<PAGE>
PRICING SUPPLEMENT NO. 1 Filed Pursuant to Rule 424(2)
(TO PROSPECTUS DATED DECEMBER 11, 1996, AND PROSPECTUS SUPPLEMENT DATED DECEMBER
11, 1996) COMMISSION FILE NO. 333-15387
[LOGO]
$100,000,000
MIDAMERICAN ENERGY COMPANY
NOTES
6.5% SERIES DUE 2001
----------------
Interest Payable June 15 and December 15
-------------------
New Notes of the 6.5% Series due 2001 are not redeemable at the option of
the Company prior to their maturity. Interest on the New Notes will accrue from
December 15, 1996, and the first interest payment date is June 15, 1997.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC (1) COMMISSIONS(2) COMPANY(1)(3)
<S> <C> <C> <C>
Per Note............................. 99.579% .500% 99.079%
Total................................ $99,579,000 $500,000 $99,079,000
</TABLE>
(1) Plus accrued interest, if any, from December 15, 1996.
(2) See "Underwriting."
(3) Before deducting expenses of issuing the New Notes, estimated at $152,000,
which are payable by the Company.
-------------------
The New Notes are offered by the Underwriters, subject to prior sale, when,
as and if delivered to and accepted by the Underwriters, and subject to their
right to reject orders in whole or in part. It is expected that delivery of the
New Notes will be made in New York City on or about December 17, 1996.
-------------------
PAINEWEBBER INCORPORATED
DILLON, READ & CO. INC.
GOLDMAN, SACHS & CO.
-------------------
<PAGE>
The date of this Pricing Supplement is December 12, 1996.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NEW NOTES
OFFERED HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------------------------
USE OF PROCEEDS
The proceeds from the issuance and sale of the New Notes will be used to
repay the $40 million principal amount of First Mortgage Bonds, 8.15% Series due
2001 (which will be redeemed by the Company), issued by Iowa-Illinois Gas and
Electric Company, a predecessor of the Company, and to repay short-term debt
incurred to finance capital expenditures.
DESCRIPTION OF NEW NOTES
The following information concerning the New Notes supplements and should be
read in conjunction with the statements under "Description of Notes" in the
accompanying Prospectus. Capitalized terms not defined in this Pricing
Supplement are used as defined in the accompanying Prospectus.
GENERAL
The New Notes will be issued under the Indenture dated as of December 1,
1996 from the Company to The First National Bank of Chicago, Trustee. The New
Notes will be the first series of Notes issued under the Indenture.
The New Notes will bear interest at the rate per annum specified in their
title as set forth on the cover page of this Pricing Supplement and will mature
on December 15, 2001. The New Notes will be issued as Book-Entry Notes. See
"Description of Notes -- General" and -- Book-Entry System" in the accompanying
Prospectus.
REDEMPTION PROVISIONS
The New Notes are not redeemable at the option of the Company prior to their
maturity.
UNDERWRITING
Subject to the terms and conditions of the Terms Agreement entered into
pursuant to the Distribution Agreement, a copy of which is filed as an exhibit
to the Registration Statement of which this Pricing Supplement is a part,
PaineWebber Incorporated, Dillon, Read & Co. Inc. and Goldman, Sachs & Co.
("Underwriters") have agreed severally to purchase the following principal
amounts of New Notes.
<TABLE>
<CAPTION>
UNDERWRITERS AMOUNT
- ------------------------------------------------------------------------------ --------------
<S> <C>
PaineWebber Incorporated...................................................... $ 34,000,000
Dillon, Read & Co. Inc........................................................ 33,000,000
Goldman, Sachs & Co........................................................... 33,000,000
--------------
$ 100,000,000
--------------
--------------
</TABLE>
The Terms Agreement provides that the obligations of the Underwriters
thereunder are subject to the approval of certain legal matters by counsel and
to various other conditions. The nature of the Underwriters' obligations is such
that they are committed to purchase all of the New Notes offered hereby if any
are purchased.
The Company has been advised by the Underwriters that they propose to offer
the New Notes to the public initially at the offering price and on the terms set
forth on the cover page of this Pricing Supplement and to certain dealers at
that price, less a concession not in excess of .30% of the principal amount of
the New Notes. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of .25% of the principal amount of the New Notes to
certain other dealers. After the initial offering to the public, the offering
price and other selling terms may be varied by the Underwriters.
The Company has been advised by the Underwriters that they presently intend
to make a market in the New Notes offered hereby; however, they are not
obligated to do so and any market making may be discontinued at any time. There
can be no assurance that an active public market for the New Notes will develop.
The Company has agreed to indemnify the Underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933.
PS-2
<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED DECEMBER 11, 1996)
[LOGO]
$300,000,000
MIDAMERICAN ENERGY COMPANY
MEDIUM-TERM NOTES
DUE FROM NINE MONTHS TO 30 YEARS FROM DATE OF ISSUE
-----------------
MidAmerican Energy Company ("MidAmerican Energy" or the "Company") may offer
from time to time its Medium-Term Notes (the "Notes"), having an aggregate
initial offering price not to exceed $300,000,000. The Notes will be offered in
varying maturities from nine months to 30 years from their date of issue and may
be subject to redemption at the option of the Company or repayment at the option
of the Holder, in each case, in whole or in part prior to the Stated Maturity
thereof as specified in a Pricing Supplement to this Prospectus Supplement and
the accompanying Prospectus (a "Pricing Supplement"). Each Note will rank as
senior unsecured debt, be registered as to principal and interest and be
denominated in United States dollars. The Indenture contains certain
restrictions on the issuance by the Company of first mortgage bonds and on
certain other mortgages or liens on property of the Company and its
Subsidiaries. See "Description of Notes--Restrictions on Secured Debt" in the
accompanying Prospectus.
Each Note will bear interest at a fixed rate (a "Fixed Rate Note"), which
may be zero in the case of certain Notes issued at a price representing a
discount from the principal amount payable at maturity (a "Zero-Coupon Note"),
or at a variable rate (a "Floating Rate Note") determined by reference to the
Commercial Paper Rate, LIBOR, Prime Rate or Treasury Rate or such other interest
rate formula (the "Interest Rate Basis") as may be specified in the applicable
Pricing Supplement, as adjusted by a Spread and/or Spread Multiplier, if any,
applicable to such Notes. In addition, the Notes may be issued as "Original
Issue Discount Notes," "Amortizing Notes" or "Reset Notes." See "Description of
Notes"in the accompanying Prospectus. Unless otherwise specified in the
applicable Pricing Supplement, interest on Fixed Rate Notes will be payable
semi-annually on each January 15 and July 15 (each an "Interest Payment Date"
with respect to such Fixed Rate Notes) and at Stated Maturity. Interest on
Floating Rate Notes and, in the case of Amortizing Notes, interest and
principal, will be payable on the dates specified in the applicable Pricing
Supplement (each an "Interest Payment Date" with respect to such Floating Rate
Notes) and at Maturity.
Each Note will be represented by either a global security (a "Book-Entry
Note") registered in the name of a nominee of The Depository Trust Company
("DTC" or the "Depositary"), or a certificate issued in definitive form (a
"Certificated Note"), as specified in the applicable Pricing Supplement.
Beneficial interests in Book-Entry Notes will be shown on, and transfers thereof
will be effected only through, records maintained by DTC and its participants.
Owners of beneficial interests in Book-Entry Notes will be entitled to physical
delivery of Certificated Notes only under the limited circumstances described
under "Description of Notes--Book-Entry System." Unless otherwise specified in
the applicable Pricing Supplement, Notes will be issued in denominations of
$1,000 and integral multiples thereof.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT,
THE ACCOMPANYING PROSPECTUS OR ANY PRICING SUPPLEMENT HERETO.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO AGENT'S COMMISSION OR PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(2) (3)
<S> <C> <C> <C>
Per Note.................................. 100% .125% - .750% 99.250% - 99.875%
Total..................................... $300,000,000 $375,000 - $2,250,000 $299,625,000 - $297,750,000
</TABLE>
(1) Unless otherwise indicated in the applicable Pricing Supplement, Notes will
be sold at 100% of their principal amount.
(2) The Company will pay to the Agents named below (the "Agents,") a commission
ranging from .125% to .750% of the principal amount of any Note, depending
on its Stated Maturity, sold through the Agents. The Agents, acting as
principal, may also purchase Notes at a discount for resale to one or more
investors or one or more broker-dealers (acting as principal for purposes of
resale) at varying prices related to prevailing market prices at the time of
resale, as determined by the Agents, or, if so agreed, at a fixed public
offering price. The Company has agreed to reimburse the Agents for certain
expenses. The Company has agreed to indemnify the Agents against certain
liabilities, including liabilities under applicable federal and state
securities laws. See "Supplemental Plan of Distribution."
(3) Before deducting offering expenses payable by the Company estimated at
$456,000.
---------------------
The Notes are offered on a continuing basis by the Company through the
Agents, each of which has agreed to use its reasonable best efforts to solicit
offers to purchase the Notes. The Company has reserved the right to sell Notes
directly to investors on its own behalf, and on such sales no commissions will
be paid. The Notes will not be listed on any securities exchange, and there can
be no assurance that the Notes will be sold or that there will be a secondary
market for the Notes. The Company reserves the right to withdraw, cancel or
modify the offer made hereby without notice. The Company or the Agent that
solicits an offer to purchase may reject any such offer to purchase Notes in
whole or in part. See "Supplemental Plan of Distribution."
---------------------
PAINEWEBBER INCORPORATED
DILLON, READ & CO. INC.
GOLDMAN, SACHS & CO.
------------
The date of this Prospectus Supplement is December 11, 1996.
<PAGE>
SUPPLEMENTAL PLAN OF DISTRIBUTION
The Notes are offered on a continuing basis by the Company through the
Agents, each of which has agreed to use its reasonable best efforts to solicit
offers to purchase the Notes. The Company will pay to the Agents a commission of
from .125% to .750% of the principal amount of each Note, depending upon its
Stated Maturity, sold through the Agents. The Distribution Agreement between the
Company and the Agents permits the Company to offer Notes through agents other
than the Agents. The name of any such other agent and the terms of any such
offering will be set forth in the applicable Pricing Supplement. The Company
will have the sole right to accept offers to purchase Notes and may reject any
such offer in whole or in part. Each Agent will have the right, in its
discretion reasonably exercised, to reject in whole or in part any offer to
purchase Notes received by such Agent. The Company also may sell Notes to the
Agents, acting as principal, at a discount to be agreed upon at the time of
sale, for resale to one or more investors or to one or more broker-dealers
(acting as principal for purposes of resale) at varying prices related to
prevailing market prices at the time of resale, as determined by the Agents, or,
if so agreed, at a fixed public offering price. Unless otherwise specified in
the applicable Pricing Supplement, if any Note is resold by the Agents to any
broker-dealer at a discount, such discount will not be in excess of the discount
or commission received by the Agents from the Company. In addition, unless
otherwise specified in the applicable Pricing Supplement, any Note purchased by
an Agent as principal will be purchased at 100% of the principal amount thereof
less a percentage equal to the commission applicable to an agency sale of a Note
having an identical Stated Maturity. After the initial public offering of the
Notes, the public offering price (in the case of Notes to be resold on a fixed
public offering price basis), any concession and the discount may be changed.
The Company also reserves the right to sell Notes directly to investors on its
own behalf in those jurisdictions where it is authorized to do so or as
otherwise provided in the applicable Pricing Supplement. In such circumstances,
the Company will have the sole right to accept offers to purchase Notes and may
reject any offer to purchase Notes in whole or in part. In the case of sales
made directly by the Company, no commissions will be paid.
The Agents may be deemed to be "underwriters" within the meaning of the
Securities Act. The Company has agreed to indemnify the Agents against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments each Agent may be required to make in respect thereof. The Company has
agreed to reimburse each Agent for certain of its expenses, including, but not
limited to, the fees and expenses of counsel to such Agent.
The Company has been advised by the Agents that they may from time to time
purchase and sell Notes in the secondary market, but that they are not obligated
to do so. There can be no assurance that there will be a secondary market for
the Notes or liquidity in the secondary market if one develops. From time to
time, one or more Agents may make a market in the Notes.
Each Agent and its affiliates may engage in transactions with and perform
services for the Company in the ordinary course of business.
S-2
<PAGE>
PROSPECTUS
[LOGO]
MIDAMERICAN ENERGY COMPANY
MEDIUM-TERM NOTES
DUE FROM NINE MONTHS TO 30 YEARS FROM DATE OF ISSUE
-----------------
MidAmerican Energy Company ("MidAmerican Energy" or the "Company") may offer
from time to time, at prices and on terms to be determined at or prior to the
time of sale, its unsecured Medium-Term Notes (the "Notes"), having an aggregate
initial offering price not to exceed $500,000,000, subject to reduction in the
event of sales of certain other securities under the registration statement
referred to below of which this Prospectus is a part. Each Note will rank as
senior unsecured debt, be registered as to principal and interest, and be
denominated in United States dollars.
Specific terms of the Notes in respect of which this Prospectus is being
delivered will be set forth in an accompanying prospectus supplement, (as
supplemented by any applicable pricing supplement relating thereto, a
"Prospectus Supplement"), together with the terms of the offering of the Notes,
the initial offering price and the net proceeds to the Company from the sale
thereof. The applicable Prospectus Supplement will set forth, among other
matters, the following with respect to the particular Notes: the aggregate
principal amount, authorized denominations, maturity, rate or method of
calculation of interest and dates for payment thereof, and any redemption,
prepayment or sinking fund provisions.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR ANY
PROSPECTUS SUPPLEMENT HERETO. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
-------------------
The Company may sell Notes directly to purchasers or through agents
designated from time to time by the Company or to or through underwriters or a
group of underwriters which may be managed by one or more underwriters. If any
agents of the Company or any underwriters are involved in the sale of Notes in
respect of which this Prospectus is being delivered, the names of such agents or
underwriters and any applicable commission or discount will be set forth in the
applicable Prospectus Supplement. The net proceeds to the Company from the sale
of Notes will be the public offering price of such Notes less such discount, in
the case of an offering through an underwriter, or the purchase price of such
Notes less such commission, in the case of an offering through an agent, and
less, in each case, other expenses of the Company associated with the issuance
and distribution of such Notes.
-------------------
The date of this Prospectus is December 11, 1996.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The Company has filed
with the Commission a registration statement on Form S-3 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Notes offered hereby and certain other securities. This
Prospectus does not contain all information set forth in the Registration
Statement and reference is hereby made to the Registration Statement and the
exhibits thereto for further information with respect to the Company and the
Notes offered hereby. Such reports, proxy statements, Registration Statement and
exhibits and other information can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, and at its Northeast Regional Office located
at 7 World Trade Center, Suite 1300, New York, New York 10048 and Midwest
Regional Office located at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such material can be obtained at
prescribed rates from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. The Company is subject to the electronic
filing requirements of the Commission. Accordingly, pursuant to the rules and
regulations of the Commission, certain documents, including annual and quarterly
reports and proxy statements, filed by the Company with the Commission have been
filed electronically. The Commission also maintains a World Wide Web site that
contains reports, proxy and information statements and other information
regarding registrants (including the Company) that file electronically with the
Commission at (http://www.sec.gov). Certain of the Company's securities are
listed on the New York Stock Exchange and such reports, proxy statements and
other information may also be inspected at the offices of the New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Annual Report of the Company on Form 10-K, as amended, for the year
ended December 31, 1995, the Quarterly Reports of the Company on Form 10-Q for
the period ended March 31, 1996, as amended, and for the periods ended June 30,
1996 and September 30, 1996, and Current Reports of the Company on Form 8-K
reporting events occurring on February 20, 1996, April 25, 1996, May 28, 1996
and October 17, 1996 are incorporated by reference into this Prospectus. All
documents filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act subsequent to the date of this Prospectus and prior to the
termination of the offering of the Notes contemplated hereby shall be deemed to
be incorporated by reference into this Prospectus and to be made a part hereof
from the respective dates of filing of such documents. Any statement contained
in a document incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for purposes of the Registration
Statement and this Prospectus to the extent that a statement contained herein,
in the applicable Prospectus Supplement or in any subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of the
Registration Statement or this Prospectus.
Copies of the above documents (other than exhibits to such documents unless
such exhibits are specifically incorporated by reference into such documents)
may be obtained upon written or oral request without charge from the Company,
666 Grand Avenue, P.O. Box 657, Des Moines, Iowa 50303-0657 (telephone number
(515) 242-4300), Attention: Investor Relations.
2
<PAGE>
THE COMPANY
GENERAL
MidAmerican Energy was formed on July 1, 1995 through the merger (the
"Merger") of Iowa-Illinois Gas and Electric Company ("Iowa-Illinois"), Midwest
Resources Inc. ("Midwest Resources") and Midwest Power Systems Inc. ("Midwest
Power") with and into MidAmerican Energy. MidAmerican Energy is a combination
electric and natural gas public utility engaged in the generation, transmission,
distribution and sale of electric energy in Illinois, Iowa and South Dakota, and
the purchase, distribution, transportation and sale of natural gas in those
states and in the state of Nebraska.
The Company is incorporated in Iowa. Its executive offices are located at
666 Grand Avenue, P.O. Box 657, Des Moines, Iowa 50303-0657 (telephone number
(515) 242-4300).
RECENT DEVELOPMENTS
On December 1, 1996, MidAmerican Energy became a subsidiary of MidAmerican
Energy Holdings Company ("Holdings") in a share exchange in which each share of
MidAmerican Energy common stock was exchanged for one share of Holdings common
stock. Holdings was formed by MidAmerican Energy to be the holding company for
MidAmerican Energy and MidAmerican Capital Company ("MidAmerican Capital"),
which conducts unregulated operations, and Midwest Capital Group, Inc. ("Midwest
Capital"), which is a regional business development company in the utility
service territory.
RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth the unaudited consolidated and utility only
ratios and supplemental ratios of earnings to fixed charges of MidAmerican
Energy for each of the years 1991 through 1995 and for the twelve months ended
September 30, 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------- TWELVE MONTHS ENDED
1991 1992 1993 1994 1995 SEPTEMBER 30, 1996
--------- --------- --------- --------- --------- -------------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED:
Ratio of earnings to fixed charges(1).............. 2.46x 1.87x 2.84x 2.78x 2.82x 3.08x
Supplemental ratio of earnings to fixed
charges(2)....................................... 2.39x 1.82x 2.75x 2.70x 2.75x 3.01x
UTILITY ONLY(3):
Ratio of earnings to fixed charges(1).............. 2.92x 2.34x 3.40x 3.30x 3.39x 3.72x
Supplemental ratio of earnings to fixed
charges(2)....................................... 2.80x 2.24x 3.25x 3.16x 3.28x 3.61x
</TABLE>
- ------------------------
(1) For purposes of computing the ratios of earnings to fixed charges,
"earnings" consist of net income from continuing operations before interest
charges and preferred dividend requirements, plus income taxes, plus the
estimated interest component of rentals. "Earnings" also include allowances
for borrowed and other funds used during construction. Fixed charges consist
of interest charges and the estimated interest component of rentals.
(2) The supplemental ratios have been calculated including obligations of the
Company under its long-term power purchase contract with the Nebraska Public
Power District relating to Cooper Nuclear Station.
(3) Reflects the transfer of MidAmerican Capital and Midwest Capital to Holdings
by MidAmerican Energy.
3
<PAGE>
USE OF PROCEEDS
Except as set forth in the Prospectus Supplement for a specific offering of
Notes, MidAmerican Energy will use the net proceeds from the sale of the Notes
for the repayment of a portion of its outstanding indebtedness. The Company has
not yet selected the indebtedness to be repaid with such net proceeds.
DESCRIPTION OF NOTES
GENERAL
The Notes offered hereby will be issued under the Indenture dated as of
December 1, 1996, as supplemented from time to time (the "Indenture"), between
the Company and The First National Bank of Chicago, as trustee (the "Trustee").
The Indenture is subject to and governed by the Trust Indenture Act of 1939, as
amended. The summary contained herein of certain provisions of the Notes is
subject to and is qualified in its entirety by reference to the provisions of
the Indenture and the forms of Notes (including the definitions of certain terms
therein), each of which has been filed as an exhibit to the Registration
Statement, to which exhibits reference is hereby made. Certain capitalized terms
used below but not defined herein have the meanings ascribed to them in the
Indenture. Unless otherwise noted, section references below are to the
Indenture.
The Notes are the only securities that may be issued under the Indenture.
The Indenture does not limit the aggregate amount of Notes that may be issued
under the Indenture, but the aggregate initial offering price of the Notes that
may be issued under this Prospectus is limited to $500,000,000, subject to
reduction in the event of sales of certain other securities under the
Registration Statement of which this Prospectus is a part. The Notes will be
denominated in United States dollars, and payments of principal of, premium, if
any, and any interest on the Notes will be made in United States dollars.
Currency amounts in this Prospectus and any Prospectus Supplement are stated in
United States dollars. Unless otherwise specified in the applicable Prospectus
Supplement, the Notes will have the terms described below.
The general provisions of the Indenture do not contain any provisions that
would limit the ability of the Company to incur indebtedness or that would
afford holders of Notes ("Holders") protection in the event of a highly
leveraged or similar transaction involving the Company. However, the general
provisions of the Indenture contain certain restrictions on mortgages and liens.
See "Restrictions on Secured Debt" below. Reference is made to the applicable
Prospectus Supplement for information with respect to any deletions from,
modifications of or additions to the Events of Default or covenants of the
Company that are described below, including any addition of covenants or other
provisions providing event risk or similar protection.
All of the Notes need not be issued at the same time, and may vary as to
interest rate, maturity and other provisions. (Section 2.05) The Notes are
offered on a continuing basis and will mature on a day from nine months to 30
years from their date of issue, as selected by the initial purchaser and agreed
to by the Company, and may be subject to redemption at the option of the Company
or repayment at the option of the Holder prior to Stated Maturity (as defined
below). See "Redemption and Repayment" below.
Each Note will be represented by either a global security (a "Book-Entry
Note") registered in the name of a nominee of the Depositary or a certificate
issued in definitive form (a "Certificated Note"), as specified in the
applicable Prospectus Supplement. Beneficial interests in Book-Entry Notes will
be shown on, and transfers thereof will be effected only through, records
maintained by DTC and its participants. Owners of beneficial interests in
Book-Entry Notes will be entitled to physical delivery of Certificated Notes
only under the limited circumstances described herein. See "Book-Entry System"
below. Unless otherwise specified in the applicable Prospectus Supplement, Notes
will be issued in denominations of $1,000 and integral multiples thereof.
(Section 2.04)
4
<PAGE>
Payments of interest and principal (and premium, if any) to Beneficial
Owners (as defined below under "Book-Entry System") of Book-Entry Notes are
expected to be made in accordance with the procedures of the Depositary and its
participants in effect from time to time as described below under "Book-Entry
System."
Unless otherwise specified in the applicable Prospectus Supplement, the
principal of and any premium and accrued interest on all Notes shall be payable
as follows:
(a) On or before 10:00 a.m., New York City time, of the day on which any
payment of principal, accrued interest or premium is due on any Book-Entry Note
pursuant to the terms thereof, the Company will deliver to the Trustee
immediately available funds sufficient to make such payment. On or before 10:30
a.m., New York City time or such other time as shall be agreed upon between the
Trustee and the Depositary, of the day on which such payment is due, the Trustee
will deposit with the Depositary such funds by wire transfer into the account
specified by the Depositary. As a condition to the payment at the Maturity of
any part of the principal and any applicable premium of any Book-Entry Note, the
Depositary will surrender, or cause to be surrendered, such Book-Entry Note to
the Trustee, whereupon a new Book-Entry Note will be issued to the Depositary.
(b) With respect to any Note that is not a Book-Entry Note, principal, any
premium and accrued interest due at the Maturity of such Note will be payable in
immediately available funds when due upon presentation and surrender of such
Note at the Corporate Trust Office of the Trustee, currently c/o First Chicago
Trust Company of New York, 14 Wall Street-8th Floor-Window 2, New York, New York
10005; PROVIDED that such Note is presented to the Trustee in time for the
Trustee to make such payment in such funds in accordance with its normal
procedures. Accrued interest on (and, in the case of Amortizing Notes, as
defined below under "Amortizing Notes", installments of principal of) any Note
that is not a Book-Entry Note (other than accrued interest or such installments
payable at Maturity) will be paid by a clearinghouse funds check mailed on the
Interest Payment Date; PROVIDED, HOWEVER, that if any Holder of Notes, the
aggregate principal amount of which equals or exceeds $10,000,000, provides a
written request to the Trustee on or before the applicable Record Date for such
Interest Payment Date, accrued interest (and such installments of principal)
shall be paid by wire transfer of immediately available funds to a bank within
the continental United States or by direct deposit into the account of such
Holder if such account is maintained with the Trustee. (Section 2.11)
Notwithstanding anything in this Prospectus to the contrary, unless
otherwise specified in the applicable Prospectus Supplement, if a Note is an
Original Issue Discount Note (as defined below under "Original Issue Discount
Notes"), the amount payable on such Note in the event the principal amount
thereof is declared to be due and payable immediately as described below under
"Description of Notes-- Events of Default" or in the event of redemption or
repayment thereof prior to its Stated Maturity, in lieu of the principal amount
due at the Stated Maturity thereof, will be the Amortized Face Amount of such
Note as of the date of declaration, redemption or repayment, as the case may be.
The "Amortized Face Amount" of an Original Issue Discount Note will be the
amount equal to (i) the principal amount of such Note multiplied by the Issue
Price (as defined below) specified in the applicable Prospectus Supplement plus
(ii) the portion of the difference between the dollar amount determined pursuant
to the preceding clause (i) and the principal amount of such Note that has
accreted at the yield to maturity specified in the applicable Prospectus
Supplement (computed in accordance with generally accepted United States bond
yield computation principles) to such date of declaration, redemption or
repayment, but in no event will the Amortized Face Amount of an Original Issue
Discount Note exceed the principal amount stated in such Note. (Section 1.03)
Each Note will bear interest at a fixed rate (a "Fixed Rate Note"), which
may be zero in the case of a Zero Coupon Note, or at a variable rate (a
"Floating Rate Note") determined by reference to the Commercial Paper Rate,
LIBOR, Prime Rate or Treasury Rate or such other interest rate formula (the
"Interest Rate Basis") as may be specified in the applicable Prospectus
Supplement as adjusted by a
5
<PAGE>
Spread and/or Spread Multiplier, if any (as defined herein), applicable to such
Notes. The Prospectus Supplement relating to each Note will describe, among
other things, the following items: (i) the price (expressed as a percentage of
the aggregate principal amount thereof) at which such Note will be issued (the
"Issue Price"); (ii) the date on which such Note will be issued (the "Original
Issue Date"); (iii) the date on which such Note will mature (the "Stated
Maturity") and whether the Stated Maturity may be extended by the Company, and
if so, the Extension Periods and the Final Maturity Date (each as defined below
under "Extension of Maturity"); (iv) whether such Note is a Fixed Rate Note or a
Floating Rate Note; (v) if such Note is a Fixed Rate Note, the rate per annum at
which such Note will bear interest, if any, the Interest Payment Date or Dates,
if different from those set forth below under "Fixed Rate Notes" and whether
such rate may be changed by the Company prior to Stated Maturity; (vi) if such
Note is a Floating Rate Note, the Initial Interest Rate, the Interest Rate
Basis, the Interest Reset Dates, the Interest Payment Dates, the Index Maturity,
the Spread, if any, the Spread Multiplier, if any (all as defined herein), the
maximum interest rate, if any, the minimum interest rate, if any, and any other
terms relating to the particular method of calculating the interest rate for
such Note, and whether any such Spread and/or Spread Multiplier may be changed
by the Company prior to Stated Maturity; (vii) whether such Note is an Original
Issue Discount Note, and if so, the yield to maturity; (viii) whether such Note
is an Amortizing Note, and if so, the basis or formula for the amortization of
principal and/or interest and the payment dates for such periodic principal
payments; (ix) the record date or dates for determining the person entitled to
receive payments of interest, principal and premium, if any (a "Record Date"),
if other than as set forth below; (x) whether such Note may be redeemed at the
option of the Company, or repaid at the option of the Holder, prior to Stated
Maturity and, if so, the provisions relating to such redemption or repayment;
(xi) any sinking fund or other mandatory redemption provisions with respect to
such Note; (xii) whether such Note will be issued initially as a Book-Entry Note
or a Certificated Note; and (xiii) any other terms of such Note not inconsistent
with the provisions of the Indenture.
Certificated Notes may be presented for payment and for registration of
transfer or exchange at the Corporate Trust Office of the Trustee, currently c/o
First Chicago Trust Company of New York, 14 Wall Street-8th Floor-Window 2, New
York, New York 10005. (Section 6.02)
All percentages resulting from any calculation with respect to any Notes
will be rounded, if necessary, to the nearest one hundred-thousandth of a
percentage point, with five one-millionths of a percentage point rounded upward
(e.g., 9.876545% (or .09876545) would be rounded to 9.87655% (or .0987655)), and
all dollar amounts used in or resulting from such calculation on any Notes will
be rounded to the nearest cent with one-half cent being rounded upward. (Section
2.04)
As used herein, "Business Day" means, unless otherwise specified in the
applicable Prospectus Supplement , any Monday, Tuesday, Wednesday, Thursday or
Friday that in The City of New York is not a day on which banking institutions
are authorized or obligated by law, regulation or executive order to close and,
with respect to Notes as to which LIBOR (as defined below under "Floating Rate
Notes--LIBOR Notes") is the applicable Interest Rate Basis is also a London
Business Day. As used herein, "London Business Day" means any day on which
dealings in deposits in United States dollars are transacted in the London
interbank market. (Section 1.03)
RESTRICTIONS ON SECURED DEBT
The Notes will constitute unsecured and unsubordinated indebtedness of the
Company, and will rank on a parity with the Company's other unsecured and
unsubordinated indebtedness, but will rank junior to the first mortgage bonds of
the Company ("First Mortgage Bonds") which were issued under the Indenture of
Mortgage and Deed of Trust, dated as of March 1, 1947, from Iowa-Illinois to
Harris Trust and Savings Bank and Lynn Lloyd (C. Potter, successor individual
trustee), as trustees, and indentures supplemental thereto ("Iowa-Illinois Bond
Indenture"), or under the General Mortgage Indenture and Deed of Trust, dated as
of January 1, 1993, between Midwest Power and Morgan Guaranty Trust Company
6
<PAGE>
of New York, trustee (Harris Trust and Savings Bank, successor trustee), and
indentures supplemental thereto ("Midwest Power Bond Indenture").
The Iowa-Illinois Bond Indenture constitutes a first mortgage lien (subject
to permissible encumbrances) on all of the electric generating, transmission and
distribution property, and all of the gas distribution property, which was owned
by Iowa-Illinois at the time of the Merger, and properties thereafter acquired
by the Company which are an integral part of, or essential to the use or
operation of, properties which were subject to the lien of the Iowa-Illinois
Bond Indenture at the time of the Merger. The Midwest Power Bond Indenture
constitutes a first mortgage lien (subject to permissible encumbrances) on all
of the electric generating, transmission and distribution property of the
Company within the State of Iowa which was owned by Midwest Power at the time of
the Merger, and properties thereafter acquired by the Company which are an
integral part of, or essential to the use or operation of, properties which were
subject to the lien of the Midwest Power Bond Indenture at the time of the
Merger. No gas distribution property or property located outside the State of
Iowa which was owned by Midwest Power at the time of the Merger is currently
subject to the lien of the Midwest Power Bond Indenture. However, the Company
has the right to subject such exempted properties to the lien of the Midwest
Power Bond Indenture at any time or times. As a result of the Merger, the
Company has the right to issue First Mortgage Bonds under either the
Iowa-Illinois Bond Indenture or the Midwest Power Bond Indenture, but after the
Company has issued First Mortgage Bonds under one such Bond Indenture, it may
not issue First Mortgage Bonds under the other such Bond Indenture.
The Company has covenanted in the Indenture that while any of the Notes are
outstanding, it will not (i) issue any additional First Mortgage Bonds, or (ii)
subject to the lien of the Iowa-Illinois Bond Indenture or the lien of the
Midwest Power Bond Indenture any property which is exempt from such liens,
unless in each case the Company concurrently issues to the Trustee under the
Indenture, a First Mortgage Bond or Bonds in the same aggregate principal amount
and having the same interest rate or rates, maturity date or dates, redemption
provisions and other terms as the Notes then outstanding and thereby give to the
holders of all outstanding Notes the benefit of the security of such First
Mortgage Bond or Bonds. (Section 4.01) At such time as the Trustee under the
Indenture is the only holder of First Mortgage Bonds outstanding under the
Iowa-Illinois Bond Indenture or the Midwest Power Bond Indenture, the Trustee
will surrender such First Mortgage Bonds to the Company for cancellation and
such Bond Indenture will be discharged and defeased. (Section 4.07).
In addition, the Company has covenanted in the Indenture that neither the
Company nor a Subsidiary will create or assume, except in favor of the Company
or a Wholly-Owned Subsidiary (as defined below under "Certain Definitions"), any
mortgage, pledge, or other lien or encumbrance upon any Principal Facility (as
defined below under "Certain Definitions") or any stock of any Regulated
Subsidiary (as defined below under "Certain Definitions") or indebtedness of any
Subsidiary to the Company or any other Subsidiary whether now owned or hereafter
acquired without equally and ratably securing the outstanding Notes. This
limitation will not apply to the lien of the Iowa-Illinois Bond Indenture, the
lien of the Midwest Power Bond Indenture or certain permitted encumbrances
described in the Indenture, including (a) purchase money mortgages entered into
within specified time limits; (b) liens extending, renewing or refunding any
liens permitted by clause (a) of this covenant; (c) liens existing on acquired
property; (d) certain tax, materialmen's, mechanics' and judgment liens, certain
liens arising by operation of law and certain other similar liens; (e) certain
mortgages, pledges, liens or encumbrances in favor of any state or local
government or governmental agency in connection with certain tax-exempt
financings; (f) liens to secure the cost of construction or improvement of any
property entered into within specified time limits; and (g) mortgages, pledges,
liens and encumbrances not otherwise permitted if the sum of the indebtedness
thereby secured does not exceed the greater of $100,000,000 or 10% of Common
Shareholders' Equity (as defined below under "Certain Definitions"). (Section
6.06)
7
<PAGE>
INTEREST AND INTEREST RATES
Unless otherwise specified in the applicable Prospectus Supplement, each
Note (other than a Zero Coupon Note), will bear interest from and including its
Original Issue Date or from and including the most recent Interest Payment Date
to which interest on such Note has been paid or duly provided for at a fixed
rate per annum or at a rate per annum determined pursuant to an Interest Rate
Basis, stated therein and in the applicable Prospectus Supplement, that may be
adjusted by a Spread and/or Spread Multiplier, until Maturity and the principal
thereof is paid or made available for payment. Unless otherwise specified in the
applicable Prospectus Supplement, interest will be payable on each Interest
Payment Date and at Maturity. "Maturity" means the date on which the principal
of a Note or an installment of principal becomes due and payable in accordance
with its terms and the terms of the Indenture, whether at Stated Maturity, upon
acceleration, redemption, repayment or otherwise. Interest (other than defaulted
interest which may be paid to the Holder on a special record date) will be
payable to the Holder at the close of business on the Record Date next preceding
an Interest Payment Date; provided, however, that the first payment of interest
on any Note originally issued between a Record Date and the next Interest
Payment Date will be made on the Interest Payment Date following the next
succeeding Record Date to the Holder on such next succeeding Record Date and
interest payable on the Maturity date, including, if applicable, upon
redemption, shall be payable to the person to whom principal is payable.
Interest rates, interest rate formulae and other variable terms of the Notes
are subject to change by the Company from time to time, but no such change will
affect any Note already issued or as to which an offer to purchase has been
accepted by the Company. Unless otherwise specified in the applicable Prospectus
Supplement, the Interest Payment Dates and the Record Dates for Fixed Rate Notes
will be as described below under "Fixed Rate Notes." The Interest Payment Dates
for Floating Rate Notes will be as specified in the applicable Prospectus
Supplement, and unless otherwise specified in the applicable Prospectus
Supplement, each Record Date for a Floating Rate Note will be the fifteenth day
(whether or not a Business Day) preceding each Interest Payment Date.
Each Note (other than a Zero Coupon Note) will bear interest at either (a) a
fixed rate or (b) a floating rate determined by reference to an Interest Rate
Basis which may be adjusted by a Spread and/or Spread Multiplier; provided that
the interest rate in effect for the ten days immediately prior to Stated
Maturity will be the interest rate in effect on the tenth day preceding such
Stated Maturity. Any Floating Rate Note may also have either or both of the
following: (i) a maximum interest rate, or ceiling, on the rate of interest
which may accrue during any interest period, and (ii) a minimum interest rate,
or floor, on the rate of interest which may accrue during any interest period.
The applicable Prospectus Supplement relating to each Note will designate either
a fixed rate of interest per annum on the applicable Fixed Rate Note or one or
more of the following Interest Rate Bases as applicable to the relevant Floating
Rate Note: (a) the Commercial Paper Rate, in which case such Note will be a
"Commercial Paper Rate Note," (b) LIBOR, in which case such Note will be a
"LIBOR Note," (c) the Prime Rate, in which case such Note will be a "Prime Rate
Note," (d) the Treasury Rate, in which case such Note will be a "Treasury Rate
Note," or (e) such other Interest Rate Basis or formula as may be specified in
such Prospectus Supplement.
Notwithstanding the determination of the interest rate as provided below,
the interest rate on the Notes for any interest period shall not be greater than
the maximum interest rate, if any, or less than the minimum interest rate, if
any, specified in the applicable Prospectus Supplement. The interest rate on the
Notes will in no event be higher than the maximum rate permitted by New York or
other applicable law, as the same may be modified by United States federal law
of general application. Under present New York law, the maximum rate of interest
is 25% per annum on a simple interest basis. This limit may not apply to Notes
in which $2,500,000 or more has been invested.
8
<PAGE>
FIXED RATE NOTES
Unless otherwise specified in the applicable Prospectus Supplement, each
Fixed Rate Note (other than a Zero Coupon Note) will accrue interest from and
including its Original Issue Date at the annual rate stated on the face thereof,
as specified in the applicable Prospectus Supplement. Unless otherwise specified
in the applicable Prospectus Supplement, payments of interest on any Fixed Rate
Note with respect to any Interest Payment Date or Maturity will include interest
accrued from and including the Original Issue Date, or from and including the
most recent Interest Payment Date to which interest has been paid or duly
provided for, to but excluding such Interest Payment Date or Maturity. Fixed
Rate Notes may bear one or more annual rates of interest during the periods or
under the circumstances specified therein and in the applicable Prospectus
Supplement. Unless otherwise specified in the applicable Prospectus Supplement,
interest on Fixed Rate Notes will be computed and paid on the basis of a 360-day
year of twelve 30-day months.
Unless otherwise specified in the applicable Prospectus Supplement, the
Interest Payment Dates for Fixed Rate Notes, including Fixed Rate Amortizing
Notes, will be semi-annually on each January 15 and July 15 and the Record Dates
will be each January 1 and July 1 (whether or not a Business Day) and the Stated
Maturity. In the case of Fixed Rate Amortizing Notes, Interest Payment Dates may
be quarterly on each January 15, April 15, July 15 and October 15 if specified
in the applicable Prospectus Supplement, and the Record Dates will be each
January 1, April 1, July 1 and October 1 (whether or not a Business Day) next
preceding each such Interest Payment Date. If the Interest Payment Date or
Maturity for any Fixed Rate Note is not a Business Day, all payments to be made
on such day with respect to such Note will be made on the next day that is a
Business Day with the same force and effect as if made on the due date, and no
additional interest will be payable on the date of payment for the period from
and after the due date as a result of such delayed payment.
FLOATING RATE NOTES
The interest rate on each Floating Rate Note will be equal to the interest
rate calculated by reference to the specified Interest Rate Basis (i) plus or
minus the Spread, if any, and/or (ii) multiplied by the Spread Multiplier, if
any. The "Spread" is the number of basis points (one basis point equals
one-hundredth of a percentage point) specified in the applicable Prospectus
Supplement as being applicable to such Note, and the "Spread Multiplier" is the
percentage of the Interest Rate Basis (adjusted for any Spread) specified in the
applicable Prospectus Supplement as being applicable to such Note. The
applicable Prospectus Supplement will specify the Interest Rate Basis and the
Spread and/or Spread Multiplier, if any, and the maximum or minimum interest
rate, if any, applicable to each Floating Rate Note. In addition, such
Prospectus Supplement will contain particulars as to the Calculation Agent
(unless otherwise specified in the applicable Prospectus Supplement, The First
National Bank of Chicago (in such capacity, the "Calculation Agent")), Index
Maturity, Original Issue Date, the interest rate in effect for the period from
the Original Issue Date to the first Interest Reset Date specified in the
applicable Prospectus Supplement (the "Initial Interest Rate"), Interest
Determination Dates, Interest Payment Dates, Record Dates, and Interest Reset
Dates with respect to such Note.
Except as provided below or in the applicable Prospectus Supplement, the
Interest Payment Dates for Floating Rate Notes, including Floating Rate
Amortizing Notes, will be (i) in the case of Floating Rate Notes that reset
daily, weekly or monthly, the third Wednesday of each month or the third
Wednesday of March, June, September and December of each year, as specified on
the face thereof and in the applicable Prospectus Supplement; (ii) in the case
of Floating Rate Notes that reset quarterly, the third Wednesday of March, June,
September and December of each year as specified on the face thereof and in the
applicable Prospectus Supplement; (iii) in the case of Floating Rate Notes that
reset semiannually, the third Wednesday of each of two months of each year, as
specified on the face thereof and in the applicable Prospectus Supplement; and
(iv) in the case of Floating Rate Notes that reset annually, the third Wednesday
of one month of each year, as specified on the face thereof and in the
applicable Prospectus
9
<PAGE>
Supplement and, in each case, at Maturity. If any Interest Payment Date, other
than Maturity, for any Floating Rate Note is not a Business Day for such
Floating Rate Note, such Interest Payment Date will be postponed to the next day
that is a Business Day for such Floating Rate Note, except that, in the case of
a LIBOR Note, if such Business Day for such Floating Rate Note is in the next
succeeding calendar month, such Interest Payment Date will be the immediately
preceding London Business Day. If the Maturity for any Floating Rate Note falls
on a day that is not a Business Day, all payments to be made on such day with
respect to such Note will be made on the next day that is a Business Day with
the same force and effect as if made on the due date, and no additional interest
will be payable on the date of payment for the period from and after the due
date as a result of such delayed payment.
The rate of interest on each Floating Rate Note will be reset daily, weekly,
monthly, quarterly, semiannually or annually (such period being the "Interest
Reset Period" for such Note, and the first day of each Interest Reset Period
being an "Interest Reset Date"), as specified in the applicable Prospectus
Supplement. Unless otherwise specified in the applicable Prospectus Supplement,
the Interest Reset Date will be, in the case of Floating Rate Notes which reset
daily, each Business Day for such Floating Rate Note; in the case of Floating
Rate Notes (other than Treasury Rate Notes) which reset weekly, the Wednesday of
each week; in the case of Treasury Rate Notes which reset weekly, the Tuesday of
each week, except as provided below; in the case of Floating Rate Notes which
reset monthly, the third Wednesday of each month; in the case of Floating Rate
Notes which reset quarterly, the third Wednesday of each March, June, September
and December; in the case of Floating Rate Notes which reset semiannually, the
third Wednesday of each of two months of each year, as specified in the
applicable Prospectus Supplement; and in the case of Floating Rate Notes which
reset annually, the third Wednesday of one month of each year, as specified in
the applicable Prospectus Supplement; provided, however, that the interest rate
in effect from the Original Issue Date to but excluding the first Interest Reset
Date with respect to a Floating Rate Note will be the Initial Interest Rate (as
specified in the applicable Prospectus Supplement). If any Interest Reset Date
for any Floating Rate Note is not a Business Day for such Floating Rate Note,
such Interest Reset Date will be postponed to the next day that is a Business
Day for such Floating Rate Note, except that in the case of a LIBOR Note, if
such Business Day is in the next succeeding calendar month, such Interest Reset
Date will be the immediately preceding London Business Day. Each adjusted rate
will be applicable on and after the Interest Reset Date to which it relates to
but excluding the next succeeding Interest Reset Date or until Maturity.
The interest rate for each Interest Reset Period will be the rate determined
by the Calculation Agent on the Calculation Date (as defined below) pertaining
to the Interest Determination Date pertaining to the Interest Reset Date for
such Interest Reset Period. Unless otherwise specified in the applicable
Prospectus Supplement, the "Interest Determination Date" pertaining to an
Interest Reset Date for (a) a Commercial Paper Rate Note (the "Commercial Paper
Interest Determination Date") or (b) a Prime Rate Note (the "Prime Interest
Determination Date") will be the second Business Day immediately preceding such
Interest Reset Date. Unless otherwise specified in the applicable Prospectus
Supplement, the Interest Determination Date pertaining to an Interest Reset Date
for a LIBOR Note (the "LIBOR Interest Determination Date") will be the second
London Business Day immediately preceding such Interest Reset Date. Unless
otherwise specified in the applicable Prospectus Supplement, the Interest
Determination Date pertaining to an Interest Reset Date for a Treasury Rate Note
(the "Treasury Interest Determination Date") will be the day of the week in
which such Interest Reset Date falls on which Treasury bills would normally be
auctioned. Treasury bills are usually sold at auction on Monday of each week,
unless that day is a legal holiday, in which case the auction is usually held on
the following Tuesday, except that such auction may be held on the preceding
Friday. If an auction is so held on the preceding Friday, such Friday will be
the Treasury Interest Determination Date pertaining to the Interest Reset Period
commencing in the next succeeding week. If an auction date falls on any Interest
Reset Date for a Treasury Rate Note, then such Interest Reset Date will instead
be the first Business Day immediately following such auction date. Unless
otherwise specified in the applicable Prospectus Supplement, the "Calculation
Date" pertaining to any
10
<PAGE>
Interest Determination Date will be the earlier of (i) the tenth calendar day
after the Interest Determination Date or, if such day is not a Business Day, the
next day that is a Business Day, or (ii) the Business Day immediately preceding
the applicable Interest Payment Date or Maturity, as the case may be.
"Index Maturity" means, with respect to a Floating Rate Note, the period to
Stated Maturity of the instrument or obligation on which the interest rate
formula of such Floating Rate Note is calculated, as specified in the applicable
Prospectus Supplement.
Unless otherwise specified in the applicable Prospectus Supplement, each
Floating Rate Note will accrue interest from and including its Original Issue
Date at the rate determined as provided in such Note and as specified in the
applicable Prospectus Supplement. Unless otherwise specified in the applicable
Prospectus Supplement, payments of interest on any Floating Rate Note with
respect to any Interest Payment Date will include interest accrued from and
including the Original Issue Date, or from and including the most recent
Interest Payment Date to which interest has been paid or duly provided for, to
but excluding the Interest Payment Date or Maturity. With respect to Floating
Rate Notes, accrued interest is calculated by multiplying the face amount of a
Note by an accrued interest factor. This accrued interest factor is computed by
adding the interest factors calculated for each day from and including the
Original Issue Date, or from and including the last date to which interest has
been paid or duly provided for, to but excluding the date for which accrued
interest is being calculated. The interest factor for each such day (unless
otherwise specified) is computed by dividing the interest rate applicable to
such day by 360, in the case of Commercial Paper Rate Notes, LIBOR Notes and
Prime Rate Notes or by the actual number of days in the year, in the case of
Treasury Rate Notes.
The Calculation Agent will calculate the interest rate on the Floating Rate
Notes, as provided below. The Trustee will, upon the request of the Holder of
any Floating Rate Note, provide the interest rate then in effect and, if then
determined, the interest rate which will become effective as a result of a
determination made with respect to the most recent Interest Determination Date
(defined below) with respect to such Note. For purposes of calculating the rate
of interest payable on Floating Rate Notes, the Company has entered into or will
enter into an agreement with the Calculation Agent. The Calculation Agent's
determination of any interest rate shall be final and binding in the absence of
manifest error.
COMMERCIAL PAPER RATE NOTES
Each Commercial Paper Rate Note will bear interest at the interest rate
(calculated with reference to the Commercial Paper Rate and the Spread and/or
Spread Multiplier, if any) specified in the Commercial Paper Rate Note and in
the applicable Prospectus Supplement.
Unless otherwise specified in the applicable Prospectus Supplement,
"Commercial Paper Rate" means, with respect to any Commercial Paper Interest
Determination Date, the Money Market Yield (calculated as described below) of
the rate on such date for commercial paper having the Index Maturity specified
in the applicable Prospectus 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 of the Board of Governors
("H.15(519)") under the heading "Commercial Paper." In the event that such rate
is not published prior to 9:00 A.M., New York City time, on the Calculation Date
pertaining to such Commercial Paper Interest Determination Date, then the
Commercial Paper Rate with respect to such Commercial Paper Interest
Determination Date will be the Money Market Yield of the rate on such Commercial
Paper Interest Determination Date for commercial paper having the Index Maturity
specified in the applicable Prospectus 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 "Commercial Paper." If by 3:00 P.M.,
New York City time, on such Calculation Date such rate is not published in
either H.15(519) or Composite Quotations, then the Commercial Paper Rate with
respect to such Commercial Paper Interest Determination Date will be calculated
by the Calculation Agent and will be the Money Market Yield of the
11
<PAGE>
arithmetic mean of the offered rates (quoted on a bank discount basis) as of
11:00 A.M., New York City time, on such Commercial Paper Interest Determination
Date of three leading dealers of commercial paper in The City of New York
selected by the Calculation Agent for commercial paper having the Index Maturity
specified in the applicable Prospectus Supplement placed for an industrial
issuer whose bond rating is "AA," or the equivalent, from a nationally
recognized securities rating agency; provided, however, that if the dealers
selected as aforesaid by the Calculation Agent are not quoting as mentioned in
this sentence, the Commercial Paper Rate with respect to such Commercial Paper
Interest Determination Date will be the Commercial Paper Rate in effect
immediately prior to such Commercial Paper Interest Determination Date.
"Money Market Yield" will be a yield (expressed as a percentage rounded, if
necessary, to the nearest one hundred-thousandth of a percent) calculated in
accordance with the following formula:
<TABLE>
<S> <C> <C>
D x 360
Money Market Yield = -------------- x 100
360 - (D x M)
</TABLE>
where "D" refers to the 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 period for which accrued interest is being calculated.
LIBOR NOTES
Each LIBOR Note will bear interest at the interest rate (calculated with
reference to LIBOR and the Spread and/or Spread Multiplier, if any) specified in
the LIBOR Note and in the applicable Prospectus Supplement.
Unless otherwise specified in the applicable Prospectus Supplement, "LIBOR"
means, with respect to any LIBOR Interest Determination Date, the rate
determined by the Calculation Agent in accordance with the following provisions:
(i) With respect to any LIBOR Interest Determination Date, LIBOR will be
either: (a) if "LIBOR Reuters" is specified in the Note and the applicable
Prospectus Supplement, the arithmetic mean of the offered rates (unless the
specified Designated LIBOR Page (as defined below) by its terms provides only
for a single rate, in which case such single rate will be used) for deposits in
United States dollars having the Index Maturity specified in the Note and the
applicable Prospectus Supplement, commencing on the second London Business Day
immediately following such LIBOR Interest Determination Date, which appear on
the Designated LIBOR Page specified in the Note and the applicable Prospectus
Supplement as of 11:00 A.M., London time, on that LIBOR Interest Determination
Date, if at least two such offered rates appear (unless, as aforesaid, only a
single rate is required) on such Designated LIBOR Page, or (b) if "LIBOR
Telerate" is specified in the Note and the applicable Prospectus Supplement, the
rate for deposits in United States dollars having the Index Maturity specified
in the Note and the applicable Prospectus Supplement, commencing on the second
London Business Day immediately following such LIBOR Interest Determination
Date, which appears on the Designated LIBOR Page specified in the Note and the
applicable Prospectus Supplement as of 11:00 A.M., London time, on that LIBOR
Interest Determination Date. Notwithstanding the foregoing, if fewer than two
offered rates appear on the Designated LIBOR Page with respect to LIBOR Reuters
(unless the specified Designated LIBOR Page by its terms provides only for a
single rate, in which case such single rate will be used), or if no rate appears
on the Designated LIBOR Page with respect to LIBOR Telerate, whichever may be
applicable, LIBOR with respect to such LIBOR Interest Determination Date will be
determined as if the parties had specified the rate described in clause (ii)
below.
(ii) With respect to any LIBOR Interest Determination Date on which fewer
than two offered rates appear on the Designated LIBOR Page with respect to LIBOR
Reuters (unless the specified Designated LIBOR Page by its terms provides only
for a single rate, in which case such single rate will be used), or if
12
<PAGE>
no rate appears on the Designated LIBOR Page with respect to LIBOR Telerate, as
the case may be, the Calculation Agent will request the principal London office
of each of four major banks in the London interbank market selected by the
Calculation Agent to provide the Calculation Agent with its offered rate
quotation for deposits in United States dollars for the period of the Index
Maturity specified in the Note and the applicable Prospectus Supplement,
commencing on the second London Business Day immediately following such LIBOR
Interest Determination Date, to prime banks in the London interbank market as of
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 United
States dollars in such market at such time. If at least two such quotations are
provided, LIBOR with respect to such LIBOR Interest Determination Date will be
calculated by the Calculation Agent and will be the arithmetic mean of such
quotations. If fewer than two quotations are provided, LIBOR with respect to
such LIBOR Interest Determination Date will be the arithmetic mean of the rates
quoted as of 11:00 A.M. New York City Time, on such LIBOR Interest Determination
Date by three major banks in The City of New York selected by the Calculation
Agent for loans in United States Dollars to leading European banks, commencing
on the second London Business Day immediately following such LIBOR Interest
Determination Date having the Index Maturity specified in the Note and the
applicable Prospectus Supplement in a principal amount that is representative
for a single transaction in such United States dollars in such market at such
time; PROVIDED, HOWEVER, that if the banks so selected by the Calculation Agent
are not quoting as mentioned in this sentence, LIBOR with respect to such LIBOR
Interest Determination Date will be LIBOR in effect immediately prior to such
LIBOR Interest Determination Date.
"Designated LIBOR Page" means either (a) the display on the Reuters Monitor
Money Rates Service for the purpose of displaying the London interbank rates of
major banks for United States Dollars (if "LIBOR Reuters" is specified in the
Note and the applicable Prospectus Supplement), or (b) the display on the Dow
Jones Telerate Service for the purpose of displaying the London interbank rates
of major banks for United States dollars (if "LIBOR Telerate" is specified in
the Note and the applicable Prospectus Supplement). If neither LIBOR Reuters nor
LIBOR Telerate is specified in the Note and the applicable Prospectus
Supplement, LIBOR for United States dollars will be determined as if LIBOR
Telerate (and page 3750) had been chosen.
PRIME RATE NOTES
Each Prime Rate Note will bear interest at the interest rate (calculated
with reference to the Prime Rate and the Spread and/or Spread Multiplier, if
any) specified in the Prime Rate Note and in the applicable Prospectus
Supplement.
Unless otherwise specified in the applicable Prospectus Supplement, "Prime
Rate" means, with respect to any Prime Interest Determination Date, the rate on
such date as published in H.15(519) under the heading "Bank Prime Loan." In the
event that such rate is not published prior to 9:00 A.M., New York City time, on
the Calculation Date pertaining to such Prime Interest Determination Date, then
the Prime Rate with respect to such Prime Interest Determination Date will be
calculated by the Calculation Agent and will be the arithmetic mean of the rates
of interest publicly announced by each bank that appears on the Reuters Screen
USPRIME1 as such bank's prime rate or base lending rate as in effect with
respect to such Prime Interest Determination Date. If fewer than four such rates
appear on the Reuters Screen USPRIME1 with respect to such Prime Interest
Determination Date, the Prime Rate with respect to such Prime Interest
Determination Date will be calculated by the Calculation Agent and will be the
arithmetic mean of the prime rates quoted on the basis of the actual number of
days in the year divided by 360 as of the close of business on such Prime
Interest Determination Date by at least two of the three major money center
banks in The City of New York selected by the Calculation Agent. If fewer than
two quotations are provided, the Prime Rate with respect to such Prime Interest
Determination Date will be determined on the basis of the rates furnished in The
City of New York by the appropriate number of substitute banks or trust
companies organized and doing business under the laws of the United States, or
any state thereof,
13
<PAGE>
having total equity capital of at least $500,000,000 and being subject to
supervision or examination by federal or state authority, selected by the
Calculation Agent to provide such rate or rates; PROVIDED, HOWEVER, that if the
appropriate number of substitute banks or trust companies selected as aforesaid
are not quoting as mentioned in this sentence, the Prime Rate with respect to
such Prime Interest Determination Date will be the Prime Rate in effect
immediately prior to such Prime Interest Determination Date.
"Reuters Screen USPRIME1" means the display designated as page "USPRIME1" on
the Reuters Monitor Money Rate Service (or such other page which may replace the
USPRIME1 page on the service for the purpose of displaying the prime rate or
base lending rate of major banks).
TREASURY RATE NOTES
Each Treasury Rate Note will bear interest at the interest rate (calculated
with reference to the Treasury Rate and the Spread and/or Spread Multiplier, if
any) specified in the Treasury Rate Note and in the applicable Prospectus
Supplement.
Unless otherwise specified in the applicable Prospectus Supplement,
"Treasury Rate" means, with respect to any Treasury Interest Determination Date,
the rate resulting from the most recent auction of direct obligations of the
United States ("Treasury bills") having the Index Maturity specified in the
applicable Prospectus Supplement, as such rate is published in H.15(519) under
the heading, "Treasury bills--auction average (investment)" or, if not so
published by 3:00 P.M., New York City time, on the Calculation Date pertaining
to such Treasury Interest Determination Date, the average auction rate on such
Treasury Interest Determination Date (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 announced by the United States Department of the Treasury. In the
event that the results of the auction of Treasury Bills having the specified
Index Maturity are not reported as provided above by 3:00 P.M., New York City
time, on the Calculation Date pertaining to such Treasury Interest Determination
Date, or if no such auction is held in a particular week, then the Treasury Rate
with respect to such Treasury Interest Determination Date 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
Interest Determination Date, of three leading primary U.S. government securities
dealers 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; PROVIDED, HOWEVER, that if the dealers selected as
aforesaid by the Calculation Agent are not quoting as mentioned in this
sentence, the Treasury Rate with respect to such Treasury Interest Determination
Date will be the Treasury Rate in effect immediately prior to such Treasury
Interest Determination Date.
ORIGINAL ISSUE DISCOUNT NOTES
The Company may from time to time offer Original Issue Discount Notes. The
Prospectus Supplement applicable to certain Original Issue Discount Notes may
provide that Holders of such Notes will not receive periodic payments of
interest. For purposes of determining whether Holders of the requisite principal
amount of Notes outstanding under the Indenture have made a demand or given a
notice or waiver or taken any other action, the outstanding principal amount of
Original Issue Discount Notes shall be deemed to be the amount of the principal
that would be due and payable upon declaration of acceleration of the Stated
Maturity thereof as of the date of such determination. See "General."
"Original Issue Discount Note" means (i) a Note that has a "stated
redemption price at maturity" that exceeds its "issue price" (each as defined
for United States federal income tax purposes) by at least 0.25% of its stated
redemption price at maturity multiplied by the number of complete years from the
Original Issue Date to the Stated Maturity for such Note (or, in the case of a
Note that provides for payment of any amount other than the "qualified stated
interest" (as so defined) prior to maturity, the weighted average
14
<PAGE>
maturity of the Note) and (ii) any other Note designated by the Company as
issued with original issue discount for United States federal income tax
purposes.
AMORTIZING NOTES
The Company may from time to time offer Notes for which payments of
principal and interest are made in installments over the life of the Note
("Amortizing Notes"). Interest on each Amortizing Note will be computed as
specified in the applicable Prospectus Supplement. Unless otherwise specified in
the applicable Prospectus Supplement, payments with respect to an Amortizing
Note will be applied first to interest due and payable thereon and then to the
reduction of the unpaid principal amount thereof. A table setting forth
repayment information with respect to each Amortizing Note will be attached to
such Note and to the applicable Prospectus Supplement and will be available,
upon request, to subsequent Holders.
RESET NOTES
The Prospectus Supplement relating to each Note will indicate whether the
Company has the option with respect to such Note to reset the interest rate, in
the case of a Fixed Rate Note, or to reset the Spread and/or Spread Multiplier,
in the case of a Floating Rate Note (in each case, a "Reset Note"), and, if so,
(i) the date or dates on which such interest rate or such Spread and/or Spread
Multiplier, as the case may be, may be reset (each an "Optional Interest Reset
Date") and (ii) the formula, if any, for such resetting.
The Company may exercise such option with respect to a Note by notifying the
Trustee of such exercise at least 45 but not more than 60 calendar days prior to
an Optional Interest Reset Date for such Note. If the Company so notifies the
Trustee of such exercise, the Trustee will send not later than 40 calendar days
prior to such Optional Interest Reset Date, by telegram, telex, facsimile
transmission, hand delivery or letter (first class, postage prepaid) to the
Holder of such Note a notice (the "Reset Notice") indicating (i) that the
Company has elected to reset the interest rate, in the case of a Fixed Rate
Note, or the Spread and/or Spread Multiplier, in the case of a Floating Rate
Note, (ii) such new interest rate or such new Spread and/or Spread Multiplier,
as the case may be, and (iii) the provisions, if any, for redemption of such
Note during the period from such Optional Interest Reset Date to the next
Optional Interest Reset Date or, if there is no such next Optional Interest
Reset Date, to the Stated Maturity of such Note (each such period a "Subsequent
Interest Period"), including the date or dates on which or the period or periods
during which and the price or prices at which such redemption may occur during
such Subsequent Interest Period.
Notwithstanding the foregoing, not later than 20 calendar days prior to an
Optional Interest Reset Date for a Note, the Company may, at its option, revoke
the interest rate, in the case of a Fixed Rate Note, or the Spread and/or Spread
Multiplier, in the case of a Floating Rate Note, provided for in the Reset
Notice and establish a higher interest rate, in the case of a Fixed Rate Note,
or a Spread and/or Spread Multiplier resulting in a higher interest rate, in the
case of a Floating Rate Note, for the Subsequent Interest Period commencing on
such Optional Interest Reset Date by causing the Trustee to send by telegram,
telex, facsimile transmission, hand delivery or letter (first class, postage
prepaid) notice of such higher interest rate or Spread and/or Spread Multiplier
resulting in a higher interest rate, as the case may be, to the Holder of such
Note. Such notice will be irrevocable. All Notes with respect to which the
interest rate or Spread and/or Spread Multiplier is reset on an Optional
Interest Reset Date to a higher interest rate or Spread and/or Spread Multiplier
resulting in a higher interest rate will bear such higher interest rate, in the
case of a Fixed Rate Note, or Spread and/or Spread Multiplier resulting in a
higher interest rate, in the case of a Floating Rate Note, whether or not
tendered for repayment as provided in the next paragraph.
If the Company elects prior to an Optional Interest Reset Date to reset the
interest rate or the Spread and/or Spread Multiplier of a Note, the Holder of
such Note will have the option to elect repayment of
15
<PAGE>
such Note, in whole but not in part, by the Company on such Optional Interest
Reset Date at a price equal to the principal amount thereof plus accrued and
unpaid interest to but excluding such Optional Interest Reset Date. In order for
a Note to be so repaid on an Optional Interest Reset Date, the Holder thereof
must follow the procedures set forth below under "Redemption and Repayment" for
optional repayment, except that the period for delivery of such Note or
notification to the Trustee will be at least 25 but not more than 35 calendar
days prior to such Optional Interest Reset Date. A Holder who has tendered a
Note for repayment following receipt of a Reset Notice may revoke such tender
for repayment by written notice to the Trustee received prior to 5:00 P.M., New
York City time, on the tenth calendar day prior to such Optional Interest Reset
Date.
EXTENSION OF MATURITY
The Prospectus Supplement relating to each Note will indicate whether the
Company has the option to extend the Stated Maturity of such Note for one or
more periods of from one to five whole years (each an "Extension Period") up to
but not beyond the date (the "Final Maturity Date") specified in such Prospectus
Supplement.
The Company may exercise such option with respect to a Note by notifying the
Trustee of such exercise at least 45 but not more than 60 calendar days prior to
the Stated Maturity of such Note (including, if such Stated Maturity has
previously been extended, the Stated Maturity as previously extended) in effect
prior to the exercise of such option (the "Pre-Exercise Stated Maturity Date").
If the Company so notifies the Trustee of such exercise, the Trustee will send
not later than 40 calendar days prior to the Pre-Exercise Stated Maturity Date,
by telegram, telex, facsimile transmission, hand delivery or letter (first
class, postage prepaid) to the Holder of such Note a notice (the "Extension
Notice") relating to such Extension Period, indicating (i) that the Company has
elected to extend the Stated Maturity of such Note, (ii) the new Stated
Maturity, (iii) in the case of a Fixed Rate Note, the interest rate applicable
to such Extension Period or, in the case of a Floating Rate Note, the Spread
and/or Spread Multiplier applicable to the Extension Period, and (iv) the
provisions, if any, for redemption of such Note during the Extension Period,
including the date or dates on which or the period or periods during which and
the price or prices at which such redemption may occur during the Extension
Period. Upon the sending by the Trustee of an Extension Notice to the Holder of
a Note, the Stated Maturity of such Note will be extended automatically, and,
except as modified by the Extension Notice and as described in the next two
paragraphs, such Note will have the same terms as prior to the sending of such
Extension Notice.
Notwithstanding the foregoing, not later than 20 calendar days prior to the
Pre-Exercise Stated Maturity Date for a Note, the Company may, at its option,
revoke the interest rate, in the case of a Fixed Rate Note, or the Spread and/or
Spread Multiplier, in the case of a Floating Rate Note, provided for in the
Extension Notice and establish a higher interest rate, in the case of a Fixed
Rate Note, or a Spread and/or Spread Multiplier resulting in a higher interest
rate, in the case of a Floating Rate Note, for the Extension Period by causing
the Trustee to send by telegram, telex, facsimile transmission, hand delivery or
letter (first class, postage prepaid) notice of such higher interest rate or
Spread and/or Spread Multiplier resulting in a higher interest rate, as the case
may be, to the Holder of such Note. Such notice will be irrevocable. All Notes
with respect to which the Stated Maturity is extended will bear such higher
interest rate, in the case of a Fixed Rate Note, or Spread and/or Spread
Multiplier resulting in a higher interest rate, in the case of a Floating Rate
Note, for the Extension Period, whether or not tendered for repayment as
provided in the next paragraph.
If the Company extends the Stated Maturity of a Note (including, if such
Stated Maturity has previously been extended, the Stated Maturity as previously
extended), the Holder of such Note will have the option to elect repayment of
such Note, in whole but not in part, by the Company on the Pre-Exercise Stated
Maturity Date (including the last day of the then current Extension Period) at a
price equal to the principal amount thereof plus accrued and unpaid interest to
but excluding such date. In order for a Note to be so repaid on the Original
Stated Maturity Date, the Holder thereof must follow the procedures set
16
<PAGE>
forth below under "Redemption and Repayment" for optional repayment, except that
the period for delivery of such Note or notification to the Trustee will be at
least 25 but not more than 35 calendar days prior to the Original Stated
Maturity Date. A Holder who has tendered a Note for repayment following receipt
of an Extension Notice may revoke such tender for repayment by written notice to
the Trustee received prior to 5:00 P.M., New York City time, on the tenth
calendar day prior to the Original Stated Maturity Date.
RENEWABLE NOTES
The applicable Prospectus Supplement will indicate whether a Note (other
than an Amortizing Note) will mature at its Pre-Exercise Stated Maturity Date
unless the term of all or any portion of any such Note is renewed by the Holder
in accordance with the procedures described in such Prospectus Supplement.
COMBINATION OF PROVISIONS
If so specified in the applicable Prospectus Supplement, any Note may be
subject to all of the provisions, or any combination of the provisions,
described above under "Reset Notes," "Extension of Maturity" and "Renewable
Notes."
REDEMPTION AND REPAYMENT
Unless otherwise specified in the applicable Prospectus Supplement, the
Notes will not be subject to any sinking fund. The Notes will be redeemable at
the option of the Company prior to the Stated Maturity thereof only if an
Initial Redemption Date is specified in the applicable Prospectus Supplement
("Initial Redemption Date"). If so specified, the Notes will be subject to
redemption at the option of the Company on the date or dates and at the prices
specified in such Prospectus Supplement. The selection of Notes or portions
thereof to be redeemed prior to their Stated Maturity shall be in the sole
discretion of the Company. Each Note which by its terms is redeemable prior to
its Stated Maturity may be redeemed by the Company in whole or in part without
also redeeming any other Note which is redeemable prior to its Stated Maturity.
The Company may exercise any such option by causing the Trustee to mail a notice
of such redemption at least 30 but not more than 60 calendar days prior to the
date of redemption in accordance with the provisions of the Indenture. In the
event of redemption of a Note in part only, such Note will be cancelled and a
new Note or Notes representing the unredeemed portion thereof will be issued in
the name of the Holder thereof. (Section 3.02)
Unless otherwise specified in the applicable Prospectus Supplement, a Note
will not be repayable prior to Stated Maturity at the option of the Holder. If
so specified, a Note will be repayable at the option of the Holder, in whole or
in part, on a date or dates prior to Stated Maturity and at a price or prices
specified in the applicable Prospectus Supplement, plus accrued and unpaid
interest to but excluding the date of repayment.
In order for a Note that is repayable at the option of the Holder to be
repaid prior to Stated Maturity, the Trustee must receive at least 30 but not
more than 45 calendar days prior to the repayment date (i) the Note with the
form entitled "Option to Elect Repayment" set forth in the Note duly completed
or (ii) a telegram, telex, facsimile transmission, hand delivery or letter
(first class, postage prepaid) from a member of a national securities exchange
or the National Association of Securities Dealers, Inc. or a commercial bank or
trust company in the United States setting forth the name of the Holder of the
Note, the principal amount of the Note, the principal amount of the Note to be
repaid, the certificate number or a description of the tenor and terms of the
Note, a statement that the option to elect repayment is being exercised thereby
and a guarantee that the Note to be repaid with the form entitled "Option to
Elect Repayment" set forth in the Note duly completed will be received by the
Trustee not later than five Business Days after the date of such telegram,
telex, facsimile transmission, hand delivery or letter and such Note and form
duly completed are received by the Trustee by such fifth Business Day. Exercise
of the repayment option by
17
<PAGE>
the Holder of a Note will be irrevocable, except that a Holder who has tendered
a Note for repayment may revoke such tender for repayment by written notice to
the Paying Agent received prior to 5:00 P.M., New York City time, on the tenth
calendar day prior to the repayment date. The repayment option may be exercised
by the Holder of a Note for less than the entire principal amount of the Note
provided that the principal amount of the Note remaining outstanding after such
repayment is an authorized denomination. Upon such partial repayment such Note
will be cancelled and a new Note or Notes for the remaining principal amount
thereof will be issued in the name of the Holder thereof.
While any Book-Entry Note is represented by one or more global Notes (each,
a "Global Note") held by or on behalf of the Depositary, and registered in the
name of the Depositary or its nominee, any such option for repayment may be
exercised by the applicable Participant (as defined below under "Book-Entry
System") that has an account with the Depositary, on behalf of a Beneficial
Owner of the Global Note or Notes representing such Book-Entry Notes, by
delivering a written notice substantially similar to the above-mentioned form
duly completed to the Trustee at its Corporate Trust Office (or such other
address of which the Company will from time to time notify the Holders), at
least 30 but not more than 60 calendar days prior to the date of repayment.
Notices of election from Participants on behalf of Beneficial Owners of the
Global Note or Notes representing such Book-Entry Notes to exercise their option
to have such Book-Entry Notes repaid must be received by the Trustee by 5:00
P.M., New York City time, on the last day for giving such notice. In order to
ensure that a notice is received by the Trustee on a particular day, the
Beneficial Owner of the Global Note or Notes representing such Book-Entry Notes
must so direct the applicable Participant 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 of the Global Note or Notes representing Book-Entry Notes
should consult the Participants through which they own their interest therein
for the respective deadlines for such Participants. All notices shall be
executed by a duly authorized officer of such Participant (with signatures
guaranteed) and will be irrevocable. In addition, Beneficial Owners of the
Global Note or Notes representing Book-Entry Notes shall effect delivery at the
time such notices of election are given to the Depositary by causing the
applicable Participant to transfer such Beneficial Owner's interest in the
Global Note or Notes representing such Book-Entry Notes, on the Depositary's
records, to the Trustee. See "Book-Entry System." (Section 3.04)
If applicable, the Company will comply with the requirements of Rule 14e-1
under the Exchange Act, and any other securities laws or regulations in
connection with any such repayment.
REPURCHASE
The Company may at any time purchase Notes at any price or prices in the
open market or otherwise. Notes so purchased by the Company may be held or
resold or, at the discretion of the Company, may be surrendered to the Trustee
for cancellation.
OTHER PROVISIONS
Any provisions with respect to the determination of an Interest Rate Basis,
the specifications of an Interest Rate Basis, calculation of the interest rate
applicable to, or the principal payable at Maturity on, any Note, its Interest
Payment Dates or any other matter relating thereto may be modified by the terms
as specified on the face of such Note, or in an annex relating thereto if so
specified on the face thereof, and/or in the applicable Prospectus Supplement.
BOOK-ENTRY SYSTEM
DTC will act as securities depositary for the Book-Entry Notes. The
Book-Entry Notes will be issued as fully-registered securities registered in the
name of Cede & Co. (DTC's partnership nominee). One fully-registered Global Note
will be issued for each issue of the Notes, each in the aggregate principal
18
<PAGE>
amount of such issue, and will be deposited with DTC. If, however, the aggregate
principal amount of any issue exceeds the maximum principal amount (if any)
permitted by DTC, one Global Note will be issued with respect to such maximum
principal amount and an additional Global Note will be issued with respect to
any remaining principal amount of such issue.
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 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 ("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 New York Stock Exchange, Inc., 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 Book-Entry Notes under DTC's system must be made by or through
Direct Participants, which will receive a credit for the Book-Entry Notes on
DTC's records. The ownership interest of each actual purchaser of each
Book-Entry Note ("Beneficial Owner") is in turn to be recorded on the Direct and
Indirect Participants' records. A Beneficial Owner will not receive written
confirmation from DTC of its purchase, but such Beneficial Owner is expected to
receive a written confirmation providing details of such transaction, as well as
periodic statements of its holdings, from the Direct or Indirect Participant
through which such Beneficial Owner entered into such transaction. Transfers of
ownership interests in the Book-Entry Notes are to be accomplished by entries
made on the books of Participants acting on behalf of the Beneficial Owners.
Beneficial Owners will not receive certificates representing their ownership
interests in Book-Entry Notes, except in the event that use of the book-entry
system for one or more Book-Entry Notes is discontinued.
To facilitate subsequent transfers, all Global Notes deposited by
Participants with DTC are registered in the name of DTC's partnership nominee,
Cede & Co. The deposit of Global Notes with 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 Book-Entry Notes; DTC's records
reflect only the identity of the Direct Participants to whose accounts such
Book-Entry Notes 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.
Redemption notices for Book-Entry Notes shall be sent to Cede & Co. If less
than all of the Book-Entry Notes within an issue are being redeemed, DTC's
current practice is to determine by lot the amount of the interest of each
Direct Participant in such issue to be redeemed.
Neither DTC nor Cede & Co. will consent or vote with respect to Book-Entry
Notes. Under its usual procedures, DTC will mail an "Omnibus Proxy" to the
issuer as soon as possible after the Record Date. The Omnibus Proxy assigns Cede
& Co.'s consenting or voting rights to those Direct Participants to whose
accounts the Book-Entry Notes are credited on the Record Date (identified in a
listing attached to the Omnibus Proxy).
19
<PAGE>
Principal and interest payments on the Book-Entry Notes will be made to DTC.
DTC's practice is to credit Direct Participants' accounts on the payable 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 the payable date. Payments
by Participants to Beneficial Owners will be governed by standing instructions
and customary practices, as in the case of securities held for the accounts of
customers in bearer form or registered in "street name," and will be the
responsibility of such Participants and not of DTC, the paying agent or the
Company, subject to any statutory or regulatory requirements as may be in effect
from time to time. Payment of principal and interest to DTC is the
responsibility of the Company or the paying agent, disbursement of such payments
to Direct Participants is the responsibility of DTC, and disbursement of such
payments to the Beneficial Owners is the responsibility of Direct and Indirect
Participants.
A Beneficial Owner must give notice to elect to have its Book-Entry Notes
purchased or tendered, through its Participant, to the paying agent, and must
effect delivery of such Book-Entry Notes by causing the Direct Participant to
transfer the Participant's interest in the Book-Entry Notes, on DTC's records,
to the paying agent. The requirement for physical delivery of Book-Entry Notes
in connection with a demand for purchase or a mandatory purchase will be deemed
satisfied when the ownership rights in the Book-Entry Notes are transferred by
Direct Participants on DTC's records.
If DTC is at any time unwilling or unable to continue as depositary or if
DTC ceases to be a "clearing agency" registered pursuant to Section 17A of the
Exchange Act, and, in either case, a successor depositary is not appointed by
the Company within 90 days, or if any Notes are represented by a Global Note at
a time when an Event of Default with respect to the Notes shall have occurred
and be continuing, the Company will issue individual Certificated Notes in
exchange for Book-Entry Notes represented by Global Notes. In addition, the
Company may at any time, and in its sole discretion, determine that one or more
Book-Entry Notes will no longer be represented by one or more Global Notes and,
in such event, will issue individual Certificated Notes in exchange for
Book-Entry Notes represented by such Global Notes.
The Company may decide to discontinue use of the system of book-entry
transfers through DTC (or a successor Notes depositary). In that event,
Certificated Notes will be printed and delivered in exchange for the Book-Entry
Notes represented by the Global Notes held by DTC.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Company believes to be reliable, but the
Company takes no responsibility for the accuracy thereof. So long as DTC or its
nominee is the registered owner of a Global Note, DTC or its nominee, as the
case may be, will be considered the sole Holder of the Notes represented by such
Global Note for all purposes under the Indenture. Except as provided above,
owners of beneficial interests in a Global Note will not be entitled to have the
Note represented by such Global Note registered in their names, will not receive
or be entitled to receive physical delivery of such Note in certificated form
and will not be considered the owners or Holders thereof under the Indenture.
The laws of some states require that certain purchasers of securities take
physical delivery of such securities in certificated form; accordingly, such
laws may limit the transferability of beneficial interests in a Global Note.
None of the Company, the agent, the Trustee, any paying agent or the
registrar for the Notes will have any responsibility or liability for any aspect
of the records relating to or payments made on account of beneficial ownership
interests in a Global Note or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests. (Section 2.12)
EXCHANGE, REGISTRATION AND TRANSFER
Notes will be exchangeable for registered Notes of like aggregate principal
amount and of like Stated Maturity (as defined below under "Certain
Definitions") and with like terms and conditions. Upon surrender for
registration of transfer of any Note at the office or agency of the Company
maintained for such purpose, the Company shall execute, and the Trustee shall
authenticate and deliver, in the name of the designated transferee, one or more
new registered Notes of the like aggregate principal amount of such
20
<PAGE>
denominations as are authorized for Notes of a like Stated Maturity and with
like terms and conditions. No service charge will be made for any transfer or
exchange of Notes, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.
(Section 3.05)
The Company shall not be required (i) to register, transfer or exchange
Notes during a period beginning at the opening of business 15 days before the
day of the transmission of a notice of redemption of Notes of a like Stated
Maturity and with like terms and conditions selected for redemption and ending
at the close of business on the day of such transmission, or (ii) to register,
transfer or exchange any Note so selected for redemption in whole or in part,
except the unredeemed portion of any Note being redeemed in part. (Section 3.05)
EVENTS OF DEFAULT
Under the Indenture, "Event of Default" with respect to any Note means any
one of the following events (whatever the reason for such Event of Default and
whether it shall be voluntary or involuntary or be effected by operation of law,
pursuant to any judgment, decree or order of any court or any order, rule or
regulation of any administrative or governmental body): (1) default in the
payment of any interest upon any Note when it becomes due and payable, and
continuance of such default for a period of 30 days; (2) default in the payment
of the principal of (and premium, if any, on) any Note at its Maturity; (3)
default in the performance or breach of any covenant or warranty in the
Indenture (other than a covenant or warranty a default in whose performance or
whose breach is elsewhere in the Indenture specifically dealt with), and
continuance of such default or breach for a period of 60 days after there has
been given to the Company by the Trustee or to the Company and the Trustee by
the Holders of at least 25% in aggregate principal amount of the Notes then
outstanding, a written notice specifying such default or breach and requiring it
to be remedied; (4) default (i) in the payment of any principal of or interest
on any Indebtedness of the Company or any Subsidiary of the Company (other than
Notes), aggregating more than $10,000,000 in principal amount, when due after
giving effect to any applicable grace period or (ii) in the performance of any
other term or provision of any Indebtedness of the Company or any Subsidiary of
the Company (other than Notes) in excess of $10,000,000 principal amount that
results in such Indebtedness becoming or being declared due and payable prior to
the date on which it would otherwise become due and payable, and such
acceleration shall not have been rescinded or annulled, or such Indebtedness
shall not have been discharged, within a period of 15 days after there has been
given to the Company by the Trustee or to the Company and the Trustee by the
Holders of at least 25% in aggregate principal amount of the Notes then
outstanding, a written notice specifying such default or defaults; (5) the entry
against the Company or any Subsidiary of the Company of one or more judgments,
decrees or orders by a court from which no appeal may be or is taken for the
payment of money, either individually or in the aggregate, in excess of
$10,000,000, and the continuance of such judgment, decree or order unsatisfied
and in effect for any period of 45 consecutive days after the amount thereof is
due without a stay of execution; (6) certain events of bankruptcy, insolvency or
reorganization with respect to the Company; or (7) any other Event of Default
with respect to the subject Note described in the applicable Prospectus
Supplement. (Section 8.01)
The Indenture requires the Company to file with the Trustee, annually, an
officer's certificate as to the Company's compliance with all conditions and
covenants under the Indenture. (Section 6.04) The Indenture provides that the
Trustee may withhold notice to the Holders of Notes of any default (except
payment defaults on any Note) if it determines that the withholding of such
notice is in the interest of the Holders of such Notes. (Section 8.12)
If an Event of Default with respect to the Notes at the time outstanding
occurs and is continuing, then in every case the Trustee or the Holders of not
less than 25% in aggregate principal amount of the Notes then outstanding may
declare the principal amount (or, if any Notes are Original Issue Discount
Notes, the Amortized Face Amount) of all the Notes to be due and payable
immediately, by a notice in writing to the
21
<PAGE>
Company (and to the Trustee if given by Holders), and upon any such declaration
such principal amount (or Amortized Face Amount) shall become immediately due
and payable. Upon payment of such amount in United States dollars, all
obligations of the Company in respect of the payment of principal of the Notes
shall terminate (except as otherwise provided in the Indenture or the Prospectus
Supplement). (Section 8.02)
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default with respect to the Notes shall occur and
be continuing, the Trustee shall be under no obligation to exercise any of its
rights or powers under the Indenture at the request or direction of any of the
Holders of the Notes unless such Holders shall have offered to the Trustee
reasonable security or indemnity against the costs, expenses and liabilities
which might be incurred by it in compliance with such request or direction.
(Section 9.03) The Holders of a majority in principal amount of the outstanding
Notes shall have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee under the Indenture, or
exercising any trust or power conferred on the Trustee with respect to the
Notes, unless the Trustee determines that the proceeding or action so directed
may not lawfully be taken, would involve the Trustee in personal liability or
would be unduly prejudicial to other Holders of Notes. (Section 8.11)
At any time after such a declaration of acceleration with respect to the
Notes has been made and before a judgment or decree for payment of the money due
has been obtained by the Trustee as provided in the Indenture, the Holders of a
majority in aggregate principal amount of the Notes then outstanding, by written
notice to the Company and the Trustee, may rescind and annul such declaration
and its consequences if (1) the Company has paid or deposited with the Trustee a
sum in United States dollars sufficient to pay (A) all overdue installments of
interest on all Notes, (B) the principal of (and premium, if any, on) any Notes
which have become due otherwise than by such declaration of acceleration and
interest thereon at the rate or rates prescribed therefor in such Notes; (C) to
the extent that payment of such interest is lawful, interest upon overdue
installments of interest on each Note at the rate borne by such Note, and (D)
all sums paid or advanced by the Trustee and the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel; and
(2) all Events of Default with respect to the Notes, other than the nonpayment
of the principal of the Notes which have become due solely by such declaration
of acceleration, have been cured or waived as provided in the Indenture. No such
rescission and waiver will affect any subsequent default or impair any right
consequent thereon. (Section 8.02)
MERGER OR CONSOLIDATION
The Indenture provides that the Company may not consolidate with or merge
into any other corporation or convey, transfer or lease its properties and
assets substantially as an entirety to any Person, (1) unless the corporation
formed by such consolidation or into which the Company is merged or the Person
which acquires by conveyance or transfer, or which leases, the properties and
assets of the Company substantially as an entirety (the "successor corporation")
is a corporation organized and existing under the laws of the United States or
any State or the District of Columbia and expressly assumes by a supplemental
indenture the due and punctual payment of the principal of (and premium, if any)
and interest on all Notes and the performance of every covenant of the Indenture
on the part of the Company to be performed or observed; (2) unless immediately
after giving effect to such transaction, no Event of Default, and no event
which, after notice or lapse of time, or both, would become an Event of Default,
shall have occurred and be continuing; (3) if, as a result of any such
consolidation or merger or such conveyance, transfer or lease, properties or
assets of the Company would become subject to a mortgage, pledge, lien, security
interest or other encumbrance which would not otherwise be permitted by the
Indenture without making effective provision whereby the Notes then outstanding
and any other indebtedness of the Company then entitled thereto will be equally
and ratably secured with any and all indebtedness and obligations secured
thereby, the Company or such successor corporation or Person, as the case
22
<PAGE>
may be, will take such steps as will be necessary effectively to secure all
Notes equally and ratably with (or prior to) all indebtedness secured thereby;
and (4) unless the Company has delivered to the Trustee an officers' certificate
and an opinion of counsel each stating that such consolidation, merger,
conveyance, transfer or lease and such supplemental indenture comply with the
provisions of the Indenture and that all conditions precedent therein provided
for relating to such transaction have been complied with. (Section 12.01)
MODIFICATION OR WAIVER
Without the consent of any Holders, the Company and the Trustee, at any time
and from time to time, may enter into a supplemental indenture for any of the
following purposes: (1) to make such provision in regard to matters or questions
arising under the Indenture as may be necessary or desirable and not
inconsistent with the Indenture or for the purpose of supplying any omission,
curing any ambiguity, or curing, correcting or supplementing any defective or
inconsistent provision; PROVIDED that such provisions may not adversely affect
the interests of Holders of outstanding Notes created prior to the execution of
such supplemental indenture in any material respect; (2) to change or eliminate
any of the provisions of this Indenture; PROVIDED that any such change or
elimination shall become effective only when there is no outstanding Note
created prior to the execution of such supplemental indenture which is entitled
to the benefit of such provision; (3) to secure the Notes; (4) to establish the
form of Notes as permitted by the Indenture or to establish or reflect any terms
of any Note determined in accordance with the Indenture; (5) to evidence the
succession of another corporation to the Company, and the assumption by any such
successor of the covenants of the Company in the Indenture and in the Notes; (6)
to grant to or confer upon the Trustee for the benefit of the Holders any
additional rights, remedies, powers or authority; (7) to permit the Trustee to
comply with any duties imposed upon it by law; (8) to specify further the duties
and responsibilities of, and to define further the relationships among, the
Trustee, any Authenticating Agent and any paying agent; (9) to add to the
covenants of the Company for the benefit of the Holders of all or any Notes (and
if such covenants are to be for the benefit of less than all Notes, stating that
such covenants are expressly being included solely for the benefit of such
Notes), or to surrender a right or power conferred on the Company in the
Indenture; and (10) to add any additional Events of Default (and if such Events
of Default are to be applicable to less than all Notes, stating that such Events
of Default are expressly being included for the benefit of such Notes). (Section
13.01)
With the consent of the Holders of not less than a majority in aggregate
principal amount of the Notes then outstanding that would be affected by the
particular supplemental indenture, the Company and the Trustee, may at any time
and from time to time, enter into a supplemental indenture for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of the Indenture or of modifying in any manner the rights of the
Holders of such Notes; PROVIDED, HOWEVER, that no such supplemental indenture
may (i) change the Stated Maturity of any Note; or reduce the rate of interest
on any Note; or change the method of calculating interest, or any term used in
the calculation of interest or the period for which interest is payable, on any
Floating Rate Note; or reduce the principal amount of any Note or any premium
thereon, or reduce the amount of the principal of an Original Issue Discount
Note that would be due and payable upon a declaration of acceleration of the
Maturity thereof, or adversely affect the right of repayment or renewal, if any,
at the option of the Holder; or change the currency of payment of any Note; or
change the date on which any Note may be redeemed; or adversely affect the
rights of any Holder to institute suit for the enforcement of any payment of
principal of or any premium or interest on any Note; in each case without the
consent of the Holder of each Note then outstanding that would be affected
thereby, including Notes for which an offer to purchase has been accepted by the
Company, or (ii) reduce the aforesaid percentage of the principal amount of
Notes, the Holders of which are required to consent to any such supplemental
indenture, or the percentage in aggregate principal amount of the Notes then
outstanding, the consent of the Holders of which is required for any waiver of
certain past defaults or Events of Default hereunder or the consequences
thereof, in each case without the consent of the Holders of all of the Notes
then outstanding. (Section 13.02)
23
<PAGE>
Prior to any declaration accelerating the Maturity of the Notes, the Holders
of not less than a majority in aggregate principal amount of the Notes then
outstanding may on behalf of the Holders of all the Notes waive any past default
or Event of Default under the Indenture and its consequences, except a default
(1) in the payment of the principal of or any premium or interest on any Note,
or (2) in respect of a covenant or provision hereof which pursuant to the second
paragraph under "Modification or Waiver" cannot be modified or amended without
the consent of the Holder of each Note then outstanding that would be affected
thereby. Upon any such waiver, such default will cease to exist, and any Event
of Default arising therefrom will be deemed to have been cured, for every
purpose of the Indenture and the Notes, but no such waiver will extend to any
subsequent or other default or Event of Default or impair any right consequent
thereon. (Section 8.11)
The Company may omit in any particular instance to comply with the covenants
in the Indenture described above under "Restrictions on Secured Debt" (and if so
specified in the applicable Prospectus Supplement, any covenant not set forth in
the Indenture but specified in such Prospectus Supplement to be applicable to
any Note, except as otherwise provided in such Prospectus Supplement), if before
the time for such compliance the Holders of at least a majority in aggregate
principal amount of the Notes then outstanding either waive such compliance in
such instance or generally waive compliance with such covenants, but no such
waiver may extend to or affect any covenant except to the extent expressly so
waived, and, until such waiver becomes effective, the obligations of the Company
and the duties of the Trustee in respect of any such covenant will remain in
full force and effect. (Section 6.07)
DISCHARGE OF INDENTURE
The Indenture may be discharged, subject to certain terms and conditions,
when (1) either (A) all Notes theretofore authenticated and delivered have been
delivered to the Trustee for cancellation, or (B) all such Notes not theretofore
delivered to the 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 Trustee for the giving of notice by the Trustee, and the Company, in the
case of (i), (ii) or (iii) of this subclause (B), has irrevocably deposited or
caused to be deposited with the Trustee as trust funds in trust for such purpose
an amount in United States dollars, U.S. Government Obligations maturing as to
principal and interest in such amounts and at such times as will ensure the
availability of United States dollars, or a combination of United States dollars
and U.S. Government Obligations, sufficient to pay and discharge the entire
indebtedness on such Notes for principal (and premium, if any) and interest to
the date of such deposit (in the case of Notes which have become due and
payable) or to the Stated Maturity or Redemption Date, as the case may be;
PROVIDED, HOWEVER, in the event a petition for relief under any applicable
federal or state bankruptcy, insolvency or other similar law is filed with
respect to the Company within 91 days after the deposit and the Trustee is
required to return the deposited money to the Company, the obligations of the
Company under the Indenture with respect to such Notes will not be deemed
terminated or discharged; (2) the Company has paid or caused to be paid all
other sums payable under the Indenture by the Company; (3) the Company has
delivered to the Trustee an officers' certificate and an opinion of counsel each
stating that all conditions precedent therein provided for relating to the
satisfaction and discharge of the Indenture with respect to the Notes have been
complied with; and (4) the Company has delivered to the Trustee an opinion of
counsel or a ruling of the Internal Revenue Service to the effect that Holders
of the Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such deposit and discharge. (Section 5.01)
24
<PAGE>
PAYMENT AND PAYING AGENTS
So long as any of the Notes remain outstanding, the Company will maintain in
the Borough of Manhattan, The City of New York, an office or agency where the
Notes may be presented for registration of transfer and for exchange as in the
Indenture provided, and where, at any time when the Company is obligated to make
a payment upon Notes (other than a payment which it is permitted to make by
check), the Notes may be presented for payment, and will maintain at any such
office or agency and at its principal office an office or agency where notices
and demands to or upon the Company in respect of the Notes or of the Indenture
may be served; PROVIDED that the Company may maintain at its principal executive
offices, one or more other offices or agencies for any or all of the foregoing
purposes. The Company has appointed the Trustee as agent of the Company for the
foregoing purposes. (Section 6.02)
REGARDING THE TRUSTEE
The First National Bank of Chicago is one of a number of banks with which
the Company maintains ordinary banking relationships and from which the Company
has obtained credit facilities and lines of credit, and acts as the trustee
under an indenture under which subordinated debentures of the Company may be or
become outstanding.
CERTAIN DEFINITIONS
Set forth below is a summary of certain defined terms as used in the
Indenture. Reference is made to Article One of the Indenture for the full
definition of all such terms.
"Common Shareholders' Equity," at any time, means the total common
shareholders' equity of the Company and its consolidated subsidiaries,
determined on a consolidated basis in accordance with generally accepted
accounting principles, as of the end of the most recently completed fiscal
quarter of the Company for which financial information is then available.
"Holder" means the person in whose name a Registered Note is registered in
the Note register.
"Indebtedness" means with respect to any person (i) any liability of such
person (a) for borrowed money, or (b) evidenced by a bond, note, debenture or
similar instrument (including purchase money obligations but excluding trade
payables), or (c) for the payment of money relating to a lease that is required
to be classified as a capitalized lease obligation in accordance with generally
accepted accounting principles; (ii) any liability of others described in the
preceding clause (i) that such person has guaranteed, that is recourse to such
person or that is otherwise its legal liability; and (iii) any amendment,
supplement, modification, deferral, renewal, extension or refunding of any
liability of the types referred to in clauses (i) and (ii) above.
"Maturity" when used with respect to any Note means the date on which the
principal of the Note or an installment of principal becomes due and payable as
provided therein or in the Indenture, whether at the Stated Maturity or by
declaration of acceleration, call for redemption, repayment at the option of the
Holder or otherwise.
"Outstanding" when used with respect to Notes, means, as of the date of
determination, all the Notes theretofore authenticated and delivered under the
Indenture, except as provided in such Indenture.
"Principal Facility" means the real property, fixtures, machinery and
equipment relating to any facility owned by the Company or any Subsidiary (which
may include a network of electric or gas distribution facilities or a network of
electric or gas transmissions facilities), except any facility that, in the
opinion of the Board of Directors, is not of material importance to the business
conducted by the Company and its Subsidiaries, taken as a whole.
"Regulated Subsidiary" means any Subsidiary which owns or operates
facilities used for the generation, transmission or distribution of electric
energy and is subject to the jurisdiction of any governmental
25
<PAGE>
authority of the United States or any state or political subdivision thereof, as
to any of its: rates; services; accounts; issuances of securities; affiliate
transactions; or construction, acquisition or sale of any such facilities,
except that any "exempt wholesale generator", "qualifying facility", "foreign
utility company", and "power marketer", each as defined in the Indenture, shall
not be a Regulated Subsidiary.
"Subsidiary" means any corporation of which at least a majority of the
outstanding stock having by the terms thereof ordinary voting power to elect a
majority of the directors of such corporation, irrespective of whether or not at
the time stock of any other class or classes of such corporation shall have or
might have voting power by reason of the happening of any contingency, is at the
time, directly or indirectly, owned or controlled by the Company or by one or
more Subsidiaries thereof, or by the Company and one or more Subsidiaries.
"U.S. Government Obligations" means securities that are (i) direct
obligations of the United States for the payment of which its full faith and
credit is pledged, or (ii) obligations of a Person controlled or supervised by
and acting as an agency or instrumentality of the United States the payment of
which is unconditionally guaranteed as a full faith and credit obligation by the
United States, which, in either case under clauses (i) or (ii), are not callable
or redeemable at the option of the issuer thereof, and shall also include a
depository receipt issued by a bank or trust company as custodian with respect
to any such U.S. Government Obligation or a specific payment of interest on or
principal of any such U.S. Government Obligation held by such custodian for the
account of the holder of a depository receipt; PROVIDED that (except as required
by law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount received by the
custodian in respect of the U.S. Government Obligation or the specific payment
of interest on or principal of the U.S. Government Obligation evidenced by such
depository receipt.
"Wholly-Owned Subsidiary" means a Subsidiary of which all of the outstanding
voting stock (other than directors' qualifying shares) is at the time, directly
or indirectly, owned by the Company, or by one or more Wholly-Owned Subsidiaries
of the Company or by the Company and one or more Wholly-Owned Subsidiaries.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following summary describes the principal United States federal income
tax consequences of the purchase, ownership and disposition of Notes to
beneficial owners ("holders") of Notes purchasing Notes at their original
issuance. This summary is based on the Internal Revenue Code of 1986, as amended
(the "Code"), legislative history, administrative pronouncements, judicial
decisions and final, temporary and proposed Treasury Regulations, changes to any
of which subsequent to the date hereof may affect the tax consequences described
herein. Any such change may apply retroactively. This summary is also based on
final Treasury Regulations (the "1996 OID Regulations") published by the
Internal Revenue Service ("IRS") on June 14, 1996, which set forth rules
applicable to "contingent payment debt instruments."
This summary discusses only the principal United States federal income tax
consequences to those holders holding Notes as capital assets within the meaning
of Section 1221 of the Code. It does not address all of the tax consequences
that may be relevant to a holder in light of the holder's particular
circumstances or to holders subject to special rules (including pension plans
and other tax-exempt investors, banks, thrifts, insurance companies, real estate
investment trusts, regulated investment companies, dealers in securities,
currencies and persons so treated for federal income tax purposes, persons whose
functional currency (as defined in Section 985 of the Code) is other than the
United States dollar, and persons who hold Notes as part of a straddle, hedging
or conversion transaction). This summary also assumes that a taxpayer obtains
any necessary consent of the IRS before changing a method of accounting.
Persons considering the purchase of Notes should consult their tax advisors
with regard to the application of United States federal income tax laws to their
particular situations as well as any tax consequences to them arising under the
laws of any state, local or foreign taxing jurisdiction. State, local
26
<PAGE>
and foreign income tax laws may differ substantially from the corresponding
federal income tax laws, and this discussion does not purport to describe any
aspect of the tax laws of any state, local or foreign jurisdiction. Therefore,
potential investors should consult their own tax advisors with respect to the
various state, local and foreign tax consequences of an investment in Notes.
As used herein, the term "United States Holder" means a beneficial owner of
a Note who or which is, for United States federal income tax purposes, either
(i) a citizen or resident of the United States, (ii) a corporation or
partnership created or organized in or under the laws of the United States or of
any political subdivision thereof, (iii) an estate (or, for tax years ending on
or before December 31, 1996, a trust) the income of which is subject to United
States federal income taxation regardless of its source or (iv) for tax years
beginning after December 31, 1996 (unless earlier elected), any trust if a court
within the United States is able to exercise primary jurisdiction over the
administration of the trust and one or more United States fiduciaries have the
authority to control all substantial decisions of the trust. The term also
includes certain holders who are former citizens of the United States whose
income and gain from the Notes will be subject to United States taxation.
TAXATION OF INTEREST
The taxation of interest on a Note depends on whether it constitutes
"qualified stated interest" (as defined below). Interest on a Note that
constitutes qualified stated interest is includible in a United States Holder's
income as ordinary interest income when actually or constructively received, if
such Holder uses the cash method of accounting for federal income tax purposes,
or when accrued, if such Holder uses an accrual method of accounting for federal
income tax purposes. Interest that does not constitute qualified stated interest
is included in a United States Holder's income under the rules described below
under "Original Issue Discount," regardless of such Holder's method of
accounting. Notwithstanding the foregoing, interest that is payable on a Note
with a maturity of one year or less from its issue date (a "Short-Term Note") is
included in a United States Holder's income under the rules described below
under "Short-Term Notes."
FIXED RATE NOTES
Interest on a Fixed Rate Note will constitute "qualified stated interest" if
the interest is unconditionally payable, or will be constructively received
under Section 451 of the Code, in cash or in property (other than debt
instruments of the Company) at least annually at a single fixed rate.
FLOATING RATE NOTES
Interest on a Floating Rate Note that is unconditionally payable, or will be
constructively received under Section 451 of the Code, in cash or in property
(other than debt instruments of the Company) at least annually will constitute
"qualified stated interest" if the Note is a "variable rate debt instrument"
("VRDI") under the rules described below and the interest is payable at a single
"qualified floating rate" or single "objective rate" (each as defined below). If
the Note is a VRDI but the interest is payable other than at a single qualified
floating rate or at a single objective rate, special rules apply to determine
the portion of such interest that constitutes "qualified stated interest." See
"Original Issue Discount Floating--RATE NOTES THAT ARE VRDIS," below.
DEFINITION OF VARIABLE RATE DEBT INSTRUMENT (VRDI), QUALIFIED FLOATING RATE
AND OBJECTIVE RATE
A Note is a VRDI if all of the four following conditions are met. First, the
"issue price" of the Note (as described below) must not exceed the total
noncontingent principal payments by more than an amount equal to the lesser of
(i) .015 multiplied by the product of the total noncontingent principal payments
and the number of complete years to maturity from the issue date (or, in the
case of a Note that provides for
27
<PAGE>
payment of any amount other than qualified stated interest before maturity, its
weighted average maturity) and (ii) 15% of the total noncontingent principal
payments.
Second, the Note must provide for stated interest (compounded or paid at
least annually) at (a) one or more qualified floating rates, (b) a single fixed
rate and one or more qualified floating rates, (c) a single objective rate or
(d) a single fixed rate and a single objective rate that is a "qualified inverse
floating rate" (as defined below).
Third, the Note must provide that a qualified floating rate or objective
rate in effect at any time during the term of the Note is set at the value of
the rate on any day that is no earlier than three months prior to the first day
on which that value is in effect and no later than one year following that first
day.
Fourth, the Note may not provide for any principal payments that are
contingent except as provided in the first requirement set forth above.
Subject to certain exceptions, a variable rate of interest on a Note is a
"qualified floating rate" if variations in the value of the rate can reasonably
be expected to measure contemporaneous fluctuations in the cost of newly
borrowed funds in United States dollars. A variable rate will be considered a
qualified floating rate if the variable rate equals (i) the product of an
otherwise qualified floating rate and a fixed multiple (I.E., a Spread
Multiplier) that is greater than 0.65, but not more than 1.35 or (ii) an
otherwise qualified floating rate (or the product described in clause (i)) plus
or minus a fixed rate (I.E., a Spread). If the variable rate equals the product
of an otherwise qualified floating rate and a single Spread Multiplier greater
than 1.35 or less than or equal to 0.65, however, such rate will generally
constitute an objective rate, described more fully below. A variable rate will
not be considered a qualified floating rate if the variable rate is subject to a
cap, floor, governor (I.E., a restriction on the amount of increase or decrease
in the stated interest rate) or similar restriction that is reasonably expected
as of the issue date to cause the yield on the Note to be significantly more or
less than the expected yield determined without the restriction (other than a
cap, floor or governor that is fixed throughout the term of the Note).
Subject to certain exceptions, an "objective rate" is a rate (other than a
qualified floating rate) that is determined using a single fixed formula and
that is based on objective financial or economic information that is neither
within the control of the Company (or a related party) nor unique to the
circumstances of the Company (or a related party). For example, an objective
rate generally includes a rate that is based on one or more qualified floating
rates or on the yield of actively traded personal property (within the meaning
of Section 1092(d)(1) of the Code). Notwithstanding the first sentence of this
paragraph, a rate on a Note is not an objective rate if it is reasonably
expected that the average value of the rate during the first half of the Note's
term will be either significantly less than or significantly greater than the
average value of the rate during the final half of the Note's term. An objective
rate is a "qualified inverse floating rate" if (a) the rate is equal to a fixed
rate minus a qualified floating rate and (b) the variations in the rate can
reasonably be expected to reflect inversely contemporaneous variations in the
cost of newly borrowed funds (disregarding any caps, floors, governors or
similar restrictions that would not, as described above, cause a rate to fail to
be a qualified floating rate).
If interest on a Note is stated at a fixed rate for an initial period of
less than one year, followed by a variable rate that is either a qualified
floating rate or an objective rate for a subsequent period, and the value of the
variable rate on the issue date is intended to approximate the fixed rate, the
fixed rate and the variable rate together constitute a single qualified floating
rate or objective rate.
ORIGINAL ISSUE DISCOUNT
Original issue discount ("OID") with respect to a Note is the excess, if
any, of the Note's "stated redemption price at maturity" over the Note's "issue
price." A Note's "stated redemption price at maturity" is the sum of all
payments provided by the Note (whether designated as interest or as principal)
other than payments of qualified stated interest. The "issue price" of a Note is
the first price at which a
28
<PAGE>
substantial amount of the Notes in the issuance that includes such Note is sold
for money (excluding sales to bond houses, brokers or similar persons or
organizations acting in the capacity of underwriters, placement agents or
wholesalers).
As described more fully below, United States Holders of Notes with OID that
mature more than one year from their issue date generally will be required to
include such OID in income as it accrues in accordance with the constant yield
method described below, irrespective of the receipt of the related cash
payments. A United States Holder's tax basis in a Note is increased by each
accrual of OID and decreased by each payment other than a payment of qualified
stated interest.
The amount of OID with respect to a Note will be treated as zero if the OID
is less than an amount equal to .0025 multiplied by the product of the stated
redemption price at maturity and the number of complete years to maturity (or,
in the case of a Note that provides for payment of any amount other than
qualified stated interest prior to maturity, the weighted average maturity of
the Note). If the amount of OID with respect to a Note is less than that amount,
the OID that is not included in payments of stated interest is generally
included in income as capital gain as principal payments are made. The amount
includible with respect to a principal payment equals the product of the total
amount of OID and a fraction, the numerator of which is the amount of such
principal payment and the denominator of which is the stated principal amount of
the Note.
FIXED RATE NOTES
In the case of OID with respect to a Fixed Rate Note, the amount of OID
includible in the income of a United States Holder for any taxable year is
determined under the constant yield method, as follows. First, the "yield to
maturity" of the Note is computed. The yield to maturity is the discount rate
that, when used in computing the present value of all interest and principal
payments to be made under the Note (including payments of qualified stated
interest), produces an amount equal to the issue price of the Note. The yield to
maturity is constant over the term of the Note and, when expressed as a
percentage, must be calculated to at least two decimal places.
Second, the term of the Note is divided into "accrual periods." Accrual
periods may be of any length and may vary in length over the term of the Note,
provided that each accrual period is no longer than one year and that each
scheduled payment of principal or interest occurs either on the final day of an
accrual period or on the first day of an accrual period.
Third, the total amount of OID on the Note is allocated among accrual
periods. In general, the OID allocable to an accrual period equals the product
of the "adjusted issue price" of the Note at the beginning of the accrual period
and the yield to maturity of the Note, less the amount of any qualified stated
interest allocable to the accrual period. The adjusted issue price of a Note at
the beginning of the first accrual period is its issue price. Thereafter, the
adjusted issue price of the Note is its issue price, increased by the amount of
OID previously includible in the gross income of any holder and decreased by the
amount of any payment previously made on the Note other than a payment of
qualified stated interest. For purposes of computing the adjusted issue price of
a Note, the amount of OID previously includible in the gross income of any
holder is determined without regard to "premium" and "acquisition premium," as
those terms are defined below under "Premium and Acquisition Premium."
Fourth, the "daily portions" of OID are determined by allocating to each day
in an accrual period its ratable portion of the OID allocable to the accrual
period.
A United States Holder includes in income in any taxable year the daily
portions of OID for each day during the taxable year that such Holder held
Notes. In general, under the constant yield method described above, United
States Holders will be required to include in income increasingly greater
amounts of OID in successive accrual periods.
29
<PAGE>
FLOATING RATE NOTES THAT ARE VRDIS
The taxation of OID (including interest that does not constitute qualified
stated interest) on a Floating Rate Note will depend on whether the Note is a
"VRDI," as that term is defined above under "Taxation of Interest--DEFINITION OF
VARIABLE RATE DEBT INSTRUMENT (VRDI), QUALIFIED FLOATING RATE AND OBJECTIVE
RATE."
In the case of a VRDI that provides for qualified stated interest, the
amount of qualified stated interest and the amount of OID, if any, includible in
income during a taxable year are determined under the rules applicable to Fixed
Rate Notes (described above) by assuming that the variable rate is a fixed rate
equal to (i) in the case of a qualified floating rate or a qualified inverse
floating rate, the value, as of the issue date, of the qualified floating rate
or qualified inverse floating rate, or (ii) in the case of an objective rate
(other than a qualified inverse floating rate), the rate that reflects the yield
that is reasonably expected for the Note. Qualified stated interest allocable to
an accrual period is increased (or decreased) if the interest actually paid
during an accrual period exceeds (or is less than) the interest assumed to be
paid during the accrual period.
If a Note that is a VRDI does not provide for interest at a single variable
rate as described above, the amount of interest and OID accruals are determined
by constructing an equivalent fixed rate debt instrument, as follows.
First, in the case of an instrument that provides for interest at one or
more qualified floating rates or at a qualified inverse floating rate and, in
addition, at a fixed rate, replace the fixed rate with a qualified floating rate
(or qualified inverse floating rate) such that the fair market value of the
instrument, so modified, as of the issue date would be approximately the same as
the fair market value of the unmodified instrument.
Second, determine the fixed rate substitute for each variable rate provided
by the Note. The fixed rate substitute for each qualified floating rate provided
by the Note is the value of that qualified floating rate on the issue date. If
the Note provides for two or more qualified floating rates with different
intervals between interest adjustment dates (for example, the 30-day Commercial
Paper Rate and quarterly LIBOR), the fixed rate substitutes are based on
intervals that are equal in length (for example, the 90-day Commercial Paper
Rate and quarterly LIBOR, or the 30-day Commercial Paper Rate and monthly
LIBOR). The fixed rate substitute for an objective rate that is a qualified
inverse floating rate is the value of the qualified inverse floating rate on the
issue date. The fixed rate substitute for an objective rate (other than a
qualified inverse floating rate) is a fixed rate that reflects the yield that is
reasonably expected for the Note.
Third, construct an equivalent fixed rate debt instrument that has terms
that are identical to those provided under the Note, except that the equivalent
fixed rate debt instrument provides for the fixed rate substitutes determined in
the second step, in lieu of the qualified floating rates or objective rate
provided by the Note.
Fourth, determine the amount of qualified stated interest and OID for the
equivalent fixed rate debt instrument under the rules (described above) for
Fixed Rate Notes. These amounts are taken into account as if the United States
Holder held the equivalent fixed rate debt instrument. See "Taxation of
Interest" and "Original Issue Discount--FIXED RATE NOTES," above.
Fifth, make appropriate adjustments for the actual values of the variable
rates. In this step, qualified stated interest or OID allocable to an accrual
period is increased (or decreased) if the interest actually accrued or paid
during the accrual period exceeds (or is less than) the interest assumed to be
accrued or paid during the accrual period under the equivalent fixed rate debt
instrument.
30
<PAGE>
FLOATING RATE NOTES THAT ARE NOT VRDIS
The tax treatment of Floating Rate Notes that are not VRDIs ("Contingent
Notes") is as follows. First, the Company is required to determine, as of the
issue date, the comparable yield for the Contingent Note. The comparable yield
is generally the yield at which the Company would issue a fixed rate debt
instrument with terms and conditions similar to those of the Contingent Note
(including the level of subordination, term, timing of payments and general
market conditions, but not taking into consideration the riskiness of the
contingencies or the liquidity of the Contingent Note), but not less than the
applicable federal rate announced monthly by the IRS (the "AFR"). In certain
cases where Contingent Notes are marketed or sold in substantial part to
tax-exempt investors or other investors for whom the prescribed inclusion of
interest is not expected to have a substantial effect on their U.S. tax
liability, the comparable yield for the Contingent Note, without proper evidence
to the contrary, is presumed to be the AFR.
Second, solely for tax purposes, the Company constructs a projected schedule
of payments determined under the 1996 OID Regulations for the Contingent Note
(the "Schedule"). The Schedule is determined as of the issue date and generally
remains in place throughout the term of the Contingent Note. If a right to a
contingent payment is based on market information, the amount of the projected
payment is the forward price of the contingent payment. If a contingent payment
is not based on market information, the amount of the projected payment is the
expected value of the contingent payment as of the issue date. The Schedule must
produce the comparable yield determined as set forth above. Otherwise, the
Schedule must be adjusted under the rules set forth in the 1996 OID Regulations.
Third, under the usual rules applicable to OID and based on the Schedule,
the interest income on the Contingent Note for each accrual period is determined
by multiplying the comparable yield of the Contingent Note (adjusted for the
length of the accrual period) by the Contingent Note's adjusted issue price at
the beginning of the accrual period (determined under rules set forth in the
1996 OID Regulations). The amount so determined is then allocated on a ratable
basis to each day in the accrual period that the United States Holder held the
Contingent Note.
Fourth, appropriate adjustments are made to the interest income determined
under the foregoing rules to account for any differences between the Schedule
and actual contingent payments. Under the rules set forth in the 1996 OID
Regulations, differences between the actual amounts of any contingent payments
made in a calendar year and the projected amounts of such payments are generally
aggregated and taken into account, in the case of a positive difference, as
additional interest income, or, in the case of a negative difference, first as a
reduction in interest income for such year and thereafter, subject to certain
limitations, as ordinary loss.
The Company is required to provide each holder of a Contingent Note with the
Schedule described above. If the Company does not create a Schedule or the
Schedule is unreasonable, a United States Holder must set its own projected
payment schedule and explicitly disclose the use of such schedule and the reason
therefor. Unless otherwise prescribed by the IRS, the United States Holder must
make such disclosure on a statement attached to the United States Holder's
timely filed federal income tax return for the taxable year in which the
Contingent Note was acquired.
In general, any gain realized by a United States Holder on the sale,
exchange or retirement of a Contingent Note is interest income. In general, any
loss on a Contingent Note accounted for under the method described above is
ordinary loss to the extent it does not exceed such Holder's prior interest
inclusions on the Contingent Note (net of negative adjustments). Special rules
apply in determining the tax basis of a Contingent Note and the amount realized
on the retirement of a Contingent Note.
OTHER RULES
Certain Notes having OID may be redeemed prior to maturity or may be
repayable at the option of the holder. Such Notes may be subject to rules that
differ from the general rules discussed above relating
31
<PAGE>
to the tax treatment of OID. Purchasers of such Notes with a redemption feature
should consult their tax advisors with respect to such feature since the tax
consequences with respect to original issue discount will depend, in part, on
the particular terms and the particular features of the purchased Note.
The Treasury Regulations relating to the tax treatment of OID contain
certain language ("aggregation rules") stating in general that, with some
exceptions, if more than one type of Note is issued in connection with the same
transaction or related transactions, such Notes may be treated as a single debt
instrument with a single issue price, maturity date, yield to maturity and
stated redemption price at maturity for purposes of calculating and accruing any
OID. Unless otherwise provided in the applicable Prospectus Supplement, the
Company does not expect to treat different types of Notes as being subject to
the aggregation rules for purposes of computing OID.
MARKET DISCOUNT
If a United States Holder acquires a Note having a maturity date of more
than one year from the date of its issuance and has a tax basis in the Note that
is, in the case of a Note that does not have OID, less than its stated
redemption price at maturity, or, in the case of a Note that has OID, less than
its adjusted issue price (as defined above), the amount of such difference is
treated as "market discount" for federal income tax purposes, unless such
difference is less than 1/4 of one percent of the stated redemption price at
maturity multiplied by the number of complete years to maturity (from the date
of acquisition).
Under the market discount rules of the Code, a United States Holder is
required to treat any principal payment (or, in the case of a Note that has OID,
any payment that does not constitute a payment of qualified stated interest) on,
or any gain on the sale, exchange, retirement or other disposition of, a Note as
ordinary income to the extent of the accrued market discount that has not
previously been included in income. Thus, partial principal payments are treated
as ordinary income to the extent of accrued market discount that has not
previously been included in income. If such Note is disposed of by the United
States Holder in certain otherwise nontaxable transactions, accrued market
discount will be includible as ordinary income by the United States Holder as if
such Holder had sold the Note at its then fair market value.
In general, the amount of market discount that has accrued is determined on
a ratable basis. A United States Holder may, however, elect to determine the
amount of accrued market discount on a constant yield to maturity basis. This
election is made on a Note-by-Note basis and is irrevocable.
With respect to Notes with market discount, a United States Holder may not
be allowed to deduct immediately a portion of the interest expense on any
indebtedness incurred or continued to purchase or to carry such Notes. A United
States Holder may elect to include market discount in income currently as it
accrues, in which case the interest deferral rule set forth in the preceding
sentence will not apply. Such an election will apply to all debt instruments
acquired by the United States Holder on or after the first day of the first
taxable year to which such election applies and is irrevocable without the
consent of the IRS. A United States Holder's tax basis in a Note will be
increased by the amount of market discount included in such Holder's income
under such an election.
In lieu of the foregoing rules, different rules apply in the case of
Contingent Notes where a holder's tax basis in a Contingent Note is less than
the Contingent Note's adjusted issue price (determined under special rules set
out in the 1996 OID Regulations). Accordingly, prospective purchasers of
Contingent Notes should consult with their tax advisors with respect to the
application of such rules to such Notes.
PREMIUM AND ACQUISITION PREMIUM
A United States Holder will be treated as having purchased a Note at a
"premium" (or "amortizable bond premium") if the Note's adjusted basis,
immediately after its purchase by such Holder, exceeds the sum of all amounts
payable on the Note after the purchase date other than payments of qualified
stated interest. United States Holders may elect to amortize the premium over
the remaining term of the Note
32
<PAGE>
(where such Note is not callable prior to its maturity date), as a reduction in
the amount of the interest payments otherwise includible in income, and the
United States Holder will not be required to include in income OID (if any) with
respect to any Note purchased at a premium. If such Note may be called by the
Company prior to maturity after the United States Holder has acquired it, the
amount of amortizable bond premium is determined with reference to either the
amount payable at maturity, or, if it results in a smaller premium attributable
to the period through the earlier call date, with reference to the amount
payable on the earlier call date. If a United States Holder makes this election,
the premium will be allocated among all the interest payments on the Note, on
the basis of the United States Holders's yield to maturity, with compounding at
the close of each accrual period. A United States Holder who elects to amortize
premium must reduce the tax basis of the Note by the amount of the premium
amortized in any year. If this election is made with respect to any Note, it
will also apply to all debt instruments held by the United States Holder at the
beginning of the first taxable year to which the election applies and to all
debt instruments acquired by the United States Holder, and will be binding for
all subsequent taxable years unless the election is revoked with the consent of
the IRS.
On June 27, 1996, the IRS published in the Federal Register proposed
regulations (the "Proposed Premium Regulations") on the amortization of bond
premium. The Proposed Premium Regulations describe the constant yield method
under which such premium is amortized and provide that the resulting offset to
interest income can be taken into account only as a United States Holder takes
the corresponding interest income into account under such holder's regular
accounting method. In the case of instruments that may be redeemed at the option
of the Company or repaid at the option of the holder prior to maturity, the
Proposed Premium Regulations provide that the premium is calculated by assuming
that the Company will exercise or not exercise its redemption rights in the
manner that maximizes the United States Holder's yield and the United States
Holder will exercise or not exercise its repayment option in a manner that
maximizes the United States Holder's yield. The Proposed Premium Regulations are
proposed to be effective for debt instruments acquired on or after the date 60
days after the date final regulations are published in the Federal Register.
However, if a United States Holder elects to amortize bond premium for the
taxable year containing such effective date, the Proposed Premium Regulations
would apply to all the United States Holder's debt instruments held on or after
the first day of that taxable year. It cannot be predicted at this time whether
the Proposed Premium Regulations will become effective or what, if any,
modifications will be made to them prior to their becoming effective.
If a United States Holder purchases a Note issued with OID at an
"acquisition premium," the amount of OID that the United States Holder includes
in gross income is reduced to reflect the acquisition premium. A Note is
purchased at an acquisition premium if its adjusted basis, immediately after its
purchase, is (a) less than or equal to the sum of all amounts payable on the
Note after the purchase date other than payments of qualified stated interest
and (b) greater than the Note's "adjusted issue price" (as described above under
"Original Issue Discount--FIXED RATE NOTES").
If a Note is purchased at an acquisition premium, the United States Holder
reduces the amount of OID otherwise includible in income during an accrual
period by an amount equal to (i) the amount of OID otherwise includible in
income multiplied by (ii) a fraction, the numerator of which is the excess of
the adjusted basis of the Note immediately after its acquisition by the
purchaser over the adjusted issue price of the Note and the denominator of which
is the excess of the sum of all amounts payable on the Note after the purchase
date, other than payments of qualified stated interest, over the Note's adjusted
issue price.
As an alternative to reducing the amount of OID otherwise includible in
income by this fraction, the United States Holder may elect to compute OID
accruals by treating the purchase as a purchase at original issuance and
applying the constant yield method described above.
In lieu of the foregoing rules, different rules apply in the case of
Contingent Notes where a holder's tax basis in a Contingent Note is greater than
the Contingent Note's adjusted issue price (determined
33
<PAGE>
under special rules set out in the 1996 OID Regulations). Accordingly,
prospective purchasers of Contingent Notes should consult with their tax
advisors with respect to the application of such rules to such Notes.
SHORT-TERM NOTES
In the case of a Short-Term Note, no interest is treated as qualified stated
interest, and therefore all interest is included in OID. United States Holders
that report income for federal income tax purposes on an accrual method and
certain other United States Holders, including banks and dealers in securities,
are required to include OID in income on such Short-Term Notes on a
straight-line basis, unless an election is made to accrue the OID according to a
constant yield method based on daily compounding.
Any other United States Holder of a Short-Term Note is not required to
accrue OID for federal income tax purposes, unless it elects to do so, with the
consequence that the reporting of such income is deferred until it is received.
In the case of a United States Holder that is not required, and does not elect,
to include OID in income currently, any gain realized on the sale, exchange or
retirement of a Short-Term Note is ordinary income to the extent of the OID
accrued on a straight-line basis (or, if elected, according to a constant yield
method based on daily compounding) through the date of sale, exchange or
retirement. In addition, United States Holders that are not required, and do not
elect, to include OID in income currently are required to defer deductions for
any interest paid on indebtedness incurred or continued to purchase or carry a
Short-Term Note in an amount not exceeding the deferred interest income with
respect to such Short-Term Note (which includes both the accrued OID and accrued
interest that are payable but that have not been included in gross income),
until such deferred interest income is realized. A United States Holder of a
Short-Term Note may elect to apply the foregoing rules (except for the rule
characterizing gain on sale, exchange or retirement as ordinary) with respect to
"acquisition discount" rather than OID. Acquisition discount is the excess of
the stated redemption price at maturity of the Short-Term Note over the United
States Holder's basis in the Short-Term Note. This election applies to all
obligations acquired by the taxpayer on or after the first day of the first
taxable year to which such election applies, unless revoked with the consent of
the IRS. A United States Holder's tax basis in a Short-Term Note is increased by
the amount included in such Holder's income on such a Note.
ELECTION TO TREAT ALL INTEREST AS OID
United States Holders may elect to include in gross income all interest that
accrues on a Note, including any stated interest, acquisition discount, OID,
market discount, DE MINIMIS OID, DE MINIMIS market discount and unstated
interest (as adjusted by amortizable bond premium and acquisition premium), by
using the constant yield method described above under "Original Issue Discount."
Such an election for a Note with amortizable bond premium will result in a
deemed election to amortize bond premium for all debt instruments owned and
later acquired by the United States Holder with amortizable bond premium and may
be revoked only with the permission of the IRS. Similarly, such an election for
a Note with market discount will result in a deemed election to accrue market
discount in income currently for such Note and for all other debt instruments
acquired by the United States Holder with market discount on or after the first
day of the taxable year to which such election first applies, and may be revoked
only with the permission of the IRS. A United States Holder's tax basis in a
Note will be increased by each accrual of the amounts treated as OID under the
constant yield election described in this paragraph.
EXTENDIBLE NOTES, RENEWABLE NOTES AND RESET NOTES
If so specified in an applicable Prospectus Supplement relating to a Note,
the Company or a holder may have the option to extend the maturity of or renew
such Note. See "Description of Notes--Extension of Maturity" and "Description of
Notes--Renewable Notes." In addition, the Company may have the option to reset
the interest rate, the Spread or the Spread Multiplier with respect to a Note.
See
34
<PAGE>
"Description of Notes--Reset Notes." The treatment of a United States Holder of
Notes to which such options apply will depend, in part, on the terms established
for such Notes by the Company pursuant to the exercise of such option by the
Company or a holder. Upon the exercise of any such option, the United States
Holder of such Notes may be treated for federal income tax purposes as having
exchanged such Notes (the "Old Notes") for new Notes with revised terms (the
"New Notes"). If such holder is treated as having exchanged Old Notes for New
Notes, such exchange may be treated as either a taxable exchange or a tax-free
recapitalization.
Final Treasury Regulations under Section 1001 of the Code, published on June
26, 1996 (the "Final Section 1001 Regulations"), generally provide that the
exercise of an option provided to an issuer or a holder to change a term of a
debt instrument (such as the maturity or the interest rate) in a manner such as
that contemplated for Extendible Notes, Renewable Notes and Reset Notes will
create a deemed exchange of Old Notes for New Notes if such exercise modifies
such terms to a degree that is "economically significant." With respect to
certain types of debt instruments, under the Final Section 1001 Regulations a
deemed exchange for tax purposes occurs if the exercise of such an option alters
the annual yield of the debt instrument by more than the greater of (i) 25 basis
points or (ii) 5 percent of the annual yield of the debt instrument prior to
modification. The exercise of an option that changes the timing of payments
under a debt instrument creates a deemed exchange under the Final Section 1001
Regulations (whether or not the annual yield is altered) if there is a "material
deferral" of scheduled payments. In this connection, the Final Section 1001
Regulations generally provide that a deferral of scheduled payments within a
safe-harbor period which begins on the original due date for the first deferred
payment and extends for a period not longer than the lesser of five years or 50
percent of the original term of the debt instrument will not be considered to be
a material deferral.
If the exercise of the option by the Company or a holder is not treated as
an exchange of Old Notes for New Notes, no gain or loss will be recognized by a
United States Holder as a result thereof. If the exercise of the option is
treated as a taxable exchange of Old Notes for New Notes, a United States Holder
will recognize gain or loss equal to the difference between the issue price of
the New Notes and such Holder's tax basis in the Old Notes. However, if the
exercise of the option is treated as a tax-free recapitalization, no loss will
be recognized by a United States Holder as a result thereof and gain, if any,
will be recognized to the extent of the fair market value of the excess, if any,
of the principal amount of securities received over the principal amount of
securities surrendered. In this regard, the meaning of the term "principal
amount" is not clear. Such term could be interpreted to mean "issue price" with
respect to securities that are received and "adjusted issue price" with respect
to securities that are surrendered. Legislation to that effect has been
introduced in the past. It is not possible to determine whether such legislation
will be reintroduced or enacted, and, if enacted, whether it would apply to a
recapitalization occurring prior to the date of enactment.
The presence of such options may also affect the calculation of interest
income and OID, among other things. For purposes of determining the yield and
maturity of a Note, if the Company has an unconditional option or combination of
options to require payments to be made on the Note under an alternative payment
schedule or schedules (e.g., an option to extend or an option to call the Note
at a fixed premium), it will be deemed to exercise or not exercise an option or
combination of options in a manner that minimizes the yield on the Note.
Conversely, a holder having such option or combination of such options will be
deemed to exercise or not exercise such option or combination of options in a
manner that maximizes the yield on such Note. If both the Company and the holder
have options, the foregoing rules are applied to the options in the order that
they may be exercised. Thus, the deemed exercise of one option may eliminate
other options that are later in time. If the exercise of such option or options
actually occurs or does not occur, contrary to what is deemed to occur pursuant
to the foregoing rules, then, solely for purposes of the accrual of OID, the
yield and maturity of the Note are redetermined by treating the Note as reissued
on the date of the occurrence or non-occurrence of the exercise for an amount
equal to its adjusted issue price on that date. Depending on the terms of the
options described above, the presence of
35
<PAGE>
such options may instead cause the Notes to be taxable as Contingent Notes under
the 1996 OID Regulations. See "Original Issue Discount--FLOATING RATE NOTES THAT
ARE NOT VRDIS."
THE FOREGOING DISCUSSION OF EXTENDIBLE NOTES, RENEWABLE NOTES AND RESET
NOTES IS PROVIDED FOR GENERAL INFORMATION ONLY. ADDITIONAL TAX CONSIDERATIONS
MAY ARISE FROM THE OWNERSHIP OF SUCH NOTES IN LIGHT OF THE PARTICULAR FEATURES
OR COMBINATION OF FEATURES OF SUCH NOTES AND, ACCORDINGLY, PERSONS CONSIDERING
THE PURCHASE OF SUCH NOTES ARE ADVISED AND EXPECTED TO CONSULT WITH THEIR OWN
LEGAL AND TAX ADVISERS REGARDING THE TAX CONSEQUENCES OF THE OWNERSHIP OF SUCH
NOTES.
INTEGRATION OF NOTES WITH OTHER FINANCIAL INSTRUMENTS
Any United States Holder of Notes that also acquires or has acquired any
financial instrument which, in combination with such Notes, would permit the
calculation of a single yield to maturity or could generally constitute a VRDI
of an equivalent term, may in certain circumstances treat such Notes and such
financial instrument as an integrated debt instrument for purposes of the Code,
with a single determination of issue price and the character and timing of
income, deductions, gains and losses. (For purposes of determining OID, none of
the payments under the integrated debt instrument will be treated as qualified
stated interest.) Moreover, under the 1996 OID Regulations, the IRS may require
in certain circumstances that a United States Holder who owns Notes integrate
such Notes with a financial instrument held or acquired by such Holder or a
related party. United States Holders should consult their tax advisors as to
such possible integration.
SALE OR EXCHANGE OF NOTES
A United States Holder generally will recognize gain or loss upon the sale
or exchange of a Note equal to the difference between the amount realized upon
such sale or exchange and the United States Holder's adjusted basis in the Note.
Such adjusted basis in the Note generally will equal the cost of the Note,
increased by OID, acquisition discount or market discount previously included in
respect thereof, and reduced (but not below zero) by any payments on the Note
other than payments of qualified stated interest and by any premium that the
United States Holder has taken into account. To the extent attributable to
accrued but unpaid qualified stated interest, the amount realized by the United
States Holder will be treated as a payment of interest. Generally, any gain or
loss will be capital gain or loss if the Note was held as a capital asset,
except as provided under "Market Discount," "Short-Term Notes" and "Original
Issue Discount--FLOATING RATE NOTES THAT ARE NOT VRDIS," above. Special rules
apply in determining the tax basis of a Contingent Note and the amount realized
on the retirement of a Contingent Note. The excess of net long-term capital
gains over net short-term capital losses is taxed at a lower rate than ordinary
income for certain non-corporate taxpayers. The distinction between capital gain
or loss and ordinary income or loss is also relevant for purposes of, among
other things, limitations on the deductibility of capital losses.
FOREIGN HOLDERS
As used herein, the term "Non-United States Holder" means a holder of a Note
that is, for United States federal income tax purposes, (i) a nonresident alien
individual, (ii) a foreign corporation, (iii) a nonresident alien fiduciary of a
foreign estate or trust or (iv) a foreign partnership one or more of the members
of which is, for United States federal income tax purposes, a nonresident alien
individual, a foreign corporation or a nonresident alien fiduciary of a foreign
estate or trust.
On April 15, 1996, proposed Treasury Regulations (the "1996 Proposed
Regulations") were issued which, if adopted in final form, could affect the
United States taxation of Non-United States Holders. The 1996 Proposed
Regulations are generally proposed to be effective for payments after December
31, 1997, regardless of the issue date of the Note with respect to which such
payments are made, subject to certain transition rules. It cannot be predicted
at this time whether the 1996 Proposed Regulations will become
36
<PAGE>
effective as proposed or what, if any, modifications may be made to them. The
discussion under this heading and under "Backup Withholding and Information
Reporting," below, is not intended to include a complete discussion of the
provisions of the 1996 Proposed Regulations, and prospective investors are urged
to consult their tax advisors with respect to the effect the 1996 Proposed
Regulations may have if adopted.
Under current United States federal income tax law now in effect, and
subject to the discussion of backup withholding in the following section,
payments of principal and interest (including OID) with respect to a Note by the
Company or by any paying agent to any Non-United States Holder will not be
subject to the withholding of United States federal income tax, provided, in the
case of interest (including OID), that (i) such Holder does not actually or
constructively own 10% or more of the total combined voting power of all classes
of stock of the Company entitled to vote, (ii) such Holder is not for federal
income tax purposes a controlled foreign corporation related, directly or
indirectly, to the Company through stock ownership, (iii) such Holder is not a
bank receiving interest described in Section 881(c)(3)(A) of the Code and (iv)
either (A) the beneficial owner of the Note certifies, under penalties of
perjury, to the Company or paying agent, as the case may be, that such Holder is
a Non-United States Holder and provides such Holder's name and address, or (B) a
securities clearing organization, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business (a
"financial institution") and holds the Note, certifies, under penalties of
perjury, to the Company or paying agent, as the case may be, that such
certificate has been received from the beneficial owner by it or by a financial
institution between it and the beneficial owner and furnishes the payor with a
copy thereof. A certificate described in this paragraph is effective only with
respect to payments of interest (including OID) made to the certifying
Non-United States Holder after the issuance of the certificate in the calendar
year of its issuance and the two immediately succeeding calendar years. Under
temporary Treasury Regulations, the foregoing certification may be provided by
the beneficial owner of a Note on IRS Form W-8.
The 1996 Proposed Regulations provide optional documentation procedures
designed to simplify compliance by withholding agents. The 1996 Proposed
Regulations would not affect the documentation rules described above, but would
add "intermediary certification" options for certain qualifying withholding
agents. Under one such option, a withholding agent would be allowed to rely on
IRS Form W-8 furnished by a financial institution or other intermediary on
behalf of one or more beneficial owners (or other intermediaries) without having
to obtain the beneficial owner certificate described in the preceding paragraph,
provided that the financial institution or intermediary has entered into a
withholding agreement with the IRS and thus is a "qualified intermediary." Under
another option, an authorized foreign agent of the U.S. withholding agent would
be permitted to act on behalf of the U.S. withholding agent, provided certain
conditions are met.
For purposes of establishing entitlement to the withholding exemption
described above, the 1996 Proposed Regulations generally would, if adopted,
treat as the beneficial owners of payments on a Note those persons that, under
United States tax principles, are the taxpayers with respect to such payments.
For example, the partners of a foreign partnership, rather than the partnership
itself, would be required to provide the required certifications to qualify for
such withholding exemption. Thus, subject to certain exceptions, each partner,
rather than the partnership, would be required to provide the required
certifications to qualify for the withholding exemption described above.
The 1996 Proposed Regulations provide certain presumptions with respect to
withholding for holders not providing the required certifications to qualify for
the withholding exemption described above. In addition, the 1996 Proposed
Regulations would replace a number of current tax certification forms (including
IRS Form W-8 and IRS Form 4224, discussed below) with a single, restated form
(and, in certain circumstances, additional information) and standardize the
period of time for which withholding agents could rely on such certifications.
37
<PAGE>
Notwithstanding the foregoing, interest described in Section 871(h)(4) of
the Code will be subject to United States withholding tax at a 30% rate (or such
lower rate as may be provided by an applicable treaty). In general, interest
described in Section 871(h)(4) of the Code includes (subject to certain
exceptions) any interest the amount of which is determined by reference to
receipts, sales or other cash flow of the issuer or a related person, any income
or profits of the issuer or a related person, any change in the value of any
property of the issuer or a related person or any dividends, partnership
distribution or similar payments made by the issuer or a related person.
Interest described in Section 871(h)(4) of the Code may include other types of
contingent interest identified by the IRS in future Treasury Regulations.
If a Non-United States Holder is engaged in a trade or business in the
United States and interest (including OID) on the Note is effectively connected
with the conduct of such trade or business, the Non-United States Holder,
although exempt from the withholding tax discussed above, will be subject to
United States federal income tax on such interest (including OID) in the same
manner as if it were a United States Holder. In lieu of the certificate
described above, such Holder will be required to provide a properly executed IRS
Form 4224 in order to claim an exemption from withholding tax. In addition, if
such Holder is a foreign corporation, it may be subject to a branch profits tax
equal to 30% (or such lower rate as may be specified by an applicable treaty) of
its effectively connected earnings and profits for the taxable year, subject to
adjustments. For this purpose, interest (including OID) on a Note will be
included in the earnings and profits of such Holder if such interest (including
OID) is effectively connected with the conduct by such Holder of a trade or
business in the United States.
Generally, any gain or income (other than that attributable to accrued
interest or OID) realized upon the sale, exchange, retirement or other
disposition of a Note will not be subject to United States federal income tax
unless (i) such gain or income is effectively connected with a trade or business
in the United States of the Non-United States Holder or (ii) in the case of a
Non-United States Holder who is a nonresident alien individual, the Non-United
States Holder is present in the United States for 183 days or more in the
taxable year of such sale, exchange, retirement or other disposition and either
(a) such individual has a "tax home" (as defined in Section 911(d)(3) of the
Code) in the United States or (b) the gain is attributable to an office or other
fixed place of business maintained by such individual in the United States.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Under current United States federal income tax law, information reporting
requirements apply to interest (including OID) and principal payments made to,
and to the proceeds of sales before maturity by, certain non-corporate United
States Holders. In addition, a 31% backup withholding tax will apply if the
non-corporate United States Holder (i) fails to furnish such holder's Taxpayer
Identification Number ("TIN") (which, for an individual, would be his or her
Social Security Number) to the payor in the manner required, (ii) furnishes an
incorrect TIN and the payor is so notified by the IRS, (iii) is notified by the
IRS that it has failed properly to report payments of interest and dividends or
(iv) in certain circumstances, fails to certify, under penalties of perjury,
that it has not been notified by the IRS that it is subject to backup
withholding for failure properly to report interest and dividend payments.
Backup withholding will not apply with respect to payments made to certain
exempt recipients, including corporations, tax-exempt organizations, qualified
pension and profit-sharing trusts and individual retirement accounts, provided
that they establish entitlement to an exemption.
In the case of a Non-United States Holder, under Treasury Regulations,
backup withholding and information reporting will not apply to payments of
principal and interest made by the Company or any paying agent thereof on a Note
with respect to which such holder has provided the required certification under
penalties of perjury that it is a Non-United States Holder or has otherwise
established an exemption, provided that (i) the Company or paying agent, as the
case may be, does not have actual knowledge that the payee is a United States
person and (ii) certain other conditions are satisfied.
38
<PAGE>
In general, (i) principal or interest payments on a Note collected outside
the United States by a foreign office of a custodian, nominee or other agent
acting on behalf of a beneficial owner of a Note and (ii) payments on the sale,
exchange or retirement of a Note to or through a foreign office of a broker are
not subject to backup withholding or information reporting. However, if such
custodian, nominee, agent or broker is a United States person, a controlled
foreign corporation for United States tax purposes, or a foreign person 50% or
more of whose gross income is effectively connected with the conduct of a United
States trade or business for a specified three-year period, such custodian,
nominee, agent or broker may be subject to certain information reporting (but
not backup withholding) requirements with respect to such payments unless such
custodian, nominee, agent or broker has in its records documentary evidence that
the beneficial owner is not a United States person and certain conditions are
met or the beneficial owner otherwise establishes an exemption.
The 1996 Proposed Regulations would, if adopted, alter the foregoing rules
in certain respects. In particular, the 1996 Proposed Regulations would require
backup withholding in the event that the custodian, nominee, agent or broker has
actual knowledge that the beneficial owner is a United States person.
Backup withholding tax is not an additional tax. Rather, any amounts
withheld from a payment to a holder under the backup withholding rules will be
allowed as a refund or a credit against such holder's United States federal
income tax, provided that the required information is furnished to the IRS.
Holders should consult their tax advisors regarding the application of
information reporting and backup withholding to their particular situations, the
availability of an exemption therefrom, and the procedure for obtaining such an
exemption, if available.
PLAN OF DISTRIBUTION
The Company may sell the Notes in and/or outside the United States: (i)
through underwriters or dealers; (ii) directly to a limited number of purchasers
or to a single purchaser; or (iii) through agents. The Prospectus Supplement
with respect to the Notes being offered (the "Offered Notes") will set forth the
terms of the offering of the Offered Notes, including the name or names of any
underwriters or agents, the purchase price of the Offered Notes and the proceeds
to the Company from such sale, any underwriting discounts and other items
constituting underwriters' compensation, any initial public offering price and
any discounts or concessions allowed or reallowed or paid to dealers. Any
initial public offering price and any discounts or concessions allowed or
reallowed or paid to dealers may be changed from time to time.
If underwriters are used in the sale, the Offered Notes will be acquired by
the underwriters for their own account and may be resold from time to time in
one or more transactions, including negotiated transactions, at a fixed public
offering price or at varying prices determined at the time of sale. The Notes
may be offered to the public either through underwriting syndicates represented
by one or more managing underwriters or directly by one or more underwriters.
The underwriter or underwriters with respect to a particular underwritten
offering of Notes, or, if an underwriting syndicate is used, the managing
underwriter or underwriters, will be set forth on the cover of the applicable
Prospectus Supplement. Unless otherwise set forth in the Prospectus Supplement
relating thereto, the obligations of the underwriters to purchase the Offered
Notes will be subject to conditions precedent and the underwriters will be
obligated to purchase all of the Offered Notes if any are purchased.
If dealers are utilized in the sale of Offered Notes in respect of which
this Prospectus is delivered, and if so specified in the applicable Prospectus
Supplement, the Company will sell such Offered Notes to the dealers as
principals. The dealers may then resell such Offered Notes to the public at
varying prices to be determined by such dealers at the time of resale. The names
of the dealers and the terms of the transaction will be set forth in the
applicable Prospectus Supplement.
39
<PAGE>
The Notes may be sold directly by the Company or through agents designated
by the Company from time to time. Any agent involved in the offer or sale of the
Offered Notes in respect to which this Prospectus is delivered will be named,
and any commissions payable by the Company to such agent will be set forth, in
the Prospectus Supplement.
Underwriters, dealers and agents may be entitled under agreements entered
into with the Company to indemnification by the Company against certain civil
liabilities, including liabilities under the Securities Act, or to contribution
with respect to payments which the underwriters, dealers or agents may be
required to make in respect thereof. Underwriters, dealers and agents may be
customers of, may engage in transactions with, or perform services for, the
Company in the ordinary course of business.
LEGAL MATTERS
The legality of the Notes offered hereby will be passed upon for MidAmerican
Energy by John A. Rasmussen, Jr., Senior Vice President and General Counsel of
MidAmerican Energy, and for the Agent by Sidley & Austin, Chicago, Illinois.
Sidley & Austin will rely upon the opinion of Mr. Rasmussen as to matters of
Iowa law and the opinion of such firm will be conditioned upon, and subject to
certain assumptions regarding, future action required to be taken by MidAmerican
Energy and the Trustee in connection with the issuance and sale of any
particular Note, the specific terms of the Notes and other matters which may
affect the validity of the Notes but which cannot be ascertained on the date of
such opinion. Sidley & Austin regularly serves as special counsel to MidAmerican
Energy and to its affiliates on certain matters. Mr. Rasmussen is an officer and
full-time employee of MidAmerican Energy and at September 30, 1996, he owned
directly and/or beneficially 6,200 shares of common stock of MidAmerican Energy
and had been granted, pursuant to and subject to the terms of MidAmerican
Energy's Long-Term Incentive Plan, options to purchase 40,000 shares of
MidAmerican Energy common stock and 6,500 performance shares.
EXPERTS
The consolidated financial statements and supporting schedules included in
or incorporated by reference in MidAmerican Energy's 1995 Annual Report on Form
10-K have been audited by Arthur Andersen LLP, independent public accountants,
as set forth in its report. The consolidated financial statements and supporting
schedules referred to above have been incorporated herein in reliance upon the
authority of Arthur Andersen LLP as experts in giving said reports.
40
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PRICING SUPPLEMENT, THE PROSPECTUS SUPPLEMENT, OR THE PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PRICING SUPPLEMENT, THE
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES
DESCRIBED IN THIS PRICING SUPPLEMENT, THE PROSPECTUS SUPPLEMENT, OR THE
PROSPECTUS OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PRICING SUPPLEMENT, THE PROSPECTUS SUPPLEMENT, OR
THE PROSPECTUS NOR ANY SALE MADE HEREUNDER OR THEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF MIDAMERICAN ENERGY COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
OF SUCH INFORMATION.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Pricing Supplement
Use of Proceeds......................................................... PS-2
Description of New Notes................................................ PS-2
Underwriting............................................................ PS-2
Prospectus Supplement
Supplemental Plan of Distribution....................................... S-2
Prospectus
Available Information................................................... 2
Incorporation of Certain Documents
by Reference.......................................................... 2
The Company............................................................. 3
Ratios of Earnings to Fixed Charges..................................... 3
Use of Proceeds......................................................... 4
Description of Notes.................................................... 4
United States Federal Income Tax
Consequences.......................................................... 26
Plan of Distribution.................................................... 39
Legal Matters........................................................... 40
Experts................................................................. 40
</TABLE>
$100,000,000
[LOGO]
NOTES
6.5% SERIES DUE 2001
-----------------
P R I C I N G
S U P P L E M E N T
-------------------
PAINEWEBBER INCORPORATED
DILLON, READ & CO. INC.
GOLDMAN, SACHS & CO.
------------
DECEMBER 12, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
