
provided that such action will not adversely affect the interests of the
holders of the Debentures in any material respect;
(iv) to conform the Indenture to any amendment of the Trust Indenture
Act;
(v) to add any additional events of default;
(vi) to change or eliminate any provisions of the Indenture, provided
that any such change or elimination will become effective only when there
is no security outstanding of any series prior to the execution of such
modification that is entitled to the benefit of such provision;
(vii) to secure the Debentures;
(viii) to establish the form or terms of securities of any series and any
related coupons as permitted by the Indenture;
(ix) to effect the assumption by Industries or one of its subsidiaries of
the obligations of Capital Markets under the Indenture; or
(x) to evidence or provide for the acceptance of appointment of a
successor trustee with respect to the securities of one or more series, to
contain such provisions necessary to confirm that all the rights, powers,
trusts and duties that the predecessor trustee is not retiring will
continue to be vested in the predecessor trustee, and to add to or change
any Indenture provisions necessary to provide for or facilitate the
administration of the trusts by more than one trustee.
In addition, Capital Markets, Industries and the Indenture Trustee may modify
certain rights, covenants and obligations of Capital Markets and the rights of
holders of the Debentures under the Indenture with the written consent of the
holders of at least a majority in aggregate principal amount of Debentures.
However, unless each affected holder of Debentures consents, Capital Markets,
Industries and the Indenture Trustee may not extend the maturity of the
Debentures, reduce the interest rate or extend the time for payment of
interest, change the optional redemption or repurchase provisions in a manner
adverse to any holder of Debentures, otherwise modify the terms of payment of
the principal of, or interest on, the Debentures or reduce the percentage
required for modification.
15
<PAGE>
Indenture Events of Default
Any one or more of the following events that has occurred and is continuing
constitutes an Indenture Event of Default with respect to the Debentures
(whatever the reason for such Indenture Event of Default and whether it is
voluntary or involuntary or effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(i) failure to pay any interest on any Debenture for a period of 30 days
after such interest becomes due and payable (subject to a valid deferral of
interest payments during an Extension Period);
(ii) failure to pay the principal of (or premium, if any, on) the
Debentures for a period of three Business Days after such principal (or
premium) becomes due, whether at maturity, upon redemption, by declaration
or otherwise;
(iii) failure to deposit any sinking fund payment for a period of three
Business Days after such deposit becomes due (if applicable to the
Debentures);
(iv) failure to observe or perform any other covenant or warranty under
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 Debentures) for a period of
60 days after written notice has been given, by registered or certified
mail, to Capital Markets and Industries by the Indenture Trustee, or to
Capital Markets, Industries and the Indenture Trustee by the holders of at
least 25% in principal amount of the Debentures;
(v) failure to pay in excess of $5,000,000 of the principal or interest
of indebtedness under any bond, debenture, note or other evidence of
indebtedness for money borrowed by Capital Markets (including a default
with respect to debt securities of any series other than that series) or
under any mortgage, indenture or instrument under which there may be issued
or by which there may be secured or evidenced any indebtedness for money
borrowed by Capital Markets, whether such indebtedness now exists or shall
hereafter be created, when due and payable after the expiration of any
applicable grace period with respect thereto or shall have resulted in such
indebtedness in an amount in excess of $5 million becoming or being
declared due and payable prior to the date on which it would otherwise have
become due and payable, without such indebtedness having been discharged,
or such acceleration having been rescinded or annulled within a period of
90 days after there shall have been given, by registered or certified mail,
to Capital Markets by the Indenture Trustee or to Capital Markets and the
Indenture Trustee by the holders of at least 25% in principal amount of the
Debentures;
(vi) certain events in bankruptcy, insolvency or reorganization of
Capital Markets, Industries or Northern Indiana; and
(vii) any other Indenture Event of Default with respect to the
Debentures.
The holders of not less than a majority in outstanding principal amount of
the Debentures have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Indenture Trustee.
The Indenture Trustee or the holders of not less than 33% in aggregate
outstanding principal amount of the Debentures may declare the principal due
and payable immediately upon an Indenture Event of Default. The holders of a
majority in aggregate outstanding principal amount of the Debentures may annul
such declaration and waive the default if the default (other than the non-
payment of the principal of Debentures that has become due solely by such
acceleration) has been cured and there has been deposited with the Indenture
Trustee a sum sufficient to pay all overdue interest and all installments of
principal due otherwise than by acceleration, interest upon overdue interest at
the rates prescribed in the Debentures (to the extent lawful), and all sums
paid or advanced by the Indenture Trustee.
The holders of not less than a majority in outstanding principal amount of
the Debentures affected thereby may waive, on behalf of the holders of all of
the Debentures, any past default under the Indenture except for a default (i)
in the payment of the principal of or interest on any Debenture (unless such
default has been cured and a sum sufficient to pay all matured installments of
interest and principal due otherwise than by acceleration has been deposited
with the Indenture Trustee) or (ii) in respect of a covenant or provision that
cannot be modified or amended without the consent of the holder of each
outstanding Debenture affected thereby.
16
<PAGE>
In the event an Indenture Event of Default occurs and is continuing as to the
Debentures at any time they are held by the Trust, the Property Trustee will
have the right to declare the principal of and the interest on such Debentures,
and any other amounts payable under the Indenture, to be forthwith due and
payable and to enforce its other rights as a creditor with respect to the
Debentures. The holders of the Preferred Securities in certain circumstances
have the right to direct the Property Trustee to exercise its rights as the
holder of the Debentures. See "Description of the Preferred Securities--Voting
Rights; Amendment of Declaration." If the Property Trustee fails to enforce its
rights under the Debentures after a holder of Preferred Securities has made a
written request, the holder of Preferred Securities may, to the fullest extent
permitted by law, institute a legal proceeding directly against Capital Markets
to enforce the Property Trustee's rights under the Indenture without first
instituting any legal proceeding against the Property Trustee or any other
person or entity. Notwithstanding the foregoing, if an Indenture Event of
Default has occurred and is continuing and such event is attributable to the
failure of Capital Markets to pay interest or principal on the Debentures on
the date such interest or principal is otherwise payable (or in the case of
redemption, the redemption date), then a holder of Preferred Securities may
institute a proceeding directly against Capital Markets (a "Direct Action") to
enforce payment to such holder of the principal or interest on the Debentures
having an aggregate principal amount equal to the aggregate liquidation amount
of the Preferred Securities of such holder.
Consolidation, Merger, Sale of Assets and Other Transactions
The Indenture provides that neither Capital Markets nor Industries may
consolidate with or merge into any other person or entity or convey, transfer
or lease its properties and assets substantially as an entirety to any person
unless (i) the corporation formed by any such consolidation or continuing in
such merger, or the person that acquires by conveyance or transfer, or that
leases, its properties and assets substantially as an entirety will be a
corporation organized and existing under the laws of any domestic jurisdiction
and will expressly assume, in the case of Capital Markets, its obligations
under the 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 Indenture Event of Default, and no
event that, after notice or lapse of time, would become an Indenture Event of
Default, will have happened and be continuing and (iii) Capital Markets or
Industries will have delivered to the Indenture 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.
Capital Markets covenants and agrees that if, upon any consolidation or
merger of Capital Markets with or into any other corporation, or upon any
consolidation or merger of any other corporation with or into Capital Markets,
or upon any sale or conveyance of all or substantially all of the property and
assets of Capital Markets to any other corporation, any property of Capital
Markets or any subsidiary or any indebtedness issued by any subsidiary owned by
Capital Markets or by any subsidiary immediately prior thereto would thereupon
become subject to any mortgage, security interest, pledge, lien or other
encumbrance not permitted by the Indenture, Capital Markets, prior to or
concurrently with such consolidation, merger, sale or conveyance, will by
indenture supplemental hereto effectively secure the securities then
outstanding (equally and ratably with (or prior to) any other indebtedness of
or guaranteed by Capital Markets or such subsidiary then entitled thereto) by a
direct lien on such property of Capital Markets or any subsidiary or such
indebtedness issued by a subsidiary, prior to all liens other than any
theretofore existing thereon.
Satisfaction and Discharge
The Indenture provides that when all Debentures not previously delivered to
the Indenture Trustee for cancellation (i) have become due and payable, (ii)
will become due and payable at their stated maturity within one year or (iii)
are to be called for redemption within one year under arrangements satisfactory
to the Indenture Trustee for the giving of notice of redemption by the
Indenture Trustee in the name, and at the expense of, Capital Markets, and
Capital Markets deposits or causes to be deposited with the Indenture Trustee,
as trust funds in trust dedicated solely for such purpose, an amount in the
currency or currencies in which the
17
<PAGE>
Debentures are payable sufficient to pay and discharge the entire indebtedness
on the Debentures not previously delivered to the Indenture Trustee for
cancellation, for the principal (and premium, if any) and interest to the date
of the deposit or to the stated maturity, as the case may be, then the
Indenture will cease to be of further effect (except as to Capital Markets'
obligations to pay all other sums due pursuant to the Indenture and to provide
the officers' certificates and opinions of counsel described therein), and
Capital Markets will be deemed to have satisfied and discharged the Indenture.
At the expense of Capital Markets, the Indenture Trustee will execute proper
instruments acknowledging such satisfaction and discharge.
Redemption
Unless otherwise indicated in the applicable Prospectus Supplement, the
Debentures will not be subject to any sinking fund.
Unless otherwise indicated in the applicable Prospectus Supplement, Capital
Markets may redeem, at its option, the Debentures in whole at any time or in
part from time to time, at the redemption price set forth in the applicable
Prospectus Supplement plus accrued and unpaid interest to the date fixed for
redemption. If the Debentures are so redeemable only on or after a specified
date or upon the satisfaction of additional conditions, then the applicable
Prospectus Supplement will specify such date or describe such conditions.
Notice of any redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of Debentures to be redeemed at
such holder's registered address. Unless Capital Markets defaults in the
payment of the redemption price, interest will cease to accrue on such
Debentures or portions thereof called for redemption on and after the
redemption date.
Governing Law
The Indenture and the Debentures will be governed by and construed in
accordance with the laws of the State of New York.
Payment of Fees and Expenses
Capital Markets will pay all fees and expenses related to (i) the offering of
the Trust Securities and the Debentures, (ii) the organization, maintenance and
dissolution of the Trust, (iii) the retention of the Regular Trustees and (iv)
the enforcement by the Property Trustee of the rights of the holders of the
Preferred Securities.
Information Concerning the Indenture Trustee
The Indenture Trustee will have and be subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to such provisions, the Indenture Trustee has no
obligation to exercise any of its rights or powers under the Indenture at the
request or direction of any holder of a Debenture, unless the Indenture Trustee
is offered reasonable security or indemnity by such holder against the costs,
expenses and liabilities that might be incurred thereby. The Indenture Trustee
is not required to expend or risk its own funds or otherwise incur any personal
financial liability in the performance of any of its duties or in the exercise
of any of its rights or powers, if the Indenture Trustee reasonably believes
that repayment of funds or adequate indemnity is not reasonably assured to it.
DESCRIPTION OF THE PREFERRED SECURITIES
The following description sets forth certain general terms and provisions of
the Preferred Securities to which any Prospectus Supplement may relate. The
particular terms and provisions of the Preferred Securities offered by a
Prospectus Supplement and the application of these general terms and provisions
thereto will be described in the applicable Prospectus Supplement.
18
<PAGE>
The Regular Trustees, on behalf of the Trust and pursuant to the Declaration,
will issue one class of Preferred Securities and one class of Common
Securities. The Trust Securities will represent undivided beneficial ownership
interests in the assets of the Trust. The following summaries of certain terms
of the Preferred Securities and certain provisions of the Declaration do not
purport to be complete, and reference is hereby made to the Trust Indenture Act
and the copy of the Declaration, including definitions of certain terms used
therein, that is filed as an exhibit to the Registration Statement. Capitalized
terms used in this section not otherwise defined in this Prospectus have the
meanings set forth in the Declaration. Certain material United States federal
income tax consequences applicable to the offering of the Preferred Securities
will be described in the applicable Prospectus Supplement.
General
Except as described below under "--Subordination of Common Securities," the
Preferred Securities will rank on a parity, and payments will be made thereon
proportionately, with the Common Securities. The Property Trustee will hold
legal title to the Debentures in trust for the benefit of the holders of the
Trust Securities. The Guarantee Agreement executed by Capital Markets for the
benefit of the holders of the Preferred Securities (the "Guarantee") will be a
guarantee with respect to the Preferred Securities but will not guarantee the
payment of Distributions or any amounts payable on redemption or liquidation of
the Preferred Securities when the Trust does not have funds on hand available
to make such payments. See "Description of the Guarantee." Certain material
U.S. federal income tax consequences and special considerations applicable to
the Preferred Securities will be described in the applicable Prospectus
Supplement.
Distributions
Distributions on each Preferred Security will accumulate and be payable at a
rate specified in the applicable Prospectus Supplement. The amount of
Distributions payable for any period will be computed on the basis of a 360-day
year of twelve 30-day months and the actual number of days elapsed per 30-day
month unless otherwise specified in the applicable Prospectus Supplement.
Distributions that are in arrears will accumulate additional distributions at
the rate per annum if and as specified in the applicable Prospectus Supplement
("Additional Amounts"). The term "Distributions" means cumulative cash
distributions that accumulate at the per annum rate specified in the applicable
Prospectus Supplement, together with any Additional Amounts unless otherwise
stated.
Distributions on the Preferred Securities will be cumulative, will accumulate
from the date of original issuance and will be payable on such dates as are
specified in the applicable Prospectus Supplement. If the date on which any
Distributions on the Trust Securities are payable (each, a "payment date") is
not a Business Day (as defined below), then payment of such Distributions will
be made on the next Business Day (without any interest or other payment in
respect of any such delay), provided that if such next Business Day falls in
the next calendar year, then payment of such Distributions will be made on the
Business Day preceding the payment date. Each date on which Distributions are
payable is hereinafter referred to as a "Distribution Date." A "Business Day"
means any day other than a Saturday or Sunday or a day on which banking
institutions in New York City are authorized or required by law or executive
order to remain closed, or a day on which the Indenture Trustee, or the
principal office of the Property Trustee, is closed for business.
If provided in the applicable Prospectus Supplement, Capital Markets will
have the right under the Indenture to defer payments of interest on the
Debentures from time to time by extending the applicable interest payment
period for a period or periods that will be specified in the applicable
Prospectus Supplement (each, an "Extension Period"). If Capital Markets
exercises its right to defer interest payments on the Debentures, then any
payments of Distributions on the Preferred Securities also would be deferred.
During an Extension Period, interest will continue to accrue on the Debentures
(compounded quarterly), and, as a result, Distributions would continue to
accumulate at the rate per annum if and as specified in the applicable
Prospectus Supplement. During any Extension Period, Capital Markets and
Industries may not (i) declare or
19
<PAGE>
pay any dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of Capital Markets' or Industries'
capital stock or (ii) make any payment of principal, interest or premium, if
any, on or repay, repurchase or redeem any debt securities of Capital Markets
or Industries that rank on a parity with or junior in interest to the
Debentures or make any guarantee payments with respect to any guarantee by
Capital Markets or Industries of the debt securities of any subsidiary of
Capital Markets or Industries if such guarantee ranks on a parity with or
junior in interest to the Debentures (other than (a) purchases or acquisitions
of capital stock of Capital Markets or Industries in connection with the
satisfaction by Capital Markets or Industries of its obligations under any
employee benefit plans or pursuant to any contract or security outstanding on
the date of such event requiring Capital Markets or Industries to purchase
capital stock of Capital Markets or Industries, (b) as a result of a
reclassification of Capital Markets' or Industries' capital stock or the
exchange or conversion of one class or series of Capital Markets' or
Industries' capital stock for another class or series of Capital Markets' or
Industries' capital stock, (c) the purchase of fractional interests in shares
of Capital Markets' or Industries' capital stock pursuant to the conversion or
exchange provisions of such capital stock or the security being converted or
exchanged, (d) dividends or distributions in capital stock of Capital Markets
or Industries, (e) redemptions or repurchases of any rights pursuant to a
rights agreement and (f) payments under the Guarantee). Prior to the
termination of any Extension Period, Capital Markets may further extend the
Extension Period, but the total duration of any such Extension Period may not
exceed 20 consecutive quarters or extend beyond the stated maturity of the
Debentures. Once any Extension Period terminates and Capital Markets has paid
all amounts then due, Capital Markets may commence a new Extension Period,
provided that such Extension Period together with all extensions thereof may
not exceed 20 quarters or extend beyond the stated maturity of the Debentures.
See "Description of the Debentures--Option to Defer Interest Payments." Once an
Extension Period has terminated, any deferred Distributions, including
accumulated Additional Amounts, will be paid to those holders of record of the
Trust Securities appearing on the books and records of the Trust on the first
record date following the termination of such Extension Period.
It is expected that any revenue available for the payment of Distributions to
holders of the Preferred Securities will be limited to payments made to the
Trust by Capital Markets under the Debentures. If Capital Markets does not make
interest payments on the Debentures, then the Property Trustee will not have
any funds available to pay Distributions on the Preferred Securities. The
payment of Distributions (if and to the extent the Trust has funds legally
available for the payment of such Distributions and cash sufficient to make
such payments) is guaranteed by Capital Markets as set forth under the
Guarantee. See "Description of the Guarantee."
The Property Trustee will pay Distributions to the holders of the Preferred
Securities as such holders appear on the Trust's securities register on the
relevant record dates. As long as the Preferred Securities are represented by
one or more Global Securities, the relevant record dates will be the close of
business on the Business Day next preceding each Distribution Date, unless a
different regular record date is established or provided for the corresponding
interest payment date on the Debentures. Subject to any applicable laws and
regulations and the provisions of the Declaration, unless otherwise specified
in the applicable Prospectus Supplement, each such payment will be made as
described under "Book-Entry Issuance." If any Preferred Securities are not
represented by Global Securities, then the relevant record date for such
Preferred Securities will be the fifteenth Business Day prior to the relevant
Distribution Date, that is specified in the applicable Prospectus Supplement.
Redemption or Exchange
Mandatory Redemption. Unless otherwise specified in the applicable Prospectus
Supplement, if the Debentures held by the Trust are repaid or redeemed in whole
or in part, either upon their maturity date or earlier, then the Property
Trustee will use the proceeds from such repayment or redemption to redeem Trust
Securities having an aggregate liquidation amount equal to the aggregate
principal amount of the Debentures being repaid or redeemed. The redemption
price per Trust Security will be equal to the aggregate stated amount of the
Trust Securities being redeemed plus any accumulated and unpaid Distributions
thereon to the date of
20
<PAGE>
redemption plus the related amount of the premium, if any, paid by Capital
Markets upon the concurrent redemption of the Debentures (the "Redemption
Price"). In the event of a partial redemption, the Trust Securities will be
redeemed among all of the holders of Trust Securities on a pro rata basis.
Holders of the Trust Securities will receive at least 30 days but not more than
60 days notice of such redemption.
Tax Event Redemption. If a Tax Event occurs and is continuing, Capital
Markets will have the right to redeem the Debentures in whole (but not in part)
and thereby cause a mandatory redemption of the Trust Securities in whole (but
not in part) at the Redemption Price within 90 days following the occurrence of
such Tax Event. In the event a Tax Event has occurred and is continuing and
Capital Markets does not elect to redeem the Debentures (thereby causing a
mandatory redemption of such Preferred Securities) or to liquidate the Trust
(causing the Debentures to be distributed to holders of the Trust Securities in
exchange therefor upon liquidation of the Trust as described above), the
Preferred Securities will remain outstanding.
"Tax Event" means the receipt by Capital Markets and the Trust of an opinion
of counsel, rendered by a law firm having a recognized national tax practice,
to the effect that, as a result of any amendment to, change in or announced
proposed change in the laws (or any regulations thereunder) of the United
States or any political subdivision or taxing authority thereof or therein, or
as a result of any official administrative decision, pronouncement, judicial
decision or action interpreting or applying such laws or regulations, which
amendment or change is effective or such proposed change, pronouncement, action
or decision is announced on or after the date on which the Preferred Securities
are issued and sold, there is more than an insubstantial risk that (i) the
Trust is, or within 90 days of the date of such opinion will be, subject to the
United States federal income tax with respect to income received or accrued on
the Debentures, (ii) interest payable by Capital Markets on the Debentures is
not, or within 90 days of the date of such opinion, will not be, deductible by
Capital Markets, in whole or in part, for United States federal income tax
purposes, or (iii) the Trust is, or within 90 days of the date of such opinion
will be, subject to more than a de minimis amount of other taxes, duties or
other governmental charges.
Distribution of Debentures. Unless otherwise specified in the applicable
Prospectus Supplement, Capital Markets will have the right to dissolve the
Trust at any time and, after satisfaction of any liabilities to creditors of
the Trust as provided by applicable law, to cause the Debentures to be
distributed pro rata to the holders of the Trust Securities in liquidation of
the Trust.
After the date fixed for any distribution of Debentures, (i) the Preferred
Securities will no longer be deemed to be outstanding and (ii) any certificates
representing the Preferred Securities will be deemed to represent Debentures in
a principal amount equal to the stated liquidation amount of the Preferred
Securities, bearing accrued and unpaid interest in an amount equal to the
accumulated and unpaid Distributions on the Preferred Securities, until such
certificates are presented to the Regular Trustees or their agent for transfer
or reissuance.
There can be no assurance as to the market prices for the Preferred
Securities or for the Debentures that may be distributed in exchange for
Preferred Securities upon dissolution or liquidation of the Trust. Accordingly,
the Preferred Securities that an investor may purchase, or the Debentures that
such investor may receive upon dissolution or liquidation of the Trust, may
trade at a discount to the price that such investor paid to purchase the
Preferred Securities offered hereby.
Redemption Procedures
Any Preferred Securities being redeemed will be redeemed by the Trust at the
applicable Redemption Price with the proceeds received by the Trust from the
contemporaneous redemption of the Debentures by Capital Markets. Redemptions of
Preferred Securities will be made and the applicable Redemption Price will be
payable only to the extent that the Trust has funds on hand available for the
payment of such Redemption Price.
21
<PAGE>
If the Trust notifies the holders of the Preferred Securities of a redemption
and if the Preferred Securities to be redeemed are issued in global form, then
on the applicable redemption date, the Property Trustee will deposit
irrevocably with the depositary for the Preferred Securities funds sufficient
to pay the applicable redemption price, to the extent funds are available. In
addition, the Property Trustee will give the depositary irrevocable
instructions and authority to pay the redemption price to the beneficial owners
of the Preferred Securities. If the Preferred Securities are not issued in
global form, then the Property Trustee will pay the applicable Redemption Price
to the holders of the Preferred Securities by check mailed to their respective
addresses appearing on the register of the Trust on the redemption date. In
addition, the Property Trustee will give such paying agent irrevocable
instructions and authority to pay the Redemption Price to the holders of the
Preferred Securities upon surrender of their certificates evidencing the
Preferred Securities. Notwithstanding the foregoing, Distributions payable on
or prior to a redemption date for the Preferred Securities will be payable to
the holders of the Preferred Securities on the relevant record dates for the
related Distribution Dates. If a notice of redemption has been given and funds
have been deposited as required, then upon the date of such deposit, all of the
rights of the holders of the Preferred Securities to be redeemed will cease,
except for the right of such holders to receive the Redemption Price (without
interest thereon), and the Preferred Securities will cease to be outstanding.
If the redemption date is not a Business Day, then payment of the applicable
Redemption Price will be made on the next Business Day (and without any
interest or other payment in respect of any such delay). If, however, the next
Business Day falls in the next calendar year, then payment of the Redemption
Price will be made on the Business Day preceding the redemption date.
If any payments for the redemption of any Preferred Securities are improperly
withheld or refused and not paid either by the Trust or by Capital Markets
pursuant to the Guarantee, then Distributions on the Preferred Securities will
continue to accumulate at the then applicable rate, from the redemption date
originally established by the Trust until the date upon which such redemption
payments actually are paid, in which case the actual payment date will be the
date fixed for redemption for purposes of calculating the applicable redemption
price.
Subject to the Declaration and applicable law (including, without limitation,
U.S. federal securities laws), Capital Markets or its subsidiaries may purchase
at any time and from time to time outstanding Preferred Securities by tender,
in the open market or by private agreement.
Any notice of the redemption of Trust Securities or the distribution of
Debentures in exchange for Trust Securities will be mailed to each holder of
Preferred Securities being so redeemed at least 30 days but not more than 60
days before the applicable redemption date, at such holder's registered
address. Unless Capital Markets defaults in the payment of the redemption price
on the Debentures, interest will cease to accrue on the Debentures or portions
thereof (and Distributions will cease to accumulate on the Preferred Securities
or portions thereof) called for redemption on and after the redemption date.
Subordination of Common Securities
The payment of Distributions on, and any payment upon redemption of, the
Preferred Securities and Common Securities, as applicable, will be made pro
rata based on their respective liquidation amounts. If, however, an Indenture
Event of Default (which constitutes a "Trust Enforcement Event" under the
Declaration) has occurred and continues on any Distribution Date or redemption
date, then the amounts payable on such date will not be made on any of the
Common Securities, and no other payment on account of the redemption,
liquidation or other acquisition of any Common Securities will be made until
all accumulated and unpaid Distributions or redemption payments, as the case
may be, on all of the outstanding Preferred Securities for which Distributions
are to be paid or that have been called for redemption, as the case may be, are
fully paid. See "Description of Debentures--Indenture Events of Default." All
funds available to the Property Trustee first will be applied to the payment in
full in cash of all Distributions on, or the redemption price of, the Preferred
Securities then due and payable. The Trust will not issue any securities or
other interests in the assets of the Trust other than the Preferred Securities
and the Common Securities.
22
<PAGE>
In the event that a Trust Enforcement Event has occurred and is continuing
with respect to the Preferred Securities, then Capital Markets, as sole holder
of the Common Securities, will be deemed to have waived any right to act with
respect to any such Trust Enforcement Event until the effect of such Trust
Enforcement Event with respect to the Preferred Securities has been cured,
waived or otherwise eliminated. Until such Trust Enforcement Event has been so
cured, waived or otherwise eliminated, the Property Trustee will act solely on
behalf of the holders of the Preferred Securities and not on behalf of Capital
Markets, as holder of the Common Securities, and only the holders of the
Preferred Securities will have the right to direct the Property Trustee to act
on their behalf. See "--Trust Enforcement Events; Notice."
Dissolution of the Trust and Distributions upon Dissolution
Unless otherwise specified in the applicable Prospectus Supplement pursuant
to the Declaration, the Trust will automatically dissolve upon the expiration
of its term or, if earlier, shall dissolve on the first to occur of: (i)
certain events of bankruptcy, dissolution or liquidation of Capital Markets or
Industries; (ii) the written direction to the Property Trustee from Capital
Markets at any time to dissolve the Trust and to distribute the Debentures in
exchange for the Trust Securities; (iii) redemption of all of the Preferred
Securities as described under "--Redemption or Exchange--Mandatory Redemption";
and (iv) the entry of an order for the dissolution of the Trust by a court of
competent jurisdiction.
If an early dissolution occurs as described in clause (i), (ii) or (iv)
above, the Trust will be liquidated by the Trustees as expeditiously as the
Trustees determine to be possible by distributing, after satisfaction of
liabilities to creditors of the Trust as provided by applicable law, to the
holders of the Trust Securities in exchange therefor Debentures, unless such
distribution is determined by the Property Trustee not to be practical, in
which event the holders of the Trust Securities will be entitled to receive out
of the assets of the Trust distributions in cash or other immediately available
funds to the extent such funds are available for distribution after
satisfaction of the Trust's liabilities to any creditors (the "Liquidation
Distributions"). The amount of each Liquidation Distribution will be equal to
the aggregate of the stated liquidation amount plus accumulated and unpaid
Distributions thereon to the date of payment. If, however, Debentures are to be
distributed in connection with such Liquidation, then the holders of the Trust
Securities will receive Debentures in an aggregate principal amount equal to
the aggregate stated liquidation amount of the Trust Securities, with an
interest rate identical to the distribution rate of, and accrued and unpaid
interest equal to accumulated and unpaid Distributions on, such Trust
Securities.
If the Liquidation Distribution can be paid only in part because the Trust
has insufficient assets available to pay the aggregate Liquidation Distribution
in full, then the amounts payable directly by the Trust on the Trust Securities
will be paid on a pro rata basis. Capital Markets, as sole holder of the Common
Securities, will be entitled to receive Liquidation Distributions on a pro rata
basis with the Holders of the Preferred Securities, except that if an Indenture
Event of Default has occurred and is continuing, then the Preferred Securities
will have a preference over the Common Securities with regard to such
Liquidation Distributions.
Trust Enforcement Events; Notice
Under the Declaration, holders of Trust Securities have certain rights in the
event that any Indenture Event of Default has occurred and continues with
respect to the Trust Securities issued thereunder. See "Description of
Debentures--Indenture Events of Default." If a Trust Enforcement Event has
occurred and is continuing, the Preferred Securities will have a preference
over the Common Securities upon dissolution of the Trust, as described above.
The Property Trustee will transmit by mail, first class postage prepaid,
notice of such Trust Enforcement Event to the holders of the Trust Securities
within 90 days of the occurrence of the Trust Enforcement Event unless such
Trust Enforcement Event has been cured before the giving of such notice.
Capital Markets and the Regular Trustees 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 as
well as any reports that may be required to be filed by them under the Trust
Indenture Act.
23
<PAGE>
Removal of Trustees
Any Trustee may be removed with or without cause at any time by the holder of
the Common Securities. The removal of a Property Trustee or a Delaware Trustee,
however, will not be effective until a successor Trustee possessing the
qualifications to act as a Property Trustee or Delaware Trustee, as the case
may be, has accepted its appointment in accordance with the provisions of the
Declaration. If an Indenture Event of Default has occurred and continues, the
Property Trustee and the Delaware Trustee may be removed by a majority of the
stated liquidation amount of the Preferred Securities.
Merger or Consolidation of Trustees
Any entity into which the Property Trustee, the Delaware Trustee or any
Regular Trustee that is not a natural person may be merged or converted or with
which it may be consolidated, or any entity resulting from any merger,
conversion or consolidation to which such Trustee may be a party, or any entity
succeeding to all or substantially all the corporate trust business of such
Trustee, will be the successor of such Trustee under the Declaration, provided
that such entity is otherwise qualified and eligible.
Mergers, Consolidations or Amalgamations
The Trust may not consolidate with, convert into, amalgamate or merge with or
into, be replaced by or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other body, except as
described below. At the request of Capital Markets and with the consent of a
majority of the Regular Trustees, and without the consent of the holders of the
Preferred Securities, the Delaware Trustee or the Property Trustee, the Trust
may consolidate with, convert into, amalgamate or merge with or into, be
replaced by or convey, transfer or lease its properties substantially as an
entirety to a trust organized as such under the laws of any state. Such
consolidation, conversion, amalgamation, merger, replacement, conveyance,
transfer or lease will be subject, however, to the following limitations:
(i) if the Trust is not the successor entity, then the successor entity
either must (a) expressly assume all of the Trust"s obligations with
respect to the Trust Securities or (b) substitute for the Trust Securities
other securities having substantially the same terms as the Trust
Securities (the "Successor Securities"), so long as such Successor
Securities rank the same as the Trust Securities with respect to
distributions and payments upon liquidation, redemption and otherwise;
(ii) Capital Markets must expressly appoint a trustee of a successor
entity possessing the same powers and duties as the Property Trustee as the
holder of the Debentures;
(iii) the Preferred Securities or any Successor Securities must be
listed, or upon notification of issuance will be listed, on any national
securities exchange or with any other organization on which the Preferred
Securities are then listed or quoted;
(iv) such consolidation, conversion, amalgamation, merger, replacement,
conveyance, transfer or lease must not cause the Preferred Securities
(including any Successor Securities) to be downgraded by any nationally
recognized statistical rating organization;
(v) such consolidation, conversion, amalgamation, merger, replacement,
conveyance, transfer or lease must not adversely affect the rights,
preferences and privileges of the holders of the Preferred Securities
(including any Successor Securities) in any material respect;
(vi) such successor entity must have a purpose substantially identical to
that of the Trust;
(vii) prior to such consolidation, conversion, amalgamation, merger,
replacement, conveyance, transfer or lease, Capital Markets must have
received an opinion of independent counsel to the Trust experienced in such
matters to the effect that (a) such consolidation, conversion,
amalgamation, merger, replacement, conveyance, transfer or lease does not
adversely affect the rights, preferences and privileges of the holders of
the Trust Securities (including any Successor Securities) in any material
respect; (b) following such consolidation, conversion, amalgamation,
merger, replacement, conveyance, transfer or lease, neither the Trust nor
such successor entity will be required to register as an investment company
24
<PAGE>
under the Investment Company Act and (c) following such consolidation,
conversion, amalgamation, merger, replacement, conveyance, transfer or
lease, the Trust (or the successor entity) will continue to be classified
as a grantor trust for U.S. federal income tax purposes;
(viii) Capital Markets or any permitted successor or assignee must own
all of the Common Securities and must guarantee the obligations of such
successor entity under the Successor Securities, at least to the extent
provided by the Guarantee; and
(ix) such successor entity must expressly assume all of the obligations
of the Trust.
Notwithstanding the foregoing, unless holders of 100% in aggregate liquidation
amount of the Trust Securities give their consent, the Trust will not
consolidate with, convert into, amalgamate or merge with or into, be replaced
by or convey, transfer or lease its properties and assets substantially as an
entirety to, any other entity or permit any other entity to consolidate with,
convert into, amalgamate or merge with or into, or replace it, if such
consolidation, conversion, amalgamation, merger, replacement, conveyance,
transfer or lease would cause the Trust or the successor entity to be
classified as other than a grantor trust for U.S. federal income tax purposes
or would cause each holder of Trust Securities not to be treated as owning an
undivided beneficial ownership interest in the Debentures.
Voting Rights; Amendment of Declaration
Except as provided below and under "Description of the Guarantee--Amendments;
Assignment" and as otherwise required by the Declaration, the Business Trust
Act, the Trust Indenture Act and other applicable law, the holders of the Trust
Securities will have no voting rights.
Subject to the requirement of the Property Trustee obtaining a tax opinion in
certain circumstances set forth in the last sentence of this paragraph, the
holders of a majority in aggregate liquidation amount of the Preferred
Securities, voting separately as a class, 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. This includes the right to
direct the Property Trustee, as holder of the Debentures, to (i) exercise the
remedies available to it under the Indenture, (ii) consent to any amendment or
modification of the Indenture or the Debentures where such consent will be
required or (iii) waive any past default and its consequences that is waivable
under the Indenture; provided that if an Indenture Event of Default has
occurred and is continuing, then the holders of 25% of the aggregate stated
liquidation amount of the Preferred Securities may direct the Property Trustee
to declare the principal of and interest on the Debentures due and payable; and
provided further that where a consent or action under the Indenture would
require the consent or act of the holders of more than a majority of the
aggregate principal amount of Debentures affected thereby, the Property Trustee
only may give such consent or take such action at the direction of the holders
of at least the same proportion in aggregate stated liquidation amount of the
Preferred Securities. The Property Trustee will notify all holders of the
Preferred Securities of any notice of any Indenture Event of Default that it
has received from Capital Markets. Such notice will state that such Indenture
Event of Default also constitutes an Trust Enforcement Event. Except with
respect to directing the time, method and place of conducting a proceeding for
a remedy, the Property Trustee will have no obligation to take any of the
actions described in clause (i) or (ii) above unless it first has obtained an
opinion of independent tax counsel experienced in such matters to the effect
that, as a result of such action, the Trust will not fail to be classified as a
grantor trust for U.S. federal income tax purposes and that each holder of
Trust Securities will be treated as owning an undivided beneficial ownership
interest in the Debentures.
If the consent of the Property Trustee, as the holder of the Debentures, is
required under the Indenture with respect to any amendment or modification of
the Indenture, the Property Trustee will request the direction of the holders
of the Trust Securities with respect to such amendment or modification and will
vote with respect to such amendment or modification as directed by the holders
of a majority in stated liquidation amount of the Trust Securities voting
together as a single class; provided that where a consent under the Indenture
would require the consent of the holders of more than a majority of the
aggregate principal amount of the
25
<PAGE>
Debentures, the Property Trustee only may give such consent at the direction of
the holders of at least the same proportion in aggregate stated liquidation
amount of the Trust Securities. The Property Trustee will not take any such
action in accordance with the directions of the holders of the Trust Securities
unless the Property Trustee has obtained an opinion of independent tax counsel
to the effect that the Trust will not be classified as other than a grantor
trust for United States federal income tax purposes as a result of such action,
and that each holder of Trust Securities will be treated as owning an undivided
beneficial ownership interest in the Debentures.
A waiver of an Indenture Event of Default with respect to the Debentures will
constitute a waiver of the corresponding Trust Enforcement Event.
Any required approval or direction of the holders of the Preferred Securities
may be given at a separate meeting of holders of the Preferred Securities
convened for such purpose, at a meeting of all of the holders of the Trust
Securities or pursuant to written consent. The Regular Trustees will cause a
notice of any meeting at which the holders of the Preferred Securities are
entitled to vote to be mailed to each holder of record of Preferred Securities.
Each such notice will include a statement setting forth (i) the date of such
meeting, (ii) a description of any resolution proposed for adoption at such
meeting on which such holders are entitled to vote and (iii) instructions for
the delivery of proxies.
No vote or consent of the holders of Preferred Securities will be required
for the Trust to redeem and cancel the Preferred Securities or distribute the
Debentures in accordance with the Declaration and the terms of the Trust
Securities.
Notwithstanding that holders of the Preferred Securities are entitled to vote
or consent under any of the circumstances described above, any of the Preferred
Securities that are owned at such time by Capital Markets, the Trustees or any
entity directly or indirectly controlled by, or under direct or indirect common
control with, Capital Markets or any Trustee will not be entitled to vote or
consent and will, for purposes of such vote or consent, be treated as if such
Preferred Securities were not outstanding.
Except during the continuance of an Indenture Event of Default, the holders
of the Preferred Securities will have no rights to appoint or remove the
Trustees, who may be appointed, removed or replaced solely by Capital Markets
as the holder of all of the Common Securities. If an Indenture Event of Default
has occurred and is continuing, the Property Trustee and the Delaware Trustee
may be removed and replaced by the holders of a majority in liquidation amount
of the Preferred Securities.
Generally, the Declaration may be amended without the consent of the holders
of the Trust Securities, if such amendment does not have a material adverse
effect on certain rights, preferences or privileges of the holders of the Trust
Securities. Any amendment, however, that affects the powers, preferences or
special rights of the Trust Securities, or results in the dissolution, winding-
up or termination of the Trust (other than pursuant to the Declaration), will
not be effective unless the holders of at least 66 2/3% of the stated
liquidation amount of the Trust Securities have approved such amendment.
However, if an amendment affects only the powers, preferences or special rights
of Preferred Securities or the Common Securities, then such approval is
required only from the holders of the affected class. Further, any amendment
that changes the amount or timing of any Distribution or otherwise adversely
affects the amount of any Distribution required to be made in respect of the
Trust Securities, or any amendment that restricts the rights of a holder of
Trust Securities to institute a suit for the enforcement of payment of
Distributions, will not be effective unless each holder of Trust Securities has
approved such amendment.
Global Preferred Securities
Unless otherwise specified in the applicable Prospectus Supplement, the
Preferred Securities may be issued in whole or in part in global form ("Global
Preferred Securities") that will be deposited with, or on behalf of, a
depositary identified in the applicable Prospectus Supplement. Global Preferred
Securities may be issued only
26
<PAGE>
in fully registered form and in either temporary or permanent form. Unless and
until a Global Preferred Security is exchanged in whole or in part for the
individual Preferred Securities represented thereby, the depositary holding
such Global Preferred Security may transfer such Global Preferred Security only
to its nominee or successor depositary (or vice versa) and only as a whole.
Unless otherwise indicated in the applicable Prospectus Supplement for the
Preferred Securities, the depositary for the Global Preferred Securities will
be The Depository Trust Company. See "Book-Entry Issuance." The laws of some
jurisdictions require that certain purchasers of securities take physical
delivery of such securities in certificated form. Such limits and laws may
impair the ability to transfer beneficial interests in Global Preferred
Securities.
The specific terms of the depositary arrangement for the Preferred Securities
will be described in the applicable Prospectus Supplement. Capital Markets
anticipates that the description of the depositary set forth below under "Book-
Entry Issuance" generally will apply to any depositary arrangements. Capital
Markets expects that the applicable depositary or its nominee, upon receipt of
any payment of liquidation amount, premium or Distributions in respect of a
permanent Global Preferred Security representing any of the Preferred
Securities, immediately will credit Participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the aggregate
principal amount of such Global Preferred Security as shown on the records of
the depositary or its nominee. Capital Markets also expects that payments by
Participants to Beneficial Owners will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts
of customers in bearer form or registered in "street name." Such payments will
be the responsibility of such Participants.
Unless otherwise specified in the applicable Prospectus Supplement, if at any
time the depositary is unwilling, unable or ineligible to continue as a
depositary for the Preferred Securities, the Trust will appoint a successor
depositary with respect to the Preferred Securities. If a successor depositary
is not appointed by the Trust within 90 days after the Trust receives such
notice or becomes aware of such ineligibility, the Trust's election that the
Preferred Securities be represented by one or more Global Securities will no
longer be effective, and a Regular Trustee on behalf of the Trust will execute,
and the Property Trustee will authenticate and deliver, Preferred Securities in
definitive registered form, in any authorized denominations, in an aggregate
stated liquidation amount equal to the principal amount of the Global Preferred
Securities representing the Preferred Securities in exchange for such Global
Preferred Securities. In addition, the Trust may at any time and in its sole
discretion, subject to any limitations described in the applicable Prospectus
Supplement, determine not to have any Preferred Securities represented by one
or more Global Preferred Securities, and, in such event, a Regular Trustee on
behalf of the Trust will execute and the Property Trustee will authenticate and
deliver Preferred Securities in definitive registered form, in an aggregate
stated liquidation amount equal to the principal amount of the Global Preferred
Securities representing such Preferred Securities, in exchange for such Global
Preferred Securities.
Payment and Paying Agency
Payments in respect of the Preferred Securities will be made to the
applicable depositary, which will credit the relevant Participants' accounts on
the applicable Distribution dates or, if the Preferred Securities are not held
by a depositary, such payments will be made by check mailed to the address of
the holder entitled thereto as such address will appear on the Trust's security
register. Unless otherwise specified in the applicable Prospectus Supplement,
the paying agent for the Preferred Securities initially will be the Property
Trustee. The paying agent will be permitted to resign as paying agent upon 30
days' written notice to the Property Trustee and Capital Markets.
Registrar and Transfer Agent
Unless otherwise specified in the applicable Prospectus Supplement, the
Property Trustee will act as registrar and transfer agent for the Preferred
Securities.
27
<PAGE>
Registration of transfers of Preferred Securities will be effected without
charge by or on behalf of the Trust, but the Trust may require payment of any
tax or other governmental charges that may be imposed in connection with any
transfer or exchange of Preferred Securities.
Information Concerning the Property Trustee
The Property Trustee will not be liable for any action taken, suffered or
omitted to be taken by it without negligence, in good faith and reasonably
believed by it to be authorized or within the discretion, rights or powers
conferred upon it by the Declaration. The Property Trustee will be under no
obligation to exercise any rights or powers vested in it by the Declaration at
the request or direction of any holder of Trust Securities, unless such holder
provides the Property Trustee security and indemnity, reasonably satisfactory
to the Property Trustee, against the costs and expenses and liabilities that
might be incurred by it in complying with such request or direction.
Governing Law
The Declaration and the Preferred Securities will be governed by, construed
and interpreted in accordance with the laws of the State of Delaware.
DESCRIPTION OF THE GUARANTEE
The following description sets forth certain general terms and provisions of
the Guarantee to which any Prospectus Supplement may relate. The particular
terms and provisions of the Guarantee and the application of these general
terms and provisions thereto will be described in the applicable Prospectus
Supplement.
Pursuant to and for the purposes of compliance with the Trust Indenture Act,
the Guarantee will qualify as an indenture, and The Chase Manhattan Bank will
act as trustee under the Guarantee (the "Guarantee Trustee") and hold the
Guarantee for the benefit of the holders of the Trust Securities. The following
summaries of certain terms and provisions of the Guarantee do not purport to be
complete and are subject to, and qualified in their entirety by reference to,
the form of Guarantee (including the definitions therein of certain terms) that
is filed as an exhibit to the Registration Statement, and to the Trust
Indenture Act. Capitalized terms used in this section not otherwise defined in
this Prospectus have the meanings set forth in the Guarantee.
General
To the extent set forth in the Guarantee and except to the extent paid by the
Trust, Capital Markets will irrevocably and unconditionally agree to pay the
holders of the Trust Securities the Guarantee Payments (as defined below), in
full, as and when due, regardless of any defense, right of set-off or
counterclaim that the Trust may have or assert. The payments subject to the
Guarantee (the "Guarantee Payments") include:
(i) any accumulated and unpaid Distributions that are required to be paid
on the Trust Securities, to the extent the Trust has funds available
therefor;
(ii) the redemption price, including all accumulated and unpaid
Distributions to the date of redemption, with respect to the Trust
Securities upon the redemption of the Debentures if a Tax Event occurs or
upon maturity of the Debentures, to the extent the Trust has funds
available therefor;
(iii) upon a voluntary or involuntary dissolution, winding-up or
termination of the Trust (other than in connection with the distribution of
Debentures to the holders in exchange for the Trust Securities, as provided
in the Declaration), the lesser of (a) the aggregate of the stated
liquidation amount and all
28
<PAGE>
accumulated and unpaid Distributions on the Trust Securities to the date of
payment, to the extent the Trust has funds available therefor, and (b) the
amount of assets of the Trust remaining available for distribution to
holders of the Trust Securities in liquidation of the Trust.
Capital Markets' obligation to make a Guarantee Payment may be satisfied by
direct payment of the required amounts by Capital Markets to the holders of
Preferred Securities or by causing the Trust to pay such amounts to such
holders.
If a Trust Enforcement Event has occurred and is continuing, the rights of
holders of the Common Securities to receive Guarantee Payments will be
subordinated to the rights of holders of Preferred Securities to receive
Guarantee Payments. See "Description of the Preferred Securities--Subordination
of Common Securities."
The Guarantee will apply only to the extent the Trust has funds available to
make payments with respect to the Trust Securities. If Capital Markets does not
make interest payments on the Debentures owned by the Trust, the Trust will not
have funds available to pay Distributions on the Preferred Securities.
Through the Guarantee, the Debentures and the Indenture, taken together,
Capital Markets has fully and unconditionally guaranteed all of the Trust's
obligations under the Trust 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 the documents that has the
effect of providing a full and unconditional guarantee of the Trust's
obligations under the Declaration. See "Relationship Among the Preferred
Securities, the Debentures and the Guarantee."
Status of the Guarantee
The Guarantee will constitute a guarantee of payment and not of collection.
The beneficiaries of the Guarantee may institute a legal proceeding directly
against Capital Markets to enforce its rights under the Guarantee without
instituting a legal proceeding against any other person or entity.
Certain Covenants of Capital Markets
Capital Markets will covenant that, so long as any Trust Securities remain
outstanding, if an Event of Default occurs under the Guarantee or a Trust
Enforcement Event occurs under the Declaration and written notice of such event
has been given to Capital Markets, then Capital Markets and Industries may not
(i) declare or pay any dividends or distributions on, or redeem, purchase,
acquire, or make a liquidation payment with respect to any of Capital Markets'
or Industries' capital stock or (ii) make any payment of principal, interest or
premium, if any, on or repay, repurchase or redeem any debt securities of
Capital Markets or Industries that rank on a parity with or junior in interest
to the Debentures or make any guarantee payments with respect to any guarantee
by Capital Markets or Industries of the debt securities of any subsidiary of
Capital Markets or Industries if such guarantee ranks on a parity with or
junior in interest to the Debentures (other than (a) purchases or acquisitions
of capital stock of Capital Markets or Industries in connection with the
satisfaction by Capital Markets or Industries of its obligations under any
employee benefit plans or the satisfaction by Capital Markets or Industries of
its obligations pursuant to any contract or security outstanding on the date of
such event requiring Capital Markets or Industries to purchase capital stock of
Capital Markets or Industries, (b) as a result of a reclassification of Capital
Markets' or Industries' capital stock for another class or series of Capital
Markets' or Industries' capital stock, (c) the purchase of fractional interests
in shares of Capital Markets' or Industries' capital stock pursuant to the
conversion or exchange provisions of such capital stock or the security being
converted or exchanged, (d) dividends or distributions in capital stock of
Capital Markets or Industries, (e) redemptions or repurchases of any rights
pursuant to a rights agreement and (f) payments under the Guarantee).
29
<PAGE>
Amendments; Assignment
Except with respect to any changes that do not adversely affect the rights of
holders of the Trust Securities in any material respect (that do not require
the consent of holders), the Guarantee may be amended only with the prior
approval of the holders of at least a majority in liquidation amount (including
the stated amount that would be paid on redemption, liquidation or otherwise,
plus accrued and unpaid Distributions to the date upon which the voting
percentages are determined) of all the outstanding Trust Securities. All
guarantees and agreements contained in the Guarantee will bind the successors,
assigns, receivers, trustees and representatives of Capital Markets and will
inure to the benefit of the holders of the Trust Securities then outstanding.
Events of Default
An event of default under the Guarantee will occur upon the failure of
Capital Markets to perform any of its payment or other obligations thereunder.
The holders of a majority in stated liquidation amount of the Trust
Securities have the right to 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. If the Guarantee Trustee fails to
enforce the Guarantee, any holder of Trust Securities may institute a legal
proceeding directly against Capital Markets to enforce its rights under the
Guarantee, without first instituting a legal proceeding against the Trust, the
Guarantee Trustee or any other person. Notwithstanding the foregoing, if
Capital Markets has failed to make a Guarantee Payment, a holder of Trust
Securities may directly institute a proceeding against Capital Markets for
enforcement of the Guarantee for such payment.
Capital Markets, as guarantor, is required to file annually with the
Guarantee Trustee a certificate indicating whether or not Capital Markets is in
compliance with all of the conditions and obligations applicable to it under
the Guarantee.
Termination
The Guarantee will terminate (i) if a Tax Event occurs or upon maturity of
the Debentures, upon full payment of the redemption price of all of the Trust
Securities, (ii) upon distribution of the Debentures held by the Trust to the
holders of the Trust Securities or (iv) upon full payment of the amounts
payable in accordance with the Declaration upon liquidation of the Trust. 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 Securities must return payment of
any sums paid under the Trust Securities or the Guarantee.
Information Concerning the Guarantee Trustee
The Guarantee Trustee, prior to the occurrence of a default with respect to
the Guarantee, will undertake to perform only those duties specifically set
forth in the Guarantee and, after a default that has not been cured or waived,
will exercise the same degree of care as a prudent individual would exercise in
the conduct of his or her own affairs. Subject to such provisions, the
Guarantee Trustee will be under no obligation to exercise any of the rights or
powers vested in it by the Guarantee at the request or direction of any holder
of the Trust Securities, unless such holder provides the Guarantee Trustee
security and indemnity, reasonably satisfactory to the Guarantee Trustee,
against the costs, expenses (including attorneys' fees and expenses and the
expenses of the Guarantee Trustee's agents, nominees or custodians) and
liabilities that might be incurred thereby. The foregoing will not relieve the
Guarantee Trustee, upon the occurrence of an event of default under the
Guarantee, of its obligation to exercise the rights and powers vested in it by
the Guarantee.
Governing Law
The Guarantee will be governed by, construed and interpreted in accordance
with the laws of the State of New York.
30
<PAGE>
RELATIONSHIP AMONG THE PREFERRED SECURITIES, THE DEBENTURESAND THE GUARANTEE
To the extent set forth in the Guarantee and to the extent funds are
available, Capital Markets will irrevocably guarantee the payment of
Distributions and other amounts due on the Trust Securities. See "Description
of the Guarantee." If and to the extent Capital Markets does not make payments
on the Debentures, the Trust will not have sufficient funds to pay
Distributions or other amounts due on the Trust Securities. The Guarantee does
not cover any payment of Distributions or other amounts due on the Trust
Securities unless the Trust has sufficient funds for the payment of such
Distributions or other amounts. In such event, a holder of Trust Securities may
institute a legal proceeding directly against Capital Markets to enforce
payment of such Distributions or other amounts to such holder after the
respective due dates. Taken together, Capital Markets' obligations under the
Debentures, the Indenture and the Guarantee provide a full and unconditional
guarantee of payments of Distributions and other amounts due on the Trust
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 provides a full and
unconditional guarantee of the Trust's obligations under the Trust Securities.
Sufficiency of Payments
As long as payments of interest and other amounts are made when due on the
Debentures, such payments will be sufficient to cover Distributions and
payments due on the Trust Securities because of the following factors: (i) the
aggregate principal amount of the Debentures will be equal to the sum of the
aggregate stated liquidation amount of the Trust Securities; (ii) the interest
rate and the interest and other payment dates on the Debentures will match the
distribution rate and distribution and other payment dates for the Trust
Securities; (iii) Capital Markets, as issuer of the Debentures, will pay, and
the Trust will not be obligated to pay, directly or indirectly, all costs,
expenses, debts and obligations of the Trust (other than with respect to the
Trust Securities); and (iv) the Declaration further provides that the Trust
will not engage in any activity that is not consistent with the limited
purposes of the Trust.
Notwithstanding anything to the contrary in the Indenture, Capital Markets
has the right to set-off any payment it is otherwise required to make
thereunder against and to the extent it has already made, or is concurrently on
the date of such payment making, a related payment under the Guarantee.
Enforcement Rights of Holders of Preferred Securities
The Declaration provides that if Capital Markets fails to make interest or
other payments on the Debentures when due (taking account of any Extension
Period), the holders of the Preferred Securities may direct the Property
Trustee to enforce its rights under the Indenture. See "Description of
Preferred Securities-- Voting Rights; Amendment of Declaration." If the
Property Trustee fails to enforce its rights under the Indenture in respect of
an Indenture Event of Default, any holder of record of Preferred Securities
may, to the fullest extent permitted by applicable law, institute a legal
proceeding against Capital Markets to enforce the Property Trustee's rights
under the Indenture without first instituting any legal proceeding against the
Property Trustee or any other person or entity. Notwithstanding the foregoing,
if a Trust Enforcement Event has occurred and is continuing and such event is
attributable to the failure of Capital Markets to pay interest or principal on
the Debentures on the date such interest or principal is otherwise payable,
then a holder of Preferred Securities may institute a Direct Action against
Capital Markets for payment.
If Capital Markets fails to make payments under the Guarantee, a holder of
Preferred Securities may institute a proceeding directly against Capital
Markets for enforcement of the Guarantee for such payments.
Limited Purpose of Trust
The Preferred Securities evidence undivided beneficial ownership interests in
the Trust, and the Trust exists for the sole purpose of issuing and selling the
Trust Securities and using the proceeds to purchase
31
<PAGE>
Debentures. A principal difference between the rights of a holder of Preferred
Securities and a holder of Debentures is that a holder of Debentures is
entitled to receive from Capital Markets the principal amount of and interest
accrued on Debentures held, while a holder of Preferred Securities is entitled
to receive Distributions and other payments from the Trust (or from Capital
Markets under the Guarantee) only if and to the extent the Trust has funds
available for the payment of such Distributions and other payments.
Rights Upon Dissolution
Upon any voluntary or involuntary dissolution, winding-up or liquidation of
the Trust involving the redemption or repayment of the Debentures, the holders
of the Trust Securities will be entitled to receive, out of assets held by the
Trust, subject to the rights of creditors of the Trust, if any, the Liquidation
Distribution in cash. Because Capital Markets is the guarantor under the
Guarantee and, as issuer of the Debentures, has agreed to pay for all costs,
expenses and liabilities of the Trust (other than the Trust's obligations to
the holders of the Trust Securities), the positions of a holder of Trust
Securities and a holder of the Debentures relative to other creditors and to
shareholders of Capital Markets in the event of liquidation or bankruptcy of
Capital Markets would be substantially the same.
DESCRIPTION OF THE COMMON SHARES
The following description sets forth certain general terms and provisions of
the Common Shares and certain provisions of the Indiana Business Corporations
Law (the "Indiana BCL"). The particular terms and provisions of the Common
Shares offered by a Prospectus Supplement and the application of these general
terms and provisions thereto will be described in the applicable Prospectus
Supplement.
The following summaries of certain terms and provisions of the Common Shares
do not purport to be complete and are subject to, and qualified in their
entirety by reference to, applicable Indiana law and to the provisions of
Industries' Amended and Restated Articles of Incorporation (the "Restated
Articles") and its Amended and Restated By-Laws (the "Restated By-Laws"),
copies of which have been filed as exhibits to the Registration Statement.
General
The authorized capital stock of Industries consists of 400,000,000 Common
Shares, of which 117,525,257 Common Shares were issued and outstanding as of
October 31, 1998, and 20,000,000 preferred shares, without par value, of which
no shares are issued and outstanding as of the date of this Prospectus. Two
million preferred shares have been designated Series A Junior Participating
Preferred Shares and reserved for issuance upon exercise of the preferred share
purchase rights issued pursuant to the Share Purchase Rights Plan described
below. Subject to the limitations described below and the prior rights of
holders of Industries' preferred shares, holders of Common Shares are entitled
to receive dividends when and as declared by the Board of Directors of
Industries. Holders of Common Shares are entitled to one vote per share on each
matter submitted to a vote at a meeting of shareholders. Holders of Common
Shares are not entitled, as a matter of right, to subscribe for, purchase or
receive any new or additional issue of Industries' capital stock or securities
convertible into capital stock of Industries. In the event of any voluntary or
involuntary liquidation, distribution or sale of assets, dissolution or winding
up of Industries, the holders of Common Shares will be entitled to receive the
remaining assets after payment to the holders of preferred shares of the
preferential amounts, if any, to which they are entitled.
The Common Shares are listed on the NYSE, the CSE and the PE. The transfer
agent and registrar for the Common Shares is Harris Trust and Savings Bank.
Limitation on Dividends
Holders of Common Shares will not receive any dividends on the Common Shares
until after Industries has provided for the payment of all preferential
dividends on Industries' preferred shares and complied with
32
<PAGE>
any requirements to set aside amounts for any sinking fund provisions,
redemption provisions or purchase accounts with respect to Industries'
preferred shares.
If Capital Markets exercises its right, if any, to defer payments of interest
on the Debentures from time to time by extending the applicable interest
payment period and accordingly causes the deferral of payments of Distributions
on the Preferred Securities, Industries may not declare, set aside or pay any
dividend or distribution on any shares of any class or series of its capital
stock, except for dividends or distributions in shares of its capital stock or
in rights to acquire shares of its capital stock. See "Description of the
Preferred Securities--Distributions."
Certain Business Combinations and Share Purchases
Chapters 42 and 43 of the Indiana BCL regulate "control share acquisitions"
of securities of, and "business combinations" with, certain Indiana
corporations, including, in some instances, Industries.
Under Chapter 42 of the Indiana BCL, a "control share acquisition" is deemed
to occur when a person accumulates beneficial ownership of shares of a
corporation subject to the statute that, when added to all other shares of such
corporation beneficially owned by the acquiring person, would entitle the
acquiring person, upon acquisition of such shares, to vote or direct the voting
of shares of the corporation having voting power in the election of directors
within any of the following ranges: (i) one-fifth or more but less than one-
third of all voting power; (ii) one-third or more but less than a majority of
all voting power; or (iii) a majority or more of all voting power. Shares
acquired in a control share acquisition have the same voting rights as all
other shares of the same class or series of the corporation only to the extent
authorized by the affirmative vote of the holders of a majority of all of the
shares entitled to vote generally in the election of directors, excluding
shares held by the acquiring person, any officer of such corporation or any
employee of such corporation who is also a director of the corporation. The
acquiring person may cause a special shareholder meeting to be held to consider
whether the acquiring person can vote its shares. If no such request for a
shareholders' meeting is made, consideration of the voting rights of the
acquiring person's shares must be taken up at the next special or annual
shareholders' meeting of the corporation. In the event the acquiring person
fails to file a statement requesting such a meeting or the remaining
shareholders vote not to accord voting rights to the acquiring person's shares,
the corporation may redeem all of the acquiring person's shares for fair value.
In Indiana such a redemption must be authorized in the corporation's articles
or bylaws before a control share acquisition has occurred. The Restated By-Laws
authorize such a redemption. If voting rights are accorded to the acquiring
person and the acquiring person acquires beneficial ownership of a majority of
the shares of the corporation entitled to vote on the election of directors,
each shareholder of record who has not voted in favor of according the
acquiring person such voting rights may demand payment and an appraisal for his
or her stock at fair value. Regardless of the foregoing, full voting rights
will be restored to the shares of an acquiring person upon the transfer of
beneficial ownership of such shares to another person, unless such transfer
itself constitutes a control share acquisition.
Chapter 43 of the Indiana BCL regulates "business combinations" involving
certain Indiana corporations having a class of voting shares registered
pursuant to the Exchange Act and an "interested shareholder." An "interested
shareholder" is deemed to be, subject to certain limitations: (i) a person who
is the beneficial owner of 10% or more of the voting power of the outstanding
voting shares of the corporation; or (ii) an affiliate or associate of the
corporation who at any time within the five-year period immediately preceding
the date of the business combination was the beneficial owner of 10% or more of
the voting power of the then outstanding shares of the corporation. A "business
combination" includes: a merger, sale, lease, exchange, mortgage, pledge,
transfer or other disposition of 10% or more of the assets, outstanding stock
or earning power of the corporation, to or with an interested shareholder; any
transaction resulting in the issuance or transfer to an interested shareholder
of any stock of the corporation or its subsidiaries having 5% or more of the
aggregate market value of all outstanding shares (except pursuant to the
exercise of certain warrants or rights to purchase shares, or pro rata
dividends or distributions); any proposal for liquidation or dissolution by the
interested shareholder; any transaction involving the corporation or its
subsidiaries that would result in
33
<PAGE>
increasing the proportionate share of the stock of the corporation or its
subsidiaries owned by an interested shareholder; and any receipt by an
interested shareholder of the benefit (except proportionately as a shareholder)
of loans, guarantees or other financial benefits. The corporation may not
engage in any business combination with an interested shareholder for a period
of five years following the date such shareholder became an interested
shareholder, unless prior to that date the board of directors approved either
the business combination or the transaction that resulted in the shareholder
becoming an interested shareholder. Subsequent to the expiration of the five
year prohibition, a combination will be allowed only if (i) prior to the
interested shareholder's share acquisition date, the board of directors
approved either the business combination or the transaction that resulted in
the shareholder becoming an interested shareholder, (ii) the combination is
approved by disinterested shareholders or (iii) shareholders, other than the
interested shareholder, receive certain amounts and types of consideration in
the event a business combination with the interested shareholder that has not
been approved takes place after the expiration of the five-year period.
A corporation may elect not to be governed by the business combination
provisions by amendment to its articles of incorporation. Industries has not
adopted such an amendment. The Restated Articles contain provisions similar to
those of Chapter 43 of the Indiana BCL. Under the Restated Articles, any
business combination that is proposed by an interested shareholder must be
approved by 80% of the outstanding voting shares, unless certain fair price and
procedural requirements are met, the business combination is approved by
Industries' Board before the interested shareholder becomes an interested
shareholder, or the business combination is approved by the affirmative vote of
the holders of the majority of the outstanding voting shares that are not
beneficially owned by the interested shareholder no earlier than five years
after such person becomes an interested shareholder.
The provisions in Chapter 43, the Indiana BCL and the Restated Articles, in
effect, encourage a party seeking to control Industries, in advance of the
party becoming an interested shareholder, to negotiate and reach an agreement
with Industries' Board as to the terms of its proposed business combination.
Without such a prior agreement with Industries' Board, it could take over five
years for a party who is an interested shareholder to obtain approval of its
proposed business combination unless such proposed business combination is
approved by the requisite 80% or two-thirds vote or satisfies the fair price
and procedural requirements. As a result of these restrictions on business
combinations with interested shareholders, takeovers that might be favored by a
majority of Industries' shareholders may be impeded or prevented. On the other
hand, the negotiation of terms of a takeover transaction in advance is likely
to result in more favorable terms for all of the shareholders of Industries
than are likely to be offered in takeovers initiated without advance
negotiations.
Board of Directors
The Restated Articles provide that Industries' Board shall consist of ten
persons and be divided into three classes serving staggered three-year terms.
As a result, approximately one-third of Industries' Board is elected each year.
The Restated Articles provide that a director of Industries may only be removed
for cause by the directors or shareholders and that vacancies shall be filled
by a majority vote of the remaining directors.
The existence of Industries' staggered Board requires a substantial
shareholder to negotiate with the existing Board before attempting a takeover
of Industries because, without the cooperation of the existing Board, it could
take such a shareholder up to two years to acquire control of the Board. This
provision enables Industries' Board, and ultimately its shareholders, to
negotiate with potential acquirors from a strong position and protects
Industries' shareholders against unfair or unequal treatment that could arise
from an unsolicited attempt to acquire the respective companies. On the other
hand, the additional time required to obtain control of Industries' Board may
discourage takeover bids that a majority of Industries' shareholders might deem
desirable.
34
<PAGE>
Shareholder Meetings; Action by Written Consent; Shareholder Proposals
The Restated By-Laws provide that the Chairman, President or Industries'
Board may call a special meeting of shareholders and that the Chairman must
call a special meeting of shareholders upon the written request of a majority
of Industries' Board or the holders of at least 25% of the outstanding voting
stock.
Under the Indiana BCL, any action required to be taken at meeting of
shareholders may be taken without a meeting if all shareholders entitled to
vote on the matter consent to the action in writing and the written consents
are filed with the records of the meetings of shareholders.
The Restated By-Laws provide that nominations for election to Industries'
Board and the proposal of business to be considered by the shareholders at an
annual meeting of shareholders may be made by any shareholder of record who
gives notice to Industries prior to the date set forth for such notice in
Industries' proxy statement for the preceding annual meeting of shareholders.
The notice must contain, for director nominees, the information required
pursuant to Regulation 14A of the Exchange Act in regard to such nominees, or
for business proposed to be brought before the meeting, a brief description of
the business and, in either case, certain information regarding the shareholder
making the proposal.
Amendment of Restated Articles
The Restated Articles provide that the provisions relating to directors,
business combinations, indemnification and amendment of the Restated Articles
may not be amended, altered, changed or repealed unless such amendment,
alteration, change or repeal is approved by the affirmative vote of the holders
of not less than 75% of the outstanding shares entitled to vote thereon. This
requirement of a 75% vote is greater than the general voting requirement under
the Indiana BCL and, in effect, could give certain minority shareholders of
Industries, including the members of Industries' Board in their capacity as
shareholders, a veto power over subsequent changes to provisions relating to
directors, business combinations, indemnification and amendment of the Restated
Articles, ultimately making it more difficult to amend such provisions, even if
a majority of the holders of Common Shares favors such changes.
Amendment of By-Laws
The Restated By-Laws provide that they may be altered, amended or repealed by
an affirmative vote of a majority of a quorum of Industries' Board at any
meeting of the Board.
Share Purchase Rights Plan
In February 1990, Industries adopted a Share Purchase Rights Plan and issued,
as a dividend, one preferred share purchase right (a "Right") for each
outstanding Common Share. Each Common Share issued since the date of that
dividend also includes one Right (including shares to be issued in connection
with any offering of Common Shares pursuant to this Prospectus, except in the
unlikely event that the Rights are redeemed or separately certificated prior to
the closing of any such offering).
Each Right entitles its holder to purchase one-two-hundredth ( 1/200) of an
Industries' Series A Junior Participating Preferred Share at a price of $30 per
one-two-hundredth of a share, subject to adjustment. Currently, the Rights are
not exercisable. The Rights will become exercisable if a person or group
acquires 20% or more of the voting power of Industries or announces a tender or
exchange offer following which such person or group would hold 25% or more of
Industries' voting power. If such an acquisition were consummated, or if
Industries were acquired by such person or group in a merger or other business
combination, then each Right would be exercisable for that number of
Industries' Common Shares or the acquiring company's shares of common stock
having a market value of two times the exercise price of the Right. Industries
may redeem the Rights at a price of $.005 per Industries Right prior to the
occurrence of an event that causes the Rights to be exercisable for Common
Shares. The Rights will expire on March 12, 2000.
35
<PAGE>
DESCRIPTION OF THE STOCK PURCHASE CONTRACTS AND THE STOCK PURCHASE UNITS
Industries may issue Stock Purchase Contracts, including contracts obligating
holders to purchase from Industries, and Industries to sell to the holders, a
specified number of Common Shares at a future date or dates. The consideration
per Common Share 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. Industries may issue the Stock Purchase Contracts
separately or as Stock Purchase Units consisting of (i) a Stock Purchase
Contract and (ii) Preferred Securities or debt obligations of third parties,
including U.S. Treasury securities. Such Preferred Securities or debt
obligations will serve as collateral to secure the holders' obligations to
purchase the Common Shares under the Stock Purchase Contracts. The Stock
Purchase Contracts may require Industries to make periodic payments to the
holders of the Stock Purchase Contracts. Such payments may be unsecured or
prefunded 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, including, if applicable,
collateral arrangements and depositary arrangements relating to such Stock
Purchase Contracts or Stock Purchase Units. That Prospectus Supplement also
will describe certain United States federal income tax consequences and special
considerations applicable to the offering of the Stock Purchase Contracts or
Stock Purchase Units.
The Stock Purchase Contracts and Stock Purchase Units will be governed by and
construed in accordance with the laws of the State of New York.
DESCRIPTION OF MEDIUM-TERM NOTES
The following description sets forth certain general terms and provisions of
the Medium-Term Notes to which any Prospectus Supplement or Pricing Supplement
may relate. The particular terms and provisions of the Medium-Term Notes and
the application of these general terms and provisions thereto will be described
in the applicable Prospectus Supplement or Pricing Supplement.
The Medium-Term Notes will be issued as a series of Debt Securities under the
Indenture, which is subject to and governed by the Trust Indenture Act. The
following summaries of certain terms and provisions of the Medium-Term Notes
and the Indenture do not purport to be complete and are subject to, and
qualified in their entirety by reference to, the forms of Medium-Term Notes and
the Indenture that are filed as exhibits to this Registration Statement, and to
the Trust Indenture Act. Capitalized terms used in this section not otherwise
defined in this Prospectus have the meanings set forth in the Medium-Term Notes
or the Indenture, as the case may be. Certain material United States federal
income tax consequences applicable to the offering of the Medium-Term Notes
will be described in the applicable Prospectus Supplement or Pricing
Supplement.
The term "Debt Securities," as used in this Prospectus, refers to all debt
securities, including the Debentures described above and the Medium-Term Notes,
issued and issuable from time to time under the Indenture. The following
description of the Medium-Term Notes will apply to each series of Medium-Term
Note offered hereby unless otherwise specified in the applicable Prospectus
Supplement or Pricing Supplement.
General
All Debt Securities, including the Medium-Term Notes, issued and to be issued
under the Indenture will be unsecured general obligations of Capital Markets
and will rank on a parity with all other unsecured and unsubordinated
indebtedness of Capital Markets from time to time outstanding. The Indenture
does not limit the aggregate principal amount of Debt Securities that may be
issued thereunder, and Capital Markets may issue Debt Securities thereunder
from time to time in one or more series up to the aggregate principal amount
authorized by Capital Markets for each series. From time to time, Capital
Markets may provide for the issuance
36
<PAGE>
of Medium-Term Notes or other Debt Securities under the Indenture, without the
consent of holders of Debt Securities already outstanding, in addition to the
Medium-Term Notes offered hereby.
The Medium-Term Notes currently are limited to up to an aggregate principal
amount of $250 million, or the equivalent thereof in one or more foreign or
composite currencies. Each Note will mature on any day nine months or more from
its date of issue (the "Stated Maturity Date"), as specified in the applicable
Prospectus Supplement or Pricing Supplement, unless the principal thereof (or
any installment of principal thereof) becomes due and payable prior to the
Stated Maturity Date, whether by the declaration of acceleration of maturity,
notice of redemption at Capital Markets' option, notice of the holder's option
to elect repayment or otherwise (the Stated Maturity Date or such prior date,
as the case may be, is herein referred to as the "Maturity Date" with respect
to the principal of such Note repayable on such date). Unless otherwise
specified in the applicable Prospectus Supplement or Pricing Supplement,
interest-bearing Medium-Term Notes will either be Fixed Rate Notes or Floating
Rate Notes, as specified in the applicable Prospectus Supplement or Pricing
Supplement. Capital Markets also may issue Discount Notes, Indexed Notes and
Amortizing Notes (as such terms are hereinafter defined).
Unless otherwise specified in the applicable Prospectus Supplement or Pricing
Supplement, the Medium-Term Notes will be denominated in, and payments of
principal and any premium and/or interest in respect thereof will be made in
United States dollars. The Medium-Term Notes also may be denominated in, and
payments of principal and any premium or interest in respect thereof may be
made in, one or more foreign or composite currencies. See "Special Provisions
Relating to Foreign Currency Notes--Payment of Principal and Any Premium or
Interest." The currency or composite currency in which a particular Note is
denominated (or, if such currency or composite currency is no longer legal
tender for the payment of public and private debts, such other currency or
composite currency of the relevant country that then is legal tender for the
payment of such debts) is herein referred to as the "Specified Currency" with
respect to such Note. References herein to "United States dollars," "U.S.
dollars" or "$" are to the lawful currency of the United States of America (the
"United States").
Unless otherwise specified in the applicable Prospectus Supplement or Pricing
Supplement, purchasers are required to pay for the Medium-Term Notes in the
applicable Specified Currencies. At the present time, there are limited
facilities in the United States for the conversion of United States dollars
into foreign or composite currencies and vice versa, and commercial banks do
not generally offer non-United States dollar checking or savings account
facilities in the United States. Capital Markets believes that, with respect to
Notes offered through agents, and unless otherwise specified in the applicable
Prospectus Supplement or Pricing Supplement, the agent from or through which a
Foreign Currency Note is purchased may be prepared to arrange for the
conversion of United States dollars into the Specified Currency in order to
enable the purchaser to pay for such Foreign Currency Note, provided that a
request is made to such agent on or prior to the fifth Business Day (as
hereinafter defined) preceding the date of delivery of such Foreign Currency
Note, or by such other day as determined by such agent. Each such conversion
will be made by such agent subject to such terms and conditions, limitations
and charges as such agent may from time to time establish in accordance with
its regular foreign exchange practices. All costs of exchange will be borne by
the purchaser of each such Foreign Currency Note. See "Special Provisions
Relating to Foreign Currency Notes."
Interest rates offered by Capital Markets with respect to the Medium-Term
Notes may differ depending upon, among other factors, the aggregate principal
amount of Medium-Term Notes purchased in any single transaction. Medium-Term
Notes with different variable terms other than interest rates also may be
offered concurrently to different investors. Capital Markets may change the
interest rates or formulas and other terms of the Medium-Term Notes from time
to time, but no such change will affect any Note previously issued or as to
which an offer to purchase already has been accepted by Capital Markets.
Each Note will be issued as a Book-Entry Note represented by one or more
fully registered Global Securities or as a fully registered Certificated Note.
Unless otherwise specified in the applicable Prospectus Supplement or Pricing
Supplement, the minimum denominations of each Medium-Term Note (other than a
37
<PAGE>
Foreign Currency Note) will be $1,000 and integral multiples thereof. The
minimum denominations of each Foreign Currency Note will be specified in the
applicable Prospectus Supplement or Pricing Supplement.
Capital Markets will make payments of principal of and any premium or
interest on Book-Entry Notes through the Indenture Trustee to the depositary.
See "--Book-Entry Notes." In the case of Certificated Notes, Capital Markets
will pay principal of and any premium due on the Maturity Date in immediately
available funds upon presentation and surrender of the Certificated Note (and,
in the case of any repayment on an Optional Repayment Date, upon submission of
a duly completed election form in accordance with the provisions described
below) at the office or agency maintained by Capital Markets for such purpose
in the Borough of Manhattan, The City of New York, which currently is the
corporate trust office of the Indenture Trustee. Capital Markets will make any
payment of interest due on the Maturity Date of a Certificated Note to the
person to whom payment of the principal thereof and premium, if any, thereon
will be made. Capital Markets will make any payment of interest due on a
Certificated Note on any Interest Payment Date (as hereinafter defined) other
than the Maturity Date by check mailed to the address of its holder entitled
thereto as such address will appear in the Security Register of Capital
Markets. Notwithstanding the foregoing, a holder of $10 million (or, if the
Specified Currency is other than United States dollars, the equivalent thereof
in such Specified Currency) or more in aggregate principal amount of
Certificated Notes (whether having identical or different terms and provisions)
will be entitled to receive any interest payments on any Interest Payment Date
other than the Maturity Date by wire transfer of immediately available funds,
if appropriate wire transfer instructions have been received in writing by the
Indenture Trustee not less than 15 days prior to such Interest Payment Date.
Such wire transfer instructions will remain in effect until revoked by such
holder. For special payment terms applicable to Foreign Currency Notes, see "--
Special Provisions Relating to Foreign Currency Notes--Payment of Principal and
Any Premium or Interest."
As used in this "Description of Medium-Term Notes," "Business Day" means any
day, other than a Saturday or Sunday, that is neither a legal holiday nor a day
on which banking institutions are authorized or required by law, regulation or
executive order to close in The City of New York. With respect to Foreign
Currency Notes, "Business Day" is also not a day on which banking institutions
are authorized or required by law, regulation or executive order to close in
the Principal Financial Center (as hereinafter defined) of the country issuing
the Specified Currency (unless the Specified Currency is European Currency
Units ("ECU"), in which case such day also is not a day that appears as an ECU
non-settlement day on the display designated as "ISDE" on the Reuters Monitor
Money Rates Service (or is not a day designated as an ECU non-settlement day by
the ECU Banking Association) or, if ECU non-settlement days do not appear on
that page (and are not so designated), a day that is not a day on which
payments in ECU cannot be settled in the international interbank market);
provided, further, that, with respect to Medium-Term Notes as to which LIBOR is
an applicable Interest Rate Basis, such day is also a London Business Day.
"London Business Day" means a day on which dealings in the Designated LIBOR
Currency (as hereinafter defined) are transacted in the London interbank
market.
"Principal Financial Center" means (i) the capital city of the country
issuing the Specified Currency (except as described in the immediately
preceding paragraph with respect to ECU) or (ii) the capital city of the
country to which the Designated LIBOR Currency, if applicable, relates, or, in
the case of ECU, Luxembourg. However, with respect to United States dollars,
Australian dollars, Canadian dollars, German marks, Dutch guilders, Italian
lire and Swiss francs, the "Principal Financial Center" will be New York City,
Sydney, Toronto, Frankfurt, Amsterdam, Milan (solely in the case of clause (i)
above) and Zurich, respectively, unless otherwise specified in the applicable
Prospectus Supplement or Pricing Supplement.
Book-Entry Notes may be transferred or exchanged only through the depositary.
See "--Book-Entry Notes." Registration of transfer or exchange of Certificated
Notes will be made at the office or agency maintained by Capital Markets for
such purpose in the Borough of Manhattan, The City of New York, which currently
is the corporate trust office of the Indenture Trustee. Neither Capital Markets
nor the Indenture Trustee will charge a service fee for any such registration
of transfer or exchange of the Medium-Term Notes, but Capital Markets may
require payment of a sum sufficient to cover any tax or other governmental
charge
38
<PAGE>
that may be imposed in connection therewith (other than exchanges pursuant to
the Indenture not involving any transfer).
Redemption at the Option of Capital
Unless otherwise specified in the applicable Prospectus Supplement or Pricing
Supplement, the Medium-Term Notes will not be subject to any sinking fund.
Capital Markets may redeem the Medium-Term Notes at its option prior to the
Stated Maturity Date if an Initial Redemption Date is specified in the
applicable Prospectus Supplement or Pricing Supplement. If so specified,
Capital Markets may redeem the Medium-Term Notes at its option on any date on
or after the applicable Initial Redemption Date in whole, or from time to time
thereafter in part in increments of $1,000 or such other minimum denomination
specified in such Prospectus Supplement or Pricing Supplement (provided that
any remaining principal amount thereof will be at least $1,000 or such minimum
denomination). Such redemption will be at the applicable Redemption Price (as
hereinafter defined), together with unpaid interest accrued thereon to the date
of redemption; provided that Capital Markets gives holders of Notes written
notice not more than 60 nor less than 30 calendar days prior to the date of
redemption in accordance with the provisions of the Indenture. With respect to
a Medium-Term Note, "Redemption Price" means an amount equal to the Initial
Redemption Percentage specified in the applicable Prospectus Supplement or
Pricing Supplement (as adjusted by the Annual Redemption Percentage Reduction,
if applicable) multiplied by the unpaid principal amount to be redeemed. The
Initial Redemption Percentage, if any, applicable to a Note will decline upon
each anniversary of the Initial Redemption Date by an amount equal to the
applicable Annual Redemption Percentage Reduction, if any, until the Redemption
Price is equal to 100% of the unpaid principal amount to be redeemed. For a
discussion of the redemption of Discount Notes, see "--Discount Medium-Term
Notes."
Repayment at the Option of the Holder
If the applicable Prospectus Supplement or Pricing Supplement specifies one
or more Optional Repayment Dates, then the Medium-Term Notes will be repayable
by Capital Markets at the option of the holders thereof prior to the Stated
Maturity Date. If so specified, the Medium-Term Notes will be subject to
repayment at the option of the holders thereof on any Optional Repayment Date
in whole or in part. Such repayment will be in increments of $1,000 or such
other minimum denomination specified in the applicable Prospectus Supplement or
Pricing Supplement (provided that any remaining principal amount thereof will
be at least $1,000 or such other minimum denomination) at a repayment price
equal to 100% of the unpaid principal amount to be repaid, together with unpaid
interest accrued thereon to the date of repayment. For any Note to be repaid,
the Indenture Trustee must receive the Medium-Term Note with the duly completed
form entitled "Option to Elect Repayment" at its office not more than 60 nor
less than 30 calendar days prior to the date of repayment. Exercise of such
repayment option by the holder will be irrevocable. For a discussion of the
repayment of Discount Notes, see "--Discount Medium-Term Notes."
Only the depositary may exercise the repayment option with respect to Global
Securities representing Book-Entry Notes. Accordingly, Beneficial Owners (as
hereinafter defined) of Global Securities that desire to have all or any
portion of the Book-Entry Notes represented by such Global Securities repaid
must instruct the Participant through which they own their interests to direct
the depositary to exercise the repayment option on their behalf by delivering
the related Global Security and duly completed election form to the Indenture
Trustee as described above. In order to ensure that such Global Security and
election form are received by the Indenture Trustee on a particular day, the
applicable Beneficial Owner must so instruct the Participant through which it
owns its interest before such Participant's deadline for accepting instructions
for that day. Different firms may have different deadlines for accepting
instructions from their customers. Accordingly, Beneficial Owners should
consult the Participants through which they own their interests for the
respective deadlines for such Participants. All instructions given to
Participants from Beneficial Owners of Global Securities relating to the
exercise of such repayment option will be irrevocable. In addition, at the time
such instructions are given, each such Beneficial Owner will cause the
Participant through which it owns its interest to transfer such Beneficial
Owner's interest in the Global Security or Securities representing the related
Book-Entry Notes, on the depositary's records, to the Indenture Trustee. See
"--Book-Entry Notes."
39
<PAGE>
If applicable, Capital Markets will comply with the requirements of Section
14(e) of the Exchange Act and the rules promulgated thereunder, and any other
securities laws or regulations in connection with any such repayment.
Capital Markets may purchase at any time Medium-Term Notes at any price or
prices in the open market or otherwise. In its discretion, Capital Markets may
hold such Medium-Term Notes, resell them or surrender them to the Indenture
Trustee for cancellation.
Indenture Events of Default
Any one or more of the following events that has occurred and is continuing
constitutes an Indenture Event of Default with respect to the Notes (whatever
the reason for such Indenture Event of Default and whether it is voluntary or
involuntary or effected by operation of law or pursuant to any judgment, decree
or order of any court or any order, rule or regulation of any administrative or
governmental body):
(i) failure to pay any interest on any Notes for a period of 30 days
after such interest becomes due and payable (subject to a valid deferral of
interest payments during an Extension Period);
(ii) failure to pay the principal of (or premium, if any, on) the Notes
for a period of three Business Days after such principal (or premium)
becomes due, whether at maturity, upon redemption, by declaration or
otherwise;
(iii) failure to deposit any sinking fund payment for a period of three
Business Days after such deposit becomes due (if applicable to the Notes);
(iv) failure to observe or perform any other covenant or warranty under,
the Indenture or 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 Notes) for a period of 30
days after written notice has been given to Capital Markets or Industries
as provided in the Indenture;
(v) failure to pay in excess of $5 million of the principal or interest
of indebtedness under any bond, debenture, note or other evidence of
indebtedness for money borrowed by Capital Markets (including a default
with respect to Securities of any series other than that series) or under
any mortgage, indenture or instrument under which there may be issued or by
which there may be secured or evidenced any indebtedness for money borrowed
by Capital Markets (including this Indenture), whether such indebtedness
now exists or shall hereafter be created, when due and payable after the
expiration of any applicable grace period with respect thereto or shall
have resulted in such indebtedness in an amount in excess of $5 million
becoming or being declared due and payable prior to the date on which it
would otherwise have become due and payable, without such indebtedness
having been discharged, or such acceleration having been rescinded or
annulled within a period of 90 days after there shall have been given, by
registered or certified mail, to Capital Markets by the Indenture Trustee
or to Capital Markets and the Indenture Trustee by the Holders of at least
25% in principal amount of the Debentures;
(vi) certain events in bankruptcy, insolvency or reorganization of
Capital Markets, Industries or Northern Indiana; and
(vii) any other Indenture Event of Default with respect to the Notes.
The holders of not less than a majority in outstanding principal amount of
the Notes have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Indenture Trustee. The Indenture
Trustee or the holders of not less than 25% in aggregate outstanding principal
amount of the Notes may declare the principal due and payable immediately upon
an Indenture Event of Default. The holders of a majority in aggregate
outstanding principal amount of the Notes may annul such declaration and waive
the default if the default (other than the non-payment of the principal of
Notes that has become due solely by such acceleration) has been cured and a sum
sufficient to pay all matured installments of interest and principal due
otherwise than by acceleration has been deposited with the Indenture Trustee.
40
<PAGE>
The holders of not less than a majority in outstanding principal amount of
the Notes affected thereby may waive, on behalf of the holders of all of the
Notes, any past default under the Indenture except for a default (i) in the
payment of the principal of or interest on any Note (unless such default has
been cured and a sum sufficient to pay all matured installments of interest and
principal due otherwise than by acceleration has been deposited with the
Indenture Trustee) or (ii) in respect of a covenant or provision that cannot be
modified or amended without the consent of the holder of each outstanding Note
affected thereby.
In the event an Indenture Event of Default shall occur and be continuing as
to the Notes at any time they are held by the Trust, the Property Trustee will
have the right to declare the principal of and the interest on such Notes, and
any other amounts payable under the Indenture, to be forthwith due and payable
and to enforce its other rights as a creditor with respect to the Notes. The
holders of Preferred Securities in certain circumstances have the right to
direct the Property Trustee to exercise its rights as the holder of the Notes.
Notwithstanding the foregoing, if an Indenture Event of Default has occurred
and is continuing and such event is attributable to the failure of Capital
Markets to pay interest or principal on the Notes on the date such interest or
principal is otherwise payable (or in the case of redemption, the redemption
date), then a holder of Preferred Securities may institute a proceeding
directly against Capital Markets (a "Direct Action") to enforce payment to such
holder of the principal or interest on the Notes having an aggregate principal
amount equal to the aggregate liquidation amount of the Preferred Securities of
such holder.
Interest
General
Unless otherwise specified in the applicable Prospectus Supplement or Pricing
Supplement, each interest-bearing Note will bear interest from its date of
issue at the rate per annum, in the case of a Fixed Rate Note, or pursuant to
the interest rate formula, in the case of a Floating Rate Note, in each case as
specified in the applicable Prospectus Supplement or Pricing Supplement, until
the principal thereof is paid or duly made available for payment. Unless
otherwise specified in the applicable Prospectus Supplement or Pricing
Supplement, interest payments in respect of Fixed Rate Notes and Floating Rate
Notes will be made in an amount equal to the interest accrued from and
including the immediately preceding Interest Payment Date in respect of which
interest has been paid or duly made available for payment (or from and
including the date of issue, if no interest has been paid or duly made
available for payment) to but excluding the applicable Interest Payment Date or
the Maturity Date, as the case may be (each, an "Interest Period").
Interest on Fixed Rate Notes and Floating Rate Notes will be payable in
arrears on each Interest Payment Date and on the Maturity Date. Unless
otherwise specified in the applicable Prospectus Supplement or Pricing
Supplement, the first interest payment on any such Note originally issued
between a Record Date (as hereinafter defined) and the related Interest Payment
Date will be made on the Interest Payment Date immediately following the next
Record Date to the holder on such next Record Date. Unless otherwise specified
in the applicable Prospectus Supplement or Pricing Supplement, a "Record Date"
will be the fifteenth calendar day (whether or not a Business Day) immediately
preceding the related Interest Payment Date.
Fixed Rate Notes
Interest on Fixed Rate Notes will be payable on March 15 and September 15 of
each year or on such other date(s) specified in the applicable Prospectus
Supplement or Pricing Supplement (each, an "Interest Payment Date" with respect
to Fixed Rate Notes) and on the Maturity Date. Unless otherwise specified in
the applicable Prospectus Supplement or Pricing Supplement, interest on Fixed
Rate Notes will be computed on the basis of a 360-day year of twelve 30-day
months.
If any Interest Payment Date or the Maturity Date of a Fixed Rate Note falls
on a day that is not a Business Day, then the required payment of principal and
any premium or interest will be made on the next
41
<PAGE>
Business Day as if made on the date such payment was due, and no interest will
accrue on such payment for the period from and after such Interest Payment Date
or the Maturity Date, as the case may be, to the date of such payment on the
next Business Day.
Floating Rate Notes
Interest on Floating Rate Notes will be determined by reference to the
applicable Interest Rate Basis or Interest Rate Bases, which may include, as
described below, (i) the CD Rate, (ii) the CMT Rate, (iii) the Commercial Paper
Rate, (iv) the Eleventh District Cost of Funds Rate, (v) the Federal Funds
Rate, (vi) LIBOR, (vii) the Prime Rate, (viii) the Treasury Rate or (ix) such
other Interest Rate Basis or interest rate formula as may be specified in the
applicable Prospectus Supplement or Pricing Supplement. The applicable
Prospectus Supplement or Pricing Supplement will specify certain terms with
respect to which each Floating Rate Note is being delivered, including (i)
whether such Floating Rate Note is a "Regular Floating Rate Note," a "Floating
Rate/Fixed Rate Note" or an "Inverse Floating Rate Note," (ii) the Fixed Rate
Commencement Date, if applicable, (iii) the Fixed Interest Rate, if applicable,
(iv) the Interest Rate Basis or Bases, (v) the Initial Interest Rate, if any,
the Initial Interest Reset Date, Interest Reset Dates, Interest Payment Dates,
Index Maturity, Maximum Interest Rate and/or Minimum Interest Rate, if any, and
(vi) the Spread and/or Spread Multiplier, if any, as such terms are defined
below. If one or more of the applicable Interest Rate Bases is LIBOR or the CMT
Rate, then the applicable Prospectus Supplement or Pricing Supplement also will
specify the Designated LIBOR Currency and Designated LIBOR Page or the
Designated CMT Maturity Index and Designated CMT Telerate Page, respectively,
as such terms are defined below.
The interest rate borne by the Floating Rate Notes will be determined as
follows:
(i) Unless such Floating Rate Note is designated as a "Floating
Rate/Fixed Rate Note" or an "Inverse Floating Rate Note," or as having an
addendum attached or having "Other/Additional Provisions" apply, in each
case relating to a different interest rate formula, such Floating Rate Note
will be designated as a "Regular Floating Rate Note" and, except as
described below or in the applicable Prospectus Supplement or Pricing
Supplement, will bear interest at the rate determined by reference to the
applicable Interest Rate Basis or Bases (a) plus or minus the applicable
Spread, if any, and/or (b) multiplied by the applicable Spread Multiplier,
if any. Commencing on the Initial Interest Reset Date, the rate at which
interest on such Regular Floating Rate Note will be payable will be reset
as of each Interest Reset Date; provided that the interest rate in effect
for the period, if any, from the date of issue to the Initial Interest
Reset Date will be the Initial Interest Rate.
(ii) If such Floating Rate Note is designated as a "Floating Rate/Fixed
Rate Note," then, except as described below or in the applicable Prospectus
Supplement or Pricing Supplement, such Floating Rate Note will bear
interest at the rate determined by reference to the applicable Interest
Rate Basis or Bases (a) plus or minus the applicable Spread, if any, and/or
(b) multiplied by the applicable Spread Multiplier, if any. Commencing on
the Initial Interest Reset Date, the rate at which interest on such
Floating Rate/Fixed Rate Note will be payable will be reset as of each
Interest Reset Date; provided that (y) the interest rate in effect for the
period, if any, from the date of issue to the Initial Interest Reset Date
will be the Initial Interest Rate and (z) the interest rate in effect for
the period commencing on the Fixed Rate Commencement Date to the Maturity
Date will be the Fixed Interest Rate, if such rate is specified in the
applicable Prospectus Supplement or Pricing Supplement or, if no such Fixed
Interest Rate is specified, the interest rate in effect on the day
immediately preceding the Fixed Rate Commencement Date.
(iii) If such Floating Rate Note is designated as an "Inverse Floating
Rate Note," then, except as described below or in the applicable Prospectus
Supplement or Pricing Supplement, such Floating Rate Note will bear
interest at the Fixed Interest Rate minus the rate determined by reference
to the applicable Interest Rate Basis or Bases (a) plus or minus the
applicable Spread, if any, and/or (b) multiplied by the applicable Spread
Multiplier, if any; provided that, unless otherwise specified in the
applicable Prospectus Supplement or Pricing Supplement, the interest rate
thereon will not be less than zero. Commencing on the Initial Interest
Reset Date, the rate at which interest on such Inverse Floating Rate Note
will be payable
42
<PAGE>
will be reset as of each Interest Reset Date; provided that the interest
rate in effect for the period, if any, from the date of issue to the
Initial Interest Reset Date will be the Initial Interest Rate.
The "Spread" is the number of basis points to be added to or subtracted from
the related Interest Rate Basis or Bases applicable to such Floating Rate Note.
The "Spread Multiplier" is the percentage of the related Interest Rate Basis or
Bases applicable to such Floating Rate Note by which such Interest Rate Basis
or Bases will be multiplied to determine the applicable interest rate on such
Floating Rate Note. The "Index Maturity" is the period to maturity of the
instrument or obligation with respect to which the related Interest Rate Basis
or Bases will be calculated.
Unless otherwise specified in the applicable Prospectus Supplement or Pricing
Supplement, the interest rate with respect to each Interest Rate Basis will be
determined in accordance with the applicable provisions below. Except as set
forth above or in the applicable Prospectus Supplement or Pricing Supplement,
the interest rate in effect on each day will be (i) if such day is an Interest
Reset Date, the interest rate determined as of the Interest Determination Date
(as hereinafter defined) immediately preceding such Interest Reset Date or (ii)
if such day is not an Interest Reset Date, the interest rate determined as of
the Interest Determination Date immediately preceding the most recent Interest
Reset Date.
The applicable Prospectus Supplement or Pricing Supplement will specify
whether the rate of interest on the related Floating Rate Note will be reset
daily, weekly, monthly, quarterly, semiannually or annually or on such other
specified basis (each, an "Interest Reset Period") and the dates on which such
rate of interest will be reset (each, an "Interest Reset Date"). Unless
otherwise specified in the applicable Prospectus Supplement or Pricing
Supplement, the Interest Reset Dates for Floating Rate Notes will reset (i)
daily, each Business Day; (ii) weekly, the Wednesday of each week (with the
exception of weekly reset Floating Rate Notes as to which the Treasury Rate is
an applicable Interest Rate Basis, which will reset the Tuesday of each week,
except as described below); (iii) monthly, the third Wednesday of each month
(with the exception of monthly reset Floating Rate Notes as to which the
Eleventh District Cost of Funds Rate is an applicable Interest Rate Basis,
which will reset on the first calendar day of the month); (iv) quarterly, the
third Wednesday of March, June, September and December of each year; (v)
semiannually, the third Wednesday of the two months specified in the applicable
Prospectus Supplement or Pricing Supplement; and (vi) annually, the third
Wednesday of the month specified in the applicable Prospectus Supplement or
Pricing Supplement; provided that, with respect to Floating Rate/Fixed Rate
Notes, the rate of interest thereon will not reset after the applicable Fixed
Rate Commencement Date. If any Interest Reset Date for any Floating Rate Note
otherwise would be a day that is not a Business Day, then such Interest Reset
Date will be postponed to the next Business Day, except that for a Floating
Rate Note as to which LIBOR is an applicable Interest Rate Basis and such
Business Day falls in the next calendar month, such Interest Reset Date will be
the immediately preceding Business Day.
The interest rate applicable to each Interest Reset Period commencing on the
related Interest Reset Date will be the rate determined by the Calculation
Agent (as defined below) as of the applicable Interest Determination Date and
calculated on or prior to the Calculation Date (as hereinafter defined), except
with respect to LIBOR and the Eleventh District Cost of Funds Rate, which will
be calculated on such Interest Determination Date. The "Interest Determination
Date" with respect to the CD Rate, the CMT Rate, the Commercial Paper Rate, the
Federal Funds Rate and the Prime Rate will be the second Business Day
immediately preceding the applicable Interest Reset Date. The "Interest
Determination Date" with respect to the Eleventh District Cost of Funds Rate
will be the last working day of the month immediately preceding the applicable
Interest Reset Date on which the Federal Home Loan Bank of San Francisco (the
"FHLB of San Francisco") publishes the Index (as hereinafter defined). The
"Interest Determination Date" with respect to LIBOR will be the second London
Business Day immediately preceding the applicable Interest Reset Date, unless
the Designated LIBOR Currency is British pounds sterling, in which case the
"Interest Determination Date" will be the applicable Interest Reset Date. With
respect to the Treasury Rate, the "Interest Determination Date" will be the day
in the week in which the applicable Interest Reset Date falls on which Treasury
Bills (as hereinafter defined) are normally auctioned (Treasury Bills are
normally sold at an auction held on Monday of each week, unless that day is a
legal holiday, in which case the auction is normally held on
43
<PAGE>
the following Tuesday, except that such auction may be held on the preceding
Friday); provided that if an auction is held on the Friday of the week
preceding the applicable Interest Reset Date, the "Interest Determination Date"
will be such preceding Friday; provided, further, that if the Interest
Determination Date would otherwise fall on an Interest Reset Date, then such
Interest Reset Date will be postponed to the next Business Day. The "Interest
Determination Date" pertaining to a Floating Rate Note, the interest rate of
which is determined by reference to two or more Interest Rate Bases, will be
the most recent Business Day that is at least two Business Days prior to the
applicable Interest Reset Date for such Floating Rate Note on which each
Interest Rate Basis is determinable. Each Interest Rate Basis will be
determined as of such date, and the applicable interest rate will take effect
on the applicable Interest Reset Date.
Notwithstanding the foregoing, a Floating Rate Note also may have either or
both of the following: (i) a Maximum Interest Rate, or ceiling, that may accrue
during any Interest Period; and (ii) a Minimum Interest Rate, or floor, that
may accrue during any Interest Period. In addition to any Maximum Interest Rate
that may apply to any Floating Rate Note, in no event will the interest rate on
Floating Rate Notes be higher than the maximum rate permitted by New York law,
as the same may be modified by United States law of general application.
Except as provided below or in the applicable Prospectus Supplement or
Pricing Supplement, interest will be payable, in the case of Floating Rate
Notes which reset: (i) daily, weekly or monthly, on the third Wednesday of each
month or on the third Wednesday of March, June, September and December of each
year, as specified in the applicable Prospectus Supplement or Pricing
Supplement; (ii) quarterly, on the third Wednesday of March, June, September
and December of each year; (iii) semiannually, on the third Wednesday of the
two months of each year specified in the applicable Prospectus Supplement or
Pricing Supplement; and (iv) annually, on the third Wednesday of the month of
each year specified in the applicable Prospectus Supplement or Pricing
Supplement (each, an "Interest Payment Date" with respect to Floating Rate
Notes) and, in each case, on the Maturity Date. If any Interest Payment Date
other than the Maturity Date for any Floating Rate Note otherwise would be a
day that is not a Business Day, then such Interest Payment Date will be
postponed to the next Business Day, except that in the case of a Floating Rate
Note as to which LIBOR is an applicable Interest Rate Basis and such Business
Day falls in the next calendar month, such Interest Payment Date will be the
immediately preceding Business Day. If the Maturity Date of a Floating Rate
Note falls on a day that is not a Business Day, then the required payment of
principal and any premium or interest will be made on the next Business Day as
if made on the date such payment was due, and no interest will accrue on such
payment for the period from and after the Maturity Date to the date of such
payment on the next Business Day.
All percentages resulting from any calculation on Floating Rate Notes will be
rounded to the nearest one hundred-thousandth of a percentage point, with five-
one millionths of a percentage point rounded upwards (e.g., 9.876545% (or
.09876545) would be rounded to 9.87655% (or .0987655)), and all amounts used in
or resulting from such calculation on Floating Rate Notes will be rounded, in
the case of United States dollars, to the nearest cent or, in the case of a
foreign or composite currency, to the nearest unit (with one-half cent or unit
being rounded upwards).
With respect to each Floating Rate Note, accrued interest is calculated by
multiplying its principal amount by an accrued interest factor. Such accrued
interest factor is computed by adding the interest factor calculated for each
day in the applicable Interest Period. Unless otherwise specified in the
applicable Prospectus Supplement or Pricing Supplement, the interest factor for
each such day will be computed by dividing the interest rate applicable to such
day by 360, in the case of Floating Rate Notes for which an applicable Interest
Rate Basis is the CD Rate, the Commercial Paper Rate, the Eleventh District
Cost of Funds Rate, the Federal Funds Rate, LIBOR or the Prime Rate, or by the
actual number of days in the year in the case of Floating Rate Notes for which
an applicable Interest Rate Basis is the CMT Rate or the Treasury Rate. Unless
otherwise specified in the applicable Prospectus Supplement or Pricing
Supplement, the interest factor for Floating Rate Notes for which the interest
rate is calculated with reference to two or more Interest Rate Bases will be
calculated in each period in the same manner as if only the applicable Interest
Rate Basis specified in the applicable Prospectus Supplement or Pricing
Supplement applied.
44
<PAGE>
Unless otherwise specified in the applicable Prospectus Supplement or Pricing
Supplement, The Chase Manhattan Bank will be the "Calculation Agent." Upon
request of the holder of any Floating Rate Note, the Calculation Agent will
disclose the interest rate then in effect and, if determined, the interest rate
that will become effective as a result of a determination made for the next
Interest Reset Date with respect to such Floating Rate Note. Unless otherwise
specified in the applicable Prospectus Supplement or Pricing Supplement, the
"Calculation Date," if applicable, pertaining to any Interest Determination
Date will be the earlier of (i) the tenth calendar day after such Interest
Determination Date or, if such day is not a Business Day, the next Business Day
or (ii) the Business Day immediately preceding the applicable Interest Payment
Date or the Maturity Date, as the case may be.
Unless otherwise specified in the applicable Prospectus Supplement or Pricing
Supplement, the Calculation Agent will determine each Interest Rate Basis in
accordance with the following provisions.
CD Rate. Unless otherwise specified in the applicable Prospectus Supplement
or Pricing Supplement,
"CD Rate" means, with respect to any Interest Determination Date relating to a
Floating Rate Note for which the interest rate is determined with reference to
the CD Rate (a "CD Rate Interest Determination Date"), the rate on such date
for negotiable United States dollar certificates of deposit having the Index
Maturity specified in the applicable Prospectus Supplement or Pricing
Supplement as published by the Board of Governors of the Federal Reserve System
in "Statistical Release H.15(519), Selected Interest Rates" or any successor
publication ("H.15(519)") under the heading "CDs (Secondary Market)," or, if
not published by 3:00 P.M., New York City time, on the related Calculation
Date, the rate on such CD Rate Interest Determination Date for negotiable
United States dollar certificates of deposit of the Index Maturity specified in
the applicable Prospectus Supplement or Pricing Supplement as published by the
Federal Reserve Bank of New York in its daily statistical release "Composite
3:30 P.M. Quotations for U.S. Government Securities" or any successor
publication ("Composite Quotations") under the heading "Certificates of
Deposit." If such rate is not yet published in either H.15(519) or Composite
Quotations by 3:00 P.M., New York City time, on the related Calculation Date,
then the CD Rate on such CD Rate Interest Determination Date will be calculated
by the Calculation Agent and will be the arithmetic mean of the secondary
market offered rates as of 10:00 A.M., New York City time, on such CD Rate
Interest Determination Date, of three leading nonbank dealers in negotiable
United States dollar certificates of deposit in New York City (which may
include any agents through which the Notes are offered, or their affiliates)
selected by the Calculation Agent for negotiable United States dollar
certificates of deposit of major United States money center banks for
negotiable certificates of deposit with a remaining maturity closest to the
Index Maturity specified in the applicable Prospectus Supplement or Pricing
Supplement in an amount that is representative for a single transaction in that
market at that time; provided that if the dealers so selected by the
Calculation Agent are not quoting as mentioned in this sentence, then the CD
Rate determined as of such CD Rate Interest Determination Date will be the CD
Rate in effect on such CD Rate Interest Determination Date.
CMT Rate. Unless otherwise specified in the applicable Prospectus Supplement
or Pricing Supplement, "CMT Rate" means, with respect to any Interest
Determination Date relating to a Floating Rate Note for which the interest rate
is determined with reference to the CMT Rate (a "CMT Rate Interest
Determination Date"), the rate displayed on the Designated CMT Telerate Page
under the caption ". . .Treasury Constant Maturities . . .Federal Reserve Board
Release H.15 . . .Mondays Approximately 3:45 P.M.," under the column for the
Designated CMT Maturity Index for (i) if the Designated CMT Telerate Page is
7055, the rate on such CMT Rate Interest Determination Date and (ii) if the
Designated CMT Telerate Page is 7052, the weekly or monthly average, as
specified in the applicable Prospectus Supplement or Pricing Supplement, for
the week or the month, as applicable, ended immediately preceding the week or
the month, as applicable, in which the related CMT Rate Interest Determination
Date falls. If such rate is no longer displayed on the relevant page or is not
displayed by 3:00 P.M., New York City time, on the related Calculation Date,
then the CMT Rate for such CMT Rate Interest Determination Date will be such
treasury constant maturity rate for the Designated CMT Maturity Index as
published in H.15(519). If such rate is no longer published or is not published
by 3:00 P.M., New York City time, on the related Calculation Date, then the CMT
Rate on such CMT Rate Interest
45
<PAGE>
Determination Date will be such treasury constant maturity rate for the
Designated CMT Maturity Index (or other United States Treasury rate for the
Designated CMT Maturity Index) for the CMT Rate Interest Determination Date
with respect to such Interest Reset Date as may then be published by either the
Board of Governors of the Federal Reserve System or the U.S. Department of the
Treasury that the Calculation Agent determines to be comparable to the rate
formerly displayed on the Designated CMT Telerate Page and published in
H.15(519). If such information is not provided by 3:00 P.M., New York City
time, on the related Calculation Date, then the CMT Rate on the CMT Rate
Interest Determination Date will be calculated by the Calculation Agent and
will be a yield to maturity, based on the arithmetic mean of the secondary
market offered rates as of approximately 3:30 P.M., New York City time, on such
CMT Rate Interest Determination Date reported, according to their written
records, by three leading primary United States government securities dealers
in New York City (which may include any agents through which the Notes are
offered, or their affiliates) (each, a "Reference Dealer") selected by the
Calculation Agent (from five such Reference Dealers selected by the Calculation
Agent and eliminating the highest quotation (or, in the event of equality, one
of the highest) and the lowest quotation (or, in the event of equality, one of
the lowest)), for the most recently issued direct noncallable fixed rate
obligations of the United States ("Treasury Notes") with an original maturity
of approximately the Designated CMT Maturity Index and a remaining term to
maturity of not less than such Designated CMT Maturity Index minus one year. If
the Calculation Agent is unable to obtain three such Treasury Note quotations,
the CMT Rate on such CMT Rate Interest Determination Date will be calculated by
the Calculation Agent and will be a yield to maturity based on the arithmetic
mean of the secondary market offered rates as of approximately 3:30 P.M., New
York City time, on such CMT Rate Interest Determination Date of three Reference
Dealers in New York City (from five such Reference Dealers selected by the
Calculation Agent and eliminating the highest quotation (or, in the event of
equality, one of the highest) and the lowest quotation (or, in the event of
equality, one of the lowest)), for Treasury Notes with an original maturity of
the number of years that is the next highest to the Designated CMT Maturity
Index and a remaining term to maturity closest to the Designated CMT Maturity
Index and in an amount of at least $100 million. If three or four (and not
five) of such Reference Dealers are quoting as described above, then the CMT
Rate will be based on the arithmetic mean of the offered rates obtained and
neither the highest nor the lowest of such quotes will be eliminated; and if
fewer than three Reference Dealers so selected by the Calculation Agent are
quoting as mentioned herein, then the CMT Rate determined as of such CMT Rate
Interest Determination Date will be the CMT Rate in effect on such CMT Rate
Interest Determination Date. If two Treasury Notes with an original maturity as
described in the second preceding sentence have remaining terms to maturity
equally close to the Designated CMT Maturity Index, then the Calculation Agent
will obtain quotations for the Treasury Note with the shorter remaining term to
maturity.
"Designated CMT Telerate Page" means the display on the Dow Jones Telerate
Service (or any successor service) on the page specified in the applicable
Prospectus Supplement or Pricing Supplement (or any other page as may replace
such page on such service) for the purpose of displaying Treasury Constant
Maturities as reported in H.15(519). If no such page is specified in the
applicable Prospectus Supplement or Pricing Supplement, then the Designated CMT
Telerate Page will be 7052 for the most recent week.
"Designated CMT Maturity Index" means the original period to maturity of the
U.S. Treasury securities (either 1, 2, 3, 5, 7, 10, 20 or 30 years) specified
in the applicable Prospectus Supplement or Pricing Supplement with respect to
which the CMT Rate will be calculated or, if no such maturity is specified in
the applicable Prospectus Supplement or Pricing Supplement, two years.
Commercial Paper Rate. Unless otherwise specified in the applicable
Prospectus Supplement or Pricing Supplement, "Commercial Paper Rate" means,
with respect to any Interest Determination Date relating to a Floating Rate
Note for which the interest rate is determined with reference to the Commercial
Paper Rate (a "Commercial Paper Rate Interest Determination Date"), the Money
Market Yield (as hereinafter defined) on such date of the rate for commercial
paper having the Index Maturity specified in the applicable Prospectus
Supplement or Pricing Supplement as published in H.15(519) under the heading
"Commercial Paper." In the event that such rate is not published by 3:00 P.M.,
New York City time, on the related Calculation Date, then
46
<PAGE>
the Commercial Paper Rate on such Commercial Paper Rate Interest Determination
Date will be the Money Market Yield of the rate for commercial paper having the
Index Maturity specified in the applicable Prospectus Supplement or Pricing
Supplement as published in Composite Quotations under the heading "Commercial
Paper" (with an Index Maturity of one month or three months being deemed to be
equivalent to an Index Maturity of 30 days or 90 days, respectively). If such
rate is not yet published in either H.15(519) or Composite Quotations by 3:00
P.M., New York City time, on the related Calculation Date, then the Commercial
Paper Rate on such Commercial Paper Rate Interest Determination Date will be
calculated by the Calculation Agent and will be the Money Market Yield of the
arithmetic mean of the offered rates at approximately 11:00 A.M., New York City
time, on such Commercial Paper Rate Interest Determination Date of three
leading dealers of commercial paper in New York City (which may include any
agents through which the Notes are offered, or their affiliates) selected by
the Calculation Agent for commercial paper having the Index Maturity specified
in the applicable Prospectus Supplement or Pricing Supplement placed for an
industrial issuer whose bond rating is "Aa" or the equivalent, from a
nationally recognized statistical rating organization; provided that if the
dealers so selected by the Calculation Agent are not quoting as mentioned in
this sentence, then the Commercial Paper Rate determined as of such Commercial
Paper Rate Interest Determination Date will be the Commercial Paper Rate in
effect on such Commercial Paper Rate Interest Determination Date.
"Money Market Yield" means a yield (expressed as a percentage) calculated in
accordance with the following formula:
DX360
------------- X 100
360-(DXM)
where "D" refers to the applicable per annum rate for commercial paper quoted
on a bank discount basis and expressed as a decimal, and "M" refers to the
actual number of days in the applicable Interest Reset Period.
Eleventh District Cost of Funds Rate. Unless otherwise specified in the
applicable Prospectus Supplement or Pricing Supplement, "Eleventh District Cost
of Funds Rate" means, with respect to any Interest Determination Date relating
to a Floating Rate Note for which the interest rate is determined with
reference to the Eleventh District Cost of Funds Rate (an "Eleventh District
Cost of Funds Rate Interest Determination Date"), the rate equal to the monthly
weighted average cost of funds for the calendar month immediately preceding the
month in which such Eleventh District Cost of Funds Rate Interest Determination
Date falls, as set forth under the caption "11th District" on Telerate Page
7058 as of 11:00 A.M., San Francisco time, on such Eleventh District Cost of
Funds Rate Interest Determination Date. If such rate does not appear on
Telerate Page 7058 on such Eleventh District Cost of Funds Rate Interest
Determination Date, then the Eleventh District Cost of Funds Rate on such
Eleventh District Cost of Funds Rate Interest Determination Date will be the
monthly weighted average cost of funds paid by member institutions of the
Eleventh Federal Home Loan Bank District that was most recently announced (the
"Index") by the FHLB of San Francisco as such cost of funds for the calendar
month immediately preceding such Eleventh District Cost of Funds Rate Interest
Determination Date. If the FHLB of San Francisco fails to announce the Index on
or prior to such Eleventh District Cost of Funds Rate Interest Determination
Date for the calendar month immediately preceding such Eleventh District Cost
of Funds Rate Interest Determination Date, then the Eleventh District Cost of
Funds Rate determined as of such Eleventh District Cost of Funds Rate Interest
Determination Date will be the Eleventh District Cost of Funds Rate in effect
on such Eleventh District Cost of Funds Rate Interest Determination Date.
Federal Funds Rate. Unless otherwise specified in the applicable Prospectus
Supplement or Pricing Supplement, "Federal Funds Rate" means, with respect to
any Interest Determination Date relating to a Floating Rate Note for which the
interest rate is determined with reference to the Federal Funds Rate (a
"Federal Funds Rate Interest Determination Date"), the rate on such date for
United States dollar federal funds as published in H.15(519) under the heading
"Federal Funds (Effective)" or, if not published by 3:00 P.M., New York City
time, on the related Calculation Date, the rate on such Federal Funds Rate
Interest Determination Date as published in Composite Quotations under the
heading "Federal Funds/Effective Rate." If such rate is not published in either
H.15(519) or Composite Quotations by 3:00 P.M., New York City time,
47
<PAGE>
on the related Calculation Date, then the Federal Funds Rate on such Federal
Funds Rate Interest Determination Date will be calculated by the Calculation
Agent and will be the arithmetic mean of the rates for the last transaction in
overnight United States dollar federal funds arranged by three leading brokers
of federal funds transactions in New York City (which may include any agents
through which the Notes are offered, or their affiliates) selected by the
Calculation Agent prior to 9:00 A.M., New York City time, on such Federal Funds
Rate Interest Determination Date; provided that if the brokers so selected by
the Calculation Agent are not quoting as mentioned in this sentence, then the
Federal Funds Rate determined as of such Federal Funds Rate Interest
Determination Date will be the Federal Funds Rate in effect on such Federal
Funds Rate Interest Determination Date.
LIBOR. Unless otherwise specified in the applicable Prospectus Supplement or
Pricing Supplement, "LIBOR" means the rate determined in accordance with the
following provisions:
(i) With respect to any Interest Determination Date relating to a
Floating Rate Note for which the interest rate is determined with reference
to LIBOR (a "LIBOR Interest Determination Date"), LIBOR will be either: (a)
if "LIBOR Reuters" is specified in the applicable Prospectus Supplement or
Pricing Supplement, the arithmetic mean of the offered rates (unless the
Designated LIBOR Page by its terms provides only for a single rate, in
which case such single rate will be used) for deposits in the Designated
LIBOR Currency having the Index Maturity specified in such Prospectus
Supplement or Pricing Supplement, commencing on the applicable Interest
Reset Date, that appear (or, if only a single rate is required as
aforesaid, appears) on the Designated LIBOR Page as of 11:00 A.M., London
time, on such LIBOR Interest Determination Date or (b) if "LIBOR Telerate"
is specified in the applicable Prospectus Supplement or Pricing Supplement
or if neither "LIBOR Reuters" nor "LIBOR Telerate" is specified in the
applicable Prospectus Supplement or Pricing Supplement as the method for
calculating LIBOR, the rate for deposits in the Designated LIBOR Currency
having the Index Maturity specified in such Prospectus Supplement or
Pricing Supplement, commencing on such Interest Reset Date, that appears on
the Designated LIBOR Page as of 11:00 A.M., London time, on such LIBOR
Interest Determination Date. If fewer than two such offered rates so
appear, or if no such rate so appears, as applicable, then LIBOR on such
LIBOR Interest Determination Date will be determined in accordance with the
provisions described in clause (ii) below.
(ii) With respect to a LIBOR Interest Determination Date on which fewer
than two offered rates appear or no rate appears, as the case may be, on
the Designated LIBOR Page as specified in clause (i) above, the Calculation
Agent will request the principal London offices of each of four major
reference banks (which may include affiliates of any agents through which
the Notes are offered) in the London interbank market, as selected by the
Calculation Agent, to provide the Calculation Agent with its offered
quotation for deposits in the Designated LIBOR Currency for the period of
the Index Maturity specified in the applicable Prospectus Supplement or
Pricing Supplement, commencing on the applicable Interest Reset Date, to
prime banks in the London interbank market at approximately 11:00 A.M.,
London time, on such LIBOR Interest Determination Date and in a principal
amount that is representative for a single transaction in the Designated
LIBOR Currency in such market at such time. If at least two such quotations
are so provided, then LIBOR on such LIBOR Interest Determination Date will
be the arithmetic mean of such quotations. If fewer than two such
quotations are so provided, then LIBOR on such LIBOR Interest Determination
Date will be the arithmetic mean of the rates quoted at approximately 11:00
A.M., in the applicable Principal Financial Center, on such LIBOR Interest
Determination Date by three major banks (which may include affiliates of
the Agents) in such Principal Financial Center selected by the Calculation
Agent for loans in the Designated LIBOR Currency to leading European banks,
having the Index Maturity specified in the applicable Prospectus Supplement
or Pricing Supplement and in a principal amount that is representative for
a single transaction in the Designated LIBOR Currency in such market at
such time; provided that if the banks so selected by the Calculation Agent
are not quoting as mentioned in this sentence, then LIBOR determined as of
such LIBOR Interest Determination Date will be LIBOR in effect on such
LIBOR Interest Determination Date.
"Designated LIBOR Currency" means the currency or composite currency
specified in the applicable Prospectus Supplement or Pricing Supplement as
to which LIBOR will be calculated or, if no such
48
<PAGE>
currency or composite currency is specified in the applicable Prospectus
Supplement or Pricing Supplement, United States dollars.
Designated LIBOR Page" means (a) if "LIBOR Reuters" is specified in the
applicable Prospectus Supplement or Pricing Supplement, the display on the
Reuters Monitor Money Rates Service (or any successor service) on the page
specified in such Prospectus Supplement or Pricing Supplement (or any other
page as may replace such page on such service) for the purpose of
displaying the London interbank rates of major banks for the Designated
LIBOR Currency or (b) if "LIBOR Telerate" is specified in the applicable
Prospectus Supplement or Pricing Supplement or neither "LIBOR Reuters" nor
"LIBOR Telerate" is specified in the applicable Prospectus Supplement or
Pricing Supplement as the method for calculating LIBOR, the display on the
Dow Jones Telerate Service (or any successor service) on the page specified
in such Prospectus Supplement or Pricing Supplement (or any other page as
may replace such page on such service) for the purpose of displaying the
London interbank rates of major banks for the Designated LIBOR Currency.
Prime Rate. Unless otherwise specified in the applicable Prospectus
Supplement or Pricing Supplement, "Prime Rate" means, with respect to any
Interest Determination Date relating to a Floating Rate Note for which the
interest rate is determined with reference to the Prime Rate (a "Prime Rate
Interest Determination Date"), the rate on such date as such rate is published
in H.15(519) under the heading "Bank Prime Loan." If such rate is not published
prior to 3:00 P.M., New York City time, on the related Calculation Date, then
the Prime Rate will be the arithmetic mean of the rates of interest publicly
announced by each bank that appears on the Reuters Screen USPRIME1 Page (as
hereinafter defined) at such bank's prime rate or base lending rate as in
effect for such Prime Rate Interest Determination Date. If fewer than four such
rates appear on the Reuters Screen USPRIME1 Page for such Prime Rate Interest
Determination Date, then the Prime Rate will be the arithmetic mean of the
prime rates or base lending rates quoted on the basis of the actual number of
days in the year divided by a 360-day year as of the close of business on such
Prime Rate Interest Determination Date by four major money center banks (which
may include affiliates of any agents through which the Notes are offered,) in
New York City selected by the Calculation Agent. If fewer than four such
quotations are so provided, then the Prime Rate will be the arithmetic mean of
four prime rates quoted on the basis of the actual number of days in the year
divided by a 360-day year as of the close of business on such Prime Rate
Interest Determination Date as furnished in New York City by the major money
center banks, if any, that have provided such quotations and by a reasonable
number of substitute banks or trust companies (which may include affiliates of
the Agents) to obtain four such prime rate quotations, provided such substitute
banks or trust companies are organized and doing business under the laws of the
United States, or any State thereof, each having total equity capital of at
least $500 million and being subject to supervision or examination by Federal
or State authority, selected by the Calculation Agent to provide such rate or
rates; provided that if the banks or trust companies so selected by the
Calculation Agent are not quoting as mentioned in this sentence, then the Prime
Rate determined as of such Prime Rate Interest Determination Date will be the
Prime Rate in effect on such Prime Rate Interest Determination Date.
"Reuters Screen USPRIME1 Page" means the display on the Reuters Monitor Money
Rates Service (or any successor service) on the "USPRIME1" page (or such other
page as may replace such page on such service) for the purpose of displaying
prime rates or base lending rates of major United States banks.
Treasury Rate. Unless otherwise specified in the applicable Prospectus
Supplement or Pricing Supplement, "Treasury Rate" means, with respect to any
Interest Determination Date relating to a Floating Rate Note for which the
interest rate is determined by reference to the Treasury Rate (a "Treasury Rate
Interest Determination Date"), the rate from the auction held on such Treasury
Rate Interest Determination Date (the "Auction") of direct obligations of the
United States ("Treasury Bills") having the Index Maturity specified in the
applicable Prospectus Supplement or Pricing Supplement, as such rate is
published in H.15(519) under the heading "Treasury Bills-auction average
(investment)" or, if not published by 3:00 P.M., New York City time, on the
related Calculation Date, the auction average rate of such Treasury Bills
(expressed as a bond equivalent on the basis of a year of 365 or 366 days, as
applicable, and applied on a daily basis) as otherwise
49
<PAGE>
announced by the U.S. Department of the Treasury. In the event that the results
of the Auction of Treasury Bills having the Index Maturity specified in the
applicable Prospectus Supplement or Pricing Supplement are not reported as
provided by 3:00 P.M., New York City time, on the related Calculation Date, or
if no such Auction is held, then the Treasury Rate will be calculated by the
Calculation Agent and will be a yield to maturity (expressed as a bond
equivalent on the basis of a year of 365 or 366 days, as applicable, and
applied on a daily basis) of the arithmetic mean of the secondary market bid
rates, as of approximately 3:30 P.M., New York City time, on such Treasury Rate
Interest Determination Date, of three leading primary United States government
securities dealers (which may include any agents through which the Notes are
offered, or their affiliates) selected by the Calculation Agent, for the issue
of Treasury Bills with a remaining maturity closest to the Index Maturity
specified in the applicable Prospectus Supplement or Pricing Supplement;
provided that if the dealers so selected by the Calculation Agent are not
quoting as mentioned in this sentence, then the Treasury Rate determined as of
such Treasury Rate Interest Determination Date will be the Treasury Rate in
effect on such Treasury Rate Interest Determination Date.
Other/Additional Provisions; Addendum
Any provisions with respect to the Medium-Term Notes, including the
specification and determination of one or more Interest Rate Bases, the
calculation of the interest rate applicable to a Floating Rate Note, the
Interest Payment Dates, the Stated Maturity Date, any redemption or repayment
provisions or any other term relating thereto, may be modified and/or
supplemented as specified under "Other/Additional Provisions" on the face
thereof or in an Addendum relating thereto, if so specified on the face thereof
and described in the applicable Prospectus Supplement or Pricing Supplement.
Discount Medium-Term Notes
Capital Markets may offer Notes ("Discount Notes") from time to time that
have an Issue Price (as specified in the applicable Prospectus Supplement or
Pricing Supplement) that is less than 100% of the principal amount thereof
(i.e., par) by more than a percentage equal to the product of 0.25% and the
number of full years to the Stated Maturity Date. Discount Notes may not bear
any interest currently or may bear interest at a rate that is below market
rates at the time of issuance. The difference between the Issue Price of a
Discount Note and par is referred to herein as the "Discount." In the event of
redemption, repayment or acceleration of maturity of a Discount Note, the
amount payable to the holder of such Discount Note will be equal to the sum of
(i) the Issue Price (increased by any accruals of Discount) multiplied by, in
the event of any redemption of such Discount Note (if applicable), the Initial
Redemption Percentage (as adjusted by the Annual Redemption Percentage
Reduction, if applicable) and (ii) any unpaid interest accrued thereon to the
date of such redemption, repayment or acceleration of maturity, as the case may
be.
Unless otherwise specified in the applicable Prospectus Supplement or Pricing
Supplement, for purposes of determining the amount of any Discount that has
accrued as of any date on which a redemption, repayment or acceleration of
maturity occurs for a Discount Note, such Discount will be accrued using a
constant yield method. The constant yield will be calculated using a 30-day
month, 360-day year convention, a compounding period that, except for the
Initial Period (as hereinafter defined), corresponds to the shortest period
between Interest Payment Dates for the applicable Discount Note (with ratable
accruals within a compounding period), a coupon rate equal to the initial
coupon rate applicable to such Discount Note and an assumption that the
maturity of such Discount Note will not be accelerated. If the period from the
date of issue to the initial Interest Payment Date for a Discount Note (the
"Initial Period") is shorter than the compounding period for such Discount
Note, a proportionate amount of the yield for an entire compounding period will
be accrued. If the Initial Period is longer than the compounding period, then
such period will be divided into a regular compounding period and a short
period with the short period being treated as provided in the preceding
sentence. The accrual of the applicable Discount may differ from the accrual of
original issue discount for purposes of the Internal Revenue Code of 1986, as
amended (the "Code"), certain Discount Notes may not be treated as having
original issue discount within the meaning of the Code, and Notes other than
Discount Notes
50
<PAGE>
may be treated as issued with original issue discount for United States federal
income tax purposes. Certain United States federal income tax consequences and
special considerations applicable to any such Debentures will be described in
the applicable Prospectus Supplement or Pricing Supplement.
Indexed Notes
Capital Markets may offer Notes ("Indexed Notes") from time to time with the
amount of principal and any premium or interest payable in respect thereof to
be determined with reference to the price or prices of specified commodities or
stocks, to the exchange rate of one or more designated currencies (including a
composite currency such as the ECU) relative to an indexed currency or to other
items, in each case as specified in the applicable Prospectus Supplement or
Pricing Supplement. In certain cases, holders of Indexed Notes may receive a
principal payment on the Maturity Date that is greater than or less than the
principal amount of such Indexed Notes depending upon the relative value on the
Maturity Date of the specified indexed item. Information as to the method for
determining the amount of principal and any premium or interest payable with
respect to Indexed Notes, certain historical information with respect to the
specified indexed item and any material tax considerations associated with an
investment in Indexed Notes will be specified in the applicable Prospectus
Supplement or Pricing Supplement.
Amortizing Notes
Capital Markets may offer Notes ("Amortizing Notes") from time to time with
the amount of principal thereof and interest thereon payable in installments
over the term of such Notes. Unless otherwise specified in the applicable
Prospectus Supplement or Pricing Supplement, interest on each Amortizing Note
will be computed on the basis of a 360-day year of twelve 30-day months.
Payments with respect to Amortizing Notes will be applied first to interest due
and payable thereon and then to the reduction of the unpaid principal amount
thereof. Further information concerning additional terms and provisions of
Amortizing Notes, including a table setting forth repayment information for
such Amortizing Notes, and certain United States federal income tax
considerations associated with an investment in Amortizing Notes will be
specified in the applicable Prospectus Supplement or Pricing Supplement.
Book-Entry Notes
Upon issuance, all Book-Entry Notes of like tenor and terms up to $200,000
aggregate principal amount will be represented by a single Global Security.
Each Global Security representing Book-Entry Notes will be deposited with, or
on behalf of, a depositary and will be registered in the name of the depositary
or a nominee of the depositary. No Global Security may be transferred except as
a whole by a nominee of the depositary to the depositary or to another nominee
of the depositary, or by the depositary or such nominee to a successor of the
depositary or a nominee of such successor. Unless otherwise indicated in the
applicable Prospectus Supplement or Pricing Supplement, the depositary for the
Book-Entry Notes will be The Depository Trust Company. See "Book-Entry
Issuance."
So long as the depositary or its nominee is the registered owner of a Global
Security, the depositary or its nominee, as the case may be, will be the sole
holder of the Book-Entry Notes represented thereby for all purposes under the
Indenture. Except as otherwise provided below, the Beneficial Owners of the
Global Security or Securities representing Book-Entry Notes will not be enti-
tled to receive physical delivery of Certificated Notes and will not be consid-
ered the holders thereof for any purpose under the Indenture, and no Global Se-
curity representing Book-Entry Notes will be exchangeable or transferable. Ac-
cordingly, each Beneficial Owner must rely on the procedures of the depositary
and, if such Beneficial Owner is not a Participant, on the procedures of the
Participant through which such Beneficial Owner owns its interest in order to
exercise any rights of a holder under such Global Security or the Indenture.
The laws of some jurisdictions require that certain purchasers of securities
take physical delivery of such securities in certificated form. Such limits and
laws may impair the ability to transfer beneficial interests in a Global Secu-
rity representing Book-Entry Notes.
51
<PAGE>
Unless otherwise specified in the applicable Prospectus Supplement or Pricing
Supplement, each Global Security representing Book-Entry Notes will be
exchangeable for Certificated Notes of like tenor and terms and of differing
authorized denominations in a like aggregate principal amount, only if (i) the
depositary notifies Capital Markets that it is unwilling or unable to continue
as depositary for the Global Securities or Capital Markets becomes aware that
the depositary has ceased to be a clearing agency registered under the Exchange
Act and, in any such case, Capital Markets will not have appointed a successor
to the depositary within 90 days thereafter, (ii) Capital Markets, in its sole
discretion, determines that the Global Securities will be exchangeable for
Certificated Notes or (iii) an Event of Default (or event that with the giving
of notice or lapse of time would constitute an Event of Default) has occurred
and is continuing with respect to the Notes under the Indenture. Upon any such
exchange, the Certificated Notes will be registered in the names of the
Beneficial Owners of the Global Security or Securities representing Book-Entry
Notes, which names will be provided by the depositary's relevant Participants
(as identified by the depositary) to the Trustee.
Special Provisions Relating to Foreign Currency Notes
General. Unless otherwise specified in the applicable Prospectus Supplement
or Pricing Supplement, Foreign Currency Notes will not be sold in, or to
residents of, the country issuing the applicable currency. The information set
forth in this Prospectus is directed to prospective purchasers who are United
States residents and, with respect to Foreign Currency Notes, is by necessity
incomplete. The applicable Prospectus Supplement or Pricing Supplement will
describe certain United Stated federal income tax considerations associated
with an investment in Foreign Currency Notes. Capital Markets and the agents
disclaim any responsibility to advise prospective purchasers who are residents
of countries other than the United States with respect to any matters that may
affect the purchase, holding or receipt of payments of principal and any
premium or interest on Foreign Currency Notes. Such persons should consult
their own financial and legal advisors with regard to such matters.
Payment of Principal and Any Premium or Interest. Unless otherwise specified
in the applicable Prospectus Supplement or Pricing Supplement, Capital Markets
is obligated to make payments of principal and any premium or interest on a
Foreign Currency Note in the Specified Currency. Any such amounts payable by
Capital Markets in the Specified Currency will be converted by the exchange
rate agent named in the applicable Prospectus Supplement or Pricing Supplement
(the "Exchange Rate Agent") into United States dollars for payment to holders
unless otherwise specified in the applicable Prospectus Supplement or Pricing
Supplement or the holder of such Foreign Currency Note elects to receive, in
the manner hereinafter described, such amounts in the Specified Currency.
Any United States dollar amount to be received by a holder of a Foreign
Currency Note will be based on the highest bid quotation in New York City
received by the Exchange Rate Agent at approximately 11:00 A.M., New York City
time, on the second Business Day preceding the applicable payment date from
three recognized foreign exchange dealers (one of whom may be the Exchange Rate
Agent) selected by the Exchange Rate Agent and approved by Capital Markets for
the purchase by the quoting dealer of the Specified Currency for United States
dollars for settlement on such payment date in the aggregate amount of such
Specified Currency payable to all Holders of Foreign Currency Notes scheduled
to receive United States dollar payments and at which the applicable dealer
commits to execute a contract. All currency exchange costs will be borne by the
holders of such Foreign Currency Notes by deductions from such payments. If
three such bid quotations are not available, payments will be made in the
Specified Currency.
Holders of Foreign Currency Notes may elect to receive all or a specified
portion of any payment of principal and any premium or interest in the
Specified Currency by submitting a written request for such payment to the
Indenture Trustee at its corporate trust office in New York City on or prior to
the applicable Record Date or at least 15 calendar days prior to the Maturity
Date, as the case may be. Such written request may be mailed or hand delivered
or sent by cable, telex or other form of facsimile transmission. Holders of
Foreign Currency Notes may elect to receive all or a specified portion of all
future payments in the Specified Currency and need not file a separate election
for each payment. Such election will remain in effect until
52
<PAGE>
revoked by written notice to the Indenture Trustee, but written notice of any
such revocation must be received by the Indenture Trustee on or prior to the
applicable Record Date or at least 15 calendar days prior to the Maturity Date,
as the case may be. Holders of Foreign Currency Notes to be held in the name of
a broker or nominee should contact such broker or nominee to determine whether
and how an election to receive payments in the Specified Currency may be made.
Unless otherwise specified in the applicable Prospectus Supplement or Pricing
Supplement, if the Specified Currency is other than United States dollars, a
Beneficial Owner of the related Global Security or Securities which elects to
receive payments of principal and any premium or interest in the Specified
Currency must notify the Participant through which it owns its interest on or
prior to the applicable Record Date or at least 15 calendar days prior to the
Maturity Date, as the case may be, of such Beneficial Owner's election. Such
Participant must notify the depositary of such election on or prior to the
third Business Day after such Record Date or at least 12 calendar days prior to
the Maturity Date, as the case may be, and the depositary will notify the
Trustee of such election on or prior to the fifth Business Day after such
Record Date or at least ten calendar days prior to the Maturity Date, as the
case may be. If complete instructions are received by the Participant from the
Beneficial Owner and forwarded by the Participant to the depositary, and by the
depositary to the Trustee, on or prior to such dates, then such Beneficial
Owner will receive payments in the Specified Currency.
Payments of the principal and any premium or interest on Foreign Currency
Notes that are to be made in United States dollars will be made in the manner
specified herein with respect to Notes denominated in United States dollars.
See "--General." Any payments of interest on Foreign Currency Notes that are to
be made in the Specified Currency on an Interest Payment Date other than the
Maturity Date will be made by check mailed to the address of the holders of
such Foreign Currency Notes as they appear in the Security Register, subject to
the right to receive such interest payments by wire transfer of immediately
available funds under the circumstances described under "Description of Notes--
General." Payments of principal and any premium or interest on Foreign Currency
Notes that are to be made in the Specified Currency on the Maturity Date will
be made by wire transfer of immediately available funds to an account with a
bank designated at least 15 calendar days prior to the Maturity Date by each
holder thereof, provided that such bank has appropriate facilities therefor and
that the applicable Foreign Currency Note is presented and surrendered at the
office or agency maintained by Capital Markets for such purpose in the Borough
of Manhattan, New York City, which currently is the corporate trust office of
the Indenture Trustee, in time for the Indenture Trustee to make such payments
in such funds in accordance with its normal procedures.
Availability of Specified Currency. Except as set forth below, if the
Specified Currency for a Foreign Currency Note is not available for the
required payment of principal and any premium or interest in respect thereof
due to the imposition of exchange controls or other circumstances beyond the
control of Capital Markets, Capital Markets will be entitled to satisfy its
obligations to the holder of such Foreign Currency Note by making such payment
in United States dollars on the basis of the Market Exchange Rate, computed by
the Exchange Rate Agent, on the second Business Day prior to such payment or,
if such Market Exchange Rate is not then available, on the basis of the most
recently available Market Exchange Rate, or as otherwise specified in the
applicable Prospectus Supplement or Pricing Supplement.
If the Specified Currency for a Foreign Currency Note is a composite currency
that is not available for the required payment of principal and any, premium or
interest in respect thereof due to the imposition of exchange controls or other
circumstances beyond the control of Capital Markets, Capital Markets will be
entitled to satisfy its obligations to the holder of such Foreign Currency Note
by making such payment in United States dollars on the basis of the equivalent
of the composite currency in United States dollars. The component currencies of
the composite currency for this purpose (the "Component Currencies") will be
the currency amounts that were components of the composite currency as of the
last day on which the composite currency was used. The equivalent of the
composite currency in United States dollars will be calculated by aggregating
the United States dollar equivalents of the Component Currencies. The United
States dollar equivalent of each of the Component Currencies will be determined
by the Exchange Rate Agent on the basis of the Market Exchange Rate on the
second Business Day prior to the required payment or, if such Market Exchange
Rate is
53
<PAGE>
not then available, on the basis of the most recently available Market Exchange
Rate for each such Component Currency, or as otherwise specified in the
applicable Prospectus Supplement or Pricing Supplement.
If the official unit of any Component Currency is altered by way of
combination or subdivision, the number of units of the currency as a Component
Currency will be divided or multiplied in the same proportion. If two or more
Component Currencies are consolidated into a single currency, then the amounts
of those currencies as Component Currencies will be replaced by an amount in
such single currency equal to the sum of the amounts of the consolidated
Component Currencies expressed in such single currency. If any Component
Currency is divided into two or more currencies, then the amount of the
original Component Currency will be replaced by the amounts of such two or more
currencies, the sum of which will be equal to the amount of the original
Component Currency.
The "Market Exchange Rate" for a Specified Currency other than United States
dollars means the noon dollar buying rate in New York City for cable transfers
for such Specified Currency as certified for customs purposes (or, if not so
certified, as otherwise determined) by the Federal Reserve Bank of New York.
Any payment made in United States dollars under such circumstances where the
required payment is in a Specified Currency other than United States dollars
will not constitute an Event of Default under the Indenture with respect to the
Notes.
All determinations referred to above made by the Exchange Rate Agent will be
at its sole discretion and will, in the absence of manifest error, be
conclusive for all purposes and binding on the holders of the Foreign Currency
Notes.
Judgments
Under current New York law, a state court in the State of New York rendering
a judgment in respect of a Foreign Currency Note would be required to render
such judgment in the Specified Currency, and such foreign currency judgment
would be converted into United States dollars at the exchange rate prevailing
on the date of entry of such judgment. Accordingly, the foreign currency
judgment would be subject to exchange rate fluctuations between the date of
entry of such foreign currency judgment and the time the amount of such foreign
currency judgment is paid to such holder in United States dollars and converted
by such holder into the Specified Currency. It is not certain, however, whether
a non-New York state court would follow the same rules and procedures with
respect to conversions of foreign currency judgments.
Capital Markets will indemnify the holder of any Note against any loss
incurred by such holder as a result of any judgment or order being given or
made for any amount due under such Note and such judgment or order requiring
payment in a currency or composite currency (the "Judgment Currency") other
than the Specified Currency, and as a result of any variation between (i) the
rate of exchange at which the Specified Currency amount is converted into the
Judgment Currency for the purpose of such judgment or order and (ii) the rate
of exchange at which the holder of such Note, on the date of payment of such
judgment or order, is able to purchase the Specified Currency with the amount
of the Judgment Currency actually received by such holder, as the case may be.
DESCRIPTION OF THE SUPPORT AGREEMENT
The Support Agreement between Capital Markets and Industries provides that,
during the term of the agreement, Industries will own all of the voting stock
of Capital Markets and that Industries will cause Capital Markets 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.
Furthermore, if during the term of the Support Agreement Capital Markets is
unable to pay in a timely fashion any principal of or premium or interest on
any debt securities issued by Capital Markets or any other obligations of
Capital Markets, then Industries will provide to Capital Markets, at the
request of Capital Markets or any person, firm or corporation to which Capital
Markets is indebted for money borrowed or otherwise (each, a "lender"), funds
to make such payments.
54
<PAGE>
The Support Agreement also provides that any lender to Capital Markets will
have the right to demand that Capital Markets enforce its rights against
Industries under the Support Agreement. If Capital Markets fails or refuses to
act in a timely manner to enforce those rights, or if Capital Markets defaults
in the timely payment of principal of or premium or interest on any debt owed
to a lender, then that lender may proceed directly against Industries to
enforce Capital Markets' rights under the Support Agreement or to obtain
payment of such defaulted principal, premium or interest. In no event, however,
will a lender have any recourse to or against the stock or assets of Northern
Indiana, or against any interest of Capital Markets or Industries therein.
In enforcing the rights of Capital Markets or any of its lenders under the
Support Agreement, the assets of Industries (other than the stock and assets of
Northern Indiana) are available as recourse to any lender or holder of Capital
Markets' debt. These assets include cash dividends paid to Industries by any of
its subsidiaries (including dividends paid by Northern Indiana). The carrying
value of the assets of Industries other than the assets of Northern Indiana
reflected in the consolidated financial statements of Industries at September
30, 1998 was approximately $1.3 billion.
For purposes of the Support Agreement, each holder of a Debenture and each
holder of a Medium-Term Note would be considered a "lender." Funds to pay the
principal of and interest on the Debentures and on the Medium-Term Notes
pursuant to the Support Agreement would come from earnings in the form of
dividends paid to Industries by Northern Indiana and the other subsidiaries of
Industries and the proceeds of refinancing transactions. During the next few
years, it is expected that the majority of Industries' earnings that ultimately
would be available to pay the principal of and interest on the Debentures and
the Medium-Term Notes will depend upon dividends paid to Industries by Northern
Indiana. Under its indenture of mortgage, Northern Indiana may not declare or
pay any dividends on any class of capital stock (other than preferred or
preference stock) except out of Northern Indiana's earned surplus or net
profits. At September 30, 1998, Northern Indiana had approximately $146.8
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 Debentures and
the Medium-Term Notes, to participate in any distribution of the assets of any
subsidiary (other than Capital Markets) upon that subsidiary's liquidation or
reorganization or otherwise necessarily will be subject to the prior claims of
creditors of that subsidiary, except to the extent that Industries' claims as a
creditor may be recognized. Northern Indiana's indenture of mortgage does not
limit the amount of indebtedness that Capital Markets, Industries or any of
Industries' other subsidiaries may incur.
Industries and Capital Markets may amend or terminate the Support Agreement
at any time by written amendment or agreement, provided that (i) any amendment
affecting the terms described above may be made only with the advance written
consent of all of Capital Markets' lenders, (ii) any amendment to any other
term of the Support Agreement that would adversely affect the rights of the
lenders may be made only with the advance written consent of all lenders
affected by such amendment and (iii) the Support Agreement may not be
terminated until all of Capital Markets' debt obligations, including its
obligations under the Debentures and the Medium-Term Notes, have been fully
paid and satisfied.
The Support Agreement is governed by, and will be construed and interpreted
in accordance with, the laws of the State of Indiana.
BOOK-ENTRY ISSUANCE
Unless otherwise specified in the applicable Prospectus Supplement or Pricing
Supplement, the securities, including the Debentures, the Preferred Securities,
the Stock Purchase Contracts, the Stock Purchase Units and the Medium-Term
Notes, may be issued in whole or in part in global form ("Global Securities").
Such Global Securities may be issued only in fully registered form and in
either temporary or permanent form. Specific terms for each security described
in this Prospectus will be set forth in the applicable Prospectus Supplement or
Pricing Supplement relating to that security.
55
<PAGE>
Unless otherwise specified in the applicable Prospectus Supplement or Pricing
Supplement, the depositary for the Global Securities will be The Depository
Trust Company ("DTC").
The Global Securities will be issued as fully registered securities
registered in the name of Cede & Co. (DTC's partnership nominee). One or more
fully registered Global Securities will be issued for each issue of securities,
each in the aggregate principal or stated amount of such issue, and will be
deposited with DTC.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("Participants") deposit with DTC. DTC
also facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct Participants
of DTC ("Direct Participants") include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations. DTC 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 DTC's system is also available to others such as securities brokers
and dealers, banks and trust companies that clear through or maintain a
custodial relationship with a Direct Participant, either directly or indirectly
("Indirect Participants"). The rules applicable to DTC and its Participants are
on file with the Commission.
Purchases of securities under DTC's system must be made by or through Direct
Participants, which will receive a credit for such securities on DTC's records.
The ownership interest of each actual purchaser of each security ("Beneficial
Owner") is in turn to be recorded on the records of Direct Participants and
Indirect Participants. Beneficial Owners will not receive written confirmation
from DTC of their purchases, but Beneficial Owners are expected to receive
written confirmations providing details of the transactions, as well as
periodic statements of their holdings, from the Direct Participants or Indirect
Participants through which such Beneficial Owners entered into the
transactions. Transfers of ownership interests in the securities are to be
accomplished by entries made on the books of Participants acting on behalf of
Beneficial Owners. Beneficial Owners will not receive certificates representing
their securities, except in the event that use of the book-entry system for the
securities is discontinued.
To facilitate subsequent transfers, all Global Securities that are deposited
with, or on behalf of, DTC are registered in the name of DTC's nominee, Cede &
Co. The deposit of Global Securities with, or on behalf of, DTC and their
registration in the name of Cede & Co. effect no change in beneficial
ownership. DTC has no knowledge of the actual Beneficial Owners of the
securities; DTC's records reflect only the identity of the Direct Participants
to whose accounts such securities are credited, which may or may not be the
Beneficial Owners. The Participants will remain responsible for keeping account
of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct Participants,
by Direct Participants to Indirect Participants and by Direct Participants and
Indirect Participants to Beneficial Owners will be governed by arrangements
among them, subject to any statutory or regulatory requirements as may be in
effect from time to time.
Neither DTC nor Cede & Co. will consent or vote with respect to the Global
Securities. Under its usual procedures, DTC will mail an Omnibus Proxy to
Industries (in the case of Stock Purchase Contracts or Stock Purchase Units),
Capital Markets (in the case of Debentures or Medium-Term Notes) or the Trust
(in the case of the Preferred Securities) as soon as possible after the
applicable record date. The Omnibus Proxy assigns Cede & Co.'s consenting or
voting rights to those Direct Participants to whose accounts the securities are
credited on the applicable record date (identified in a listing attached to the
Omnibus Proxy).
56
<PAGE>
Redemption proceeds, distributions, principal payments and any premium,
interest or other payments on the Global Securities will be made to Cede & Co.,
as nominee of DTC. DTC's practice is to credit Direct Participants' accounts on
the applicable payment date in accordance with their respective holdings shown
on DTC's records unless DTC has reason to believe that it will not receive
payment on such date. Payments by Participants to Beneficial Owners will be
governed by standing instructions and customary practices, as is the case with
securities held for the accounts of customers in bearer form or registered in
"street name," and will be the responsibility of such Participant and not of
DTC, Industries, the Trust, the applicable Trustee or the purchase contract
agent, subject to any statutory or regulatory requirements as may be in effect
from time to time. Payment of redemption payments, principal and any premium,
interest or other payments to DTC is the responsibility of Industries and the
purchase contract agent (in the case of payments under the Stock Purchase
Contracts), Capital Markets and the applicable paying agent (in the case of
Debentures or Medium-Term Notes) or the Trust and the applicable paying agent
(in the case of the Preferred Securities), disbursement of such payments to
Direct Participants will be the responsibility of DTC, and disbursement of such
payments to the Beneficial Owners will be the responsibility of Direct
Participants and Indirect Participants.
If applicable, redemption notices will be sent to Cede & Co. If less than all
of the securities of like tenor and terms are being redeemed, DTC's practice is
to determine by lot the amount of the interest of each Direct Participant in
such issue to be redeemed. Any Preferred Securities to be redeemed will be
selected by DTC on a pro rata basis in accordance with DTC's customary
procedures.
A Beneficial Owner will give notice of any option to elect to have its
interest in a Global Security repaid by Capital Markets, through its
Participant, to the Indenture Trustee, and will effect delivery of such
interest by causing the Direct Participant to transfer the Participant's
interest in the Global Security or Securities on DTC's records, to the
Indenture Trustee. The requirement for physical delivery in connection with a
demand for repayment will be deemed satisfied when the ownership rights in the
Global Security or Securities are transferred by Direct Participants on DTC's
records.
DTC's management is aware that some computer applications, systems and the
like for processing data that are dependent upon calendar dates, including
dates before, on, and after January 1, 2000, may encounter "Year 2000
problems." DTC has informed its Participants and other members of the financial
community that it has developed and is implementing a program so that its
systems, as the same relate to the timely payment of distributions (including
principal and interest payments) to security holders, book-entry deliveries,
and settlement of trades within DTC, continue to function appropriately. This
program includes a technical assessment and a remediation plan, each of which
is complete. Additionally, DTC's plan includes a testing phase, which is
expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on whom DTC relies for information of the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed its Participants and other members of the
financial community that it is contacting (and will continue to contact) third
party vendors from whom DTC acquires services to: (i) impress upon them the
importance of such services being Year 2000 compliant; and (ii) determine the
extent of their efforts for Year 2000 remediation (and, as appropriate,
testing) of their services. In addition, DTC is in the process of developing
such contingency plans as it deems appropriate.
The foregoing information with respect to DTC has been provided to its
Participants and other members of the financial community for information
purposes only and is not intended to serve as a representation, warranty, or
contract modification of any kind.
DTC may discontinue providing its services as securities depositary with
respect to the Global Securities at any time by giving reasonable notice to the
applicable issuer or the applicable trustee. Under such circumstances, in the
event that a successor securities depositary is not obtained, certificates for
the securities are required to be printed and delivered.
57
<PAGE>
Industries, Capital Markets or the Trust, as the case may be, may decide to
discontinue use of the system of book-entry transfers through DTC (or a
successor securities depository). In that event, certificates for the
securities will be printed and delivered.
The information in this section concerning DTC and DTC's system has been
obtained from sources that Capital Markets, the Trust and Industries believe to
be reliable, but Capital Markets, the Trust and Industries take no
responsibility for the accuracy thereof.
PLAN OF DISTRIBUTION
Industries, Capital Markets or the Trust may sell securities through agents
or dealers, to or through underwriters and directly to investors. Furthermore,
the distribution of securities may be effected from time to time in one or more
transactions at a fixed price or prices, which may be changed, or from time to
time at market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. Each Prospectus Supplement or
Pricing Supplement will describe the method of distribution of the offered
securities.
Agents designated by Capital Markets may solicit offers to purchase Medium-
Term Notes from time to time. The applicable Prospectus Supplement or Pricing
Supplement will name any such agent involved in the offer or sale of the
Medium-Term Notes and set forth any commissions payable to such agent. Unless
otherwise indicated in such Prospectus Supplement or Pricing Supplement, any
such agent will act on a reasonable best efforts basis for the period of its
appointment. Any such agent may be deemed to be an underwriter (as that term is
defined in the Securities Act) of the Medium-Term Notes so offered and sold.
If securities are sold by means of an underwritten offering, Industries,
Capital Markets and/or the Trust will execute an underwriting agreement with an
underwriter or underwriters once an agreement for such sale is reached. The
applicable Prospectus Supplement will set forth the names of the managing
underwriter or underwriters, as well as any other underwriters, the respective
amounts underwritten and the terms of the transaction, including commissions,
discounts and any other compensation payable to the underwriters and any
dealers. For any sale of securities involving underwriters, such 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 fixed public offering prices or at varying prices to be
determined at the time of sale by the underwriters and Industries, Capital
Markets or the Trust, as the case may be. Securities may be offered to the
public either through underwriting syndicates represented by managing
underwriters or directly by one or more underwriters. Unless otherwise
indicated in the applicable Prospectus Supplement, the underwriting agreement
will provide that the obligations of the underwriters are subject to certain
conditions precedent and that the underwriters will be obligated to purchase
all securities being sold if any are purchased.
Industries, Capital Markets or the Trust, as the case may be, may grant to
the underwriters options to purchase additional securities, to cover any over-
allotments, at the initial public offering price (with additional underwriting
commissions or discounts), as may be set forth in the applicable Prospectus
Supplement. Such Prospectus Supplement will set forth the terms of such over-
allotment option.
If securities are sold through a dealer, then Industries, Capital Markets or
the Trust, as the case may be, will sell all of such securities to the dealer
as principal. The dealer then may resell those securities to the public at
varying prices to be determined by the dealer at the time of resale. Any such
dealer may be deemed to be an underwriter (as that term is defined in the
Securities Act) of the securities so offered and sold. The applicable
Prospectus Supplement will set forth the name of the dealer and the terms of
the transaction.
Industries, Capital Markets or the Trust, as the case may be, may solicit
offers to purchase securities directly from investors, institutional or
otherwise. Such investors may be deemed to be underwriters within the meaning
of the Securities Act with respect to any resale of the securities so offered
and sold. In such event, the applicable Prospectus Supplement will set forth
the name of the investor and the terms of such transaction.
58
<PAGE>
Securities also may be offered and sold, if so indicated in the applicable
Prospectus Supplement, in connection with a remarketing upon their purchase, in
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 Industries, Capital Markets or the Trust,
as applicable. The applicable Prospectus Supplement will identify any
remarketing firm and its compensation and will describe the terms of its
agreement, if any, with Industries, Capital Markets or the Trust. Remarketing
firms may be deemed to be underwriters (as that term is defined in the
Securities Act) in connection with the securities remarketed.
If so indicated in the applicable Prospectus Supplement, Industries, Capital
Markets or the Trust, as the case may be, may authorize agents and underwriters
to solicit from certain institutions offers to purchase the securities pursuant
to delayed delivery contracts providing for payment and delivery on the date or
dates stated in the applicable Prospectus Supplement. Each such delayed
delivery contract will be for an amount not less than, and the amount of
Securities sold pursuant to such contract will be not less nor more than, the
respective amounts stated in the applicable Prospectus Supplement. Such delayed
delivery contracts will be subject only to those conditions set forth in the
applicable Prospectus Supplement. Such Prospectus Supplement will indicate any
commission payable to underwriters and agents soliciting offers to purchase
securities pursuant to delayed delivery contracts that are accepted by
Industries, Capital Markets or the Trust, as the case may be.
Agents, underwriters, dealers and remarketing firms may be entitled to
indemnification by Industries, Capital Markets or the Trust, as the case may
be, pursuant to agreements made with Industries, Capital Markets or the Trust.
Such agreements may indemnify such agents, underwriters, dealers and
remarketing firms against certain liabilities, including liabilities under the
Securities Act, or to contribution with respect to payments that such agents,
underwriters, dealers and remarketing firms may be required to make in respect
thereof.
Each series of securities will be a new issue and will have no established
trading market, except for the Common Shares, which are listed on the NYSE, the
CSE and the PE. Capital Markets or the Trust may elect to list any series of
securities on an exchange, or Industries may elect to list the Common Shares on
any additional exchange, but, unless otherwise specified in the applicable
Prospectus Supplement, none of Industries, Capital Markets or the Trust will be
obligated to do so. No assurance can be given as to the liquidity of the
trading market for any of the securities.
Agents, underwriters, dealers and remarketing firms may be customers of,
engage in transactions with, or perform services for Industries, Capital
Markets and Industries' subsidiaries in the ordinary course of business.
LEGAL MATTERS
The legality of the securities offered hereby will be passed upon for Capital
Markets, Industries and the Trust by Schiff Hardin & Waite, Chicago, Illinois.
Certain matters of Delaware law relating to the validity of the Preferred
Securities, the enforceability of the Declaration and the creation of the Trust
will be passed upon by Richards, Layton & Finger, P.A.
EXPERTS
The consolidated financial statements and schedules of Industries and its
subsidiaries incorporated by reference in this Prospectus from Industries' 1997
Annual Report on Form 10-K and Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1998, June 30, 1998 and September 30, 1998 have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are incorporated by reference in this
Prospectus in reliance upon the authority of such firm as experts in giving
such reports.
The consolidated financial statements of Bay State and its subsidiaries
incorporated by reference in this Prospectus from Bay State's 1998 Annual
Report on Form 10-K have been audited by KPMG Peat Marwick LLP, independent
certified public accountants, as indicated in their reports with respect
thereto, and are incorporated by reference in this Prospectus in reliance upon
such reports and upon the authority of said firm as experts in accounting and
auditing.
59
<PAGE>
6,000,000 Premium Income Equity Securitiessm ("PIESsm")
Consisting of 6,000,000 Corporate PIES
[NIPSCO LOGO]
NIPSCO Industries, inc.
NIPSCO Capital Markets, Inc.
NIPSCO Capital Trust I
--------------------------
PROSPECTUS SUPPLEMENT
February 9, 1999
--------------------------
Lehman Brothers
Goldman, Sachs & Co.
Morgan Stanley Dean Witter
"Premium Income Equity Securities" and "PIES" are service marks owned by Lehman
Brothers Inc.
