<PAGE>
Filed Pursuant to Rule 424(b)(2)
Registration File Nos.: 333-15387
and 333-40766
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 16, 1998)
[MIDAMERICAN ENERGY LOGO]
$162,000,000
MIDAMERICAN ENERGY COMPANY
MEDIUM-TERM NOTES
DUE FROM NINE MONTHS TO 30 YEARS FROM DATE OF ISSUE
----------------
We may offer up to $162,000,000 of our medium-term notes from time to time.
This prospectus supplement sets forth terms of the medium-term notes. It
supplements the description of the medium-term notes contained in the attached
prospectus. Each time we issue medium-term notes, we will attach a pricing
supplement to this prospectus supplement. The pricing supplement will contain
the specific description of the medium-term notes being offered and the terms of
the offering.
The medium-term notes will have varying maturities from nine months to 30
years. We can offer medium-term notes that are redeemable at our option or the
option of the holders prior to maturity. We will specify in the applicable
pricing supplement whether a series of medium-term notes is redeemable prior to
maturity.
----------------
INVESTING IN THE MEDIUM-TERM NOTES INVOLVES RISKS. SEE "RISK FACTORS" ON
PAGE S-2 OF THIS PROSPECTUS SUPPLEMENT.
----------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THE MEDIUM-TERM NOTES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THE PROSPECTUS OR THIS PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
BANC ONE CAPITAL MARKETS, INC. CHASE SECURITIES INC.
CIBC WORLD MARKETS CREDIT SUISSE FIRST BOSTON
LEHMAN BROTHERS MORGAN STANLEY DEAN WITTER
PAINEWEBBER INCORPORATED SALOMON SMITH BARNEY
----------------
The date of this prospectus supplement is July 19, 2000
<PAGE>
TABLE OF CONTENTS
PAGE
-----
PROSPECTUS SUPPLEMENT
About this Prospectus Supplement; Pricing Supplements ......... S-3
Risk Factors .................................................. S-3
Description of the Medium-Term Notes .......................... S-3
United States Federal Income Tax Consequences ................. S-4
Plan of Distribution .......................................... S-16
Legal Matters ................................................. S-17
Experts ....................................................... S-17
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 ................. 25
Plan of Distribution .......................................... 37
Legal Matters ................................................. 38
Experts ....................................................... 38
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
S-2
<PAGE>
ABOUT THIS PROSPECTUS SUPPLEMENT;
PRICING SUPPLEMENTS
We may use this prospectus supplement, together with the attached
prospectus and an attached pricing supplement, to offer our medium-term notes
from time to time. The total initial public offering price of medium-term notes
that may be offered by use of this prospectus supplement is $162,000,000. That
amount will be reduced by the amount of any other securities issued under our
shelf registration statement (File No. 333-15387).
This prospectus supplement sets forth terms of the medium-term notes that
we may offer. It supplements the description of the medium-term notes contained
in the attached prospectus. If information in this prospectus supplement is
inconsistent with the prospectus, this prospectus supplement will apply and will
supersede that information in the prospectus. Capitalized terms used but not
defined in this prospectus supplement have the meanings given to those terms in
the prospectus.
Each time we issue medium-term notes, we will attach a pricing supplement
to this prospectus supplement. The pricing supplement will contain the specific
description of the medium-term notes being offered and the terms of the
offering. The pricing supplement may also add, update or change information in
this prospectus supplement or the attached prospectus. Any information in the
pricing supplement, including any changes in the method of calculating interest
on any medium-term notes, that is inconsistent with this prospectus supplement
will apply and will supersede that information in this prospectus supplement.
It is important for you to read and consider all information contained in
this prospectus supplement and the attached prospectus and pricing supplement in
making your investment decision. You should also read and consider the
information in the documents we have referred you to in "Available Information"
and "Incorporation of Certain Documents by Reference" on page 2 of the attached
prospectus.
RISK FACTORS
Important risks associated with an investment in the medium-term notes are
described in our Form 8-K dated January 11, 2000, which we filed with the
Securities and Exchange Commission and which is incorporated by reference in the
prospectus. We encourage you to review the risk factors described in this Form
8-K before making an investment in the medium-term notes.
DESCRIPTION OF THE MEDIUM-TERM NOTES
GENERAL INFORMATION
We will issue the medium-term notes under an indenture dated as of December
1, 1996 between us and Bank One Trust Company, National Association (as
successor to The First National Bank of Chicago), as trustee.
The medium-term notes will be our senior unsecured debt and will be of
equal rank with all of our other senior unsecured debt. The indenture contains
limitations on our ability to incur secured debt and create liens on our
property. These restrictions are described on pages 6 and 7 of the prospectus
under the caption "Restrictions on Secured Debt".
TERMS OF THE MEDIUM-TERM NOTES
We will offer the medium-term notes in varying maturities from nine months
to 30 years. If stated in the applicable pricing supplement, the medium-term
notes may be redeemed prior to maturity at our option or repaid prior to
maturity at the option of the holders.
We can issue medium-term notes with a fixed rate or a variable rate. The
fixed rate may be zero in the case of medium-term notes issued at a price
representing a discount from the principal amount payable at maturity. The
variable rate will be determined by reference to one of the following interest
rate bases:
S-3
<PAGE>
o the commercial paper rate;
o the LIBOR rate;
o the prime rate;
o the treasury rate; or
o another rate specified in the applicable pricing supplement.
If specified in the applicable pricing supplement, the variable rate may be
adjusted by a spread and/or a spread multiplier. We may also issue medium-term
notes that are original issue discount notes, amortizing notes or reset notes.
FORM AND DENOMINATION
Each medium-term note will be represented by either a global security
registered in the name of a nominee of The Depository Trust Company or a
certificate issued in definitive form and registered in the name of the holder.
The form of each issuance of medium-term notes will be specified in the
applicable pricing supplement. Beneficial interests in the global securities
will be shown on, and transfers of the beneficial interests will be effected
only through, records maintained by The Depository Trust Company and its
participants. Owners of beneficial interests in the global securities will be
entitled to physical delivery of certificates in definitive form only in limited
circumstances which are described on page 18 of the prospectus under the caption
"Book-Entry System".
All medium-term notes will be denominated in United States dollars. Unless
otherwise specified in the applicable pricing supplement, we will issue
medium-term notes in denominations of $1,000 and integral multiples of $1,000.
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 medium-term notes
to beneficial owners ("holders") of medium-term notes purchasing medium-term
notes at their original issuance. This summary supercedes the summary under the
heading "United States Federal Income Tax Consequences" in the prospectus. 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 discusses only the principal United States federal income tax
consequences to those holders holding medium-term 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,
without limitation, pension plans and other tax-exempt investors, persons who
are subject to alternative minimum tax, banks, thrifts, insurance companies,
real estate investment trusts, "S" corporations, expatriates, regulated
investment companies, brokers, dealers or traders in securities or commodities,
persons whose functional currency is other than the United States dollar, and
persons who hold medium-term notes as part of a straddle, hedging or conversion
transaction). This summary also assumes that a taxpayer obtains any necessary
consent of the Internal Revenue Service ("IRS") before changing a method of
accounting.
Persons considering the purchase of medium-term 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 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 medium-term notes.
S-4
<PAGE>
YOU ARE URGED TO CONSULT YOUR TAX ADVISOR AS TO THE PARTICULAR CONSEQUENCES
TO YOUR ACQUISITION, OWNERSHIP AND DISPOSITION OF THE MEDIUM-TERM NOTES.
As used herein, the term "United States Holder" means a beneficial owner of
a medium-term 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 any state or political subdivision thereof, including the
District of Columbia, (iii) an estate the income of which is subject to United
States federal income taxation regardless of its source, or (iv) a trust (1) the
administration over which a United States court can exercise primary supervision
and (2) all of the substantial decisions of which one or more United States
persons have the authority to control, and other types of trusts considered
United States persons for federal income tax purposes. A "Non-United States
Holder" is a holder of a medium-term note that is not a United States Holder.
TAXATION OF INTEREST
The taxation of interest on a medium-term note depends on whether it
constitutes "qualified stated interest" (as defined below). Interest on a
medium-term 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 medium-term 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 issued by us) 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 issued by us) at least annually will constitute
"qualified stated interest" if the medium-term 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 medium-term 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 medium-term note is a VRDI if all of the four following conditions are
met. First, the "issue price" of the medium-term 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 medium-term note that provides for
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 medium-term 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).
S-5
<PAGE>
Third, the medium-term note must provide that a qualified floating rate or
objective rate in effect at any time during the term of the medium-term 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 medium-term 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 medium-term
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 medium-term 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 medium-term 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 our control (or the control of a related party) nor unique to our
circumstances (or the circumstances of 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 medium-term note is not an objective rate if it
is reasonably expected that the average value of the rate during the first half
of the medium-term 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 medium-term 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 medium-term 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 medium-term note is the
excess, if any, of the medium-term note's "stated redemption price at maturity"
over the medium-term note's "issue price." A medium-term note's "stated
redemption price at maturity" is the sum of all payments provided by the
medium-term note (whether designated as interest or as principal) other than
payments of qualified stated interest. The "issue price" of a medium-term note
is the first price at which a substantial amount of the medium-term 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 medium-term 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
S-6
<PAGE>
related cash payments. A United States Holder's tax basis in a medium-term 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 medium-term 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 medium-term 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
medium-term 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 medium-term 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 medium-term 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 medium-term note (including payments of
qualified stated interest), produces an amount equal to the issue price of the
medium-term note. The yield to maturity is constant over the term of the
medium-term note and, when expressed as a percentage, must be calculated to at
least two decimal places.
Second, the term of the medium-term note is divided into "accrual periods."
Accrual periods may be of any length and may vary in length over the term of the
medium-term 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 medium-term 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 medium-term note at the beginning
of the accrual period and the yield to maturity of the medium-term note, less
the amount of any qualified stated interest allocable to the accrual period. The
adjusted issue price of a medium-term note at the beginning of the first accrual
period is its issue price. Thereafter, the adjusted issue price of the
medium-term 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 medium-term note other than a payment of
qualified stated interest. For purposes of computing the adjusted issue price of
a medium-term 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
medium-term 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.
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 medium-term
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
S-7
<PAGE>
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 medium-term 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 medium-term 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 medium-term note. The fixed rate substitute for each qualified floating
rate provided by the medium-term note is the value of that qualified floating
rate on the issue date. If the medium-term 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 medium-term note.
Third, construct an equivalent fixed rate debt instrument that has terms
that are identical to those provided under the medium-term 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 medium-term 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.
FLOATING RATE NOTES THAT ARE NOT VRDIS
Floating rate notes that are not VRDIs ("Contingent Notes") will be taxable
under the rules applicable to contingent payment debt instruments (the
"Contingent Debt Regulations"), as follows. First, we are required to determine,
as of the issue date, the comparable yield for the Contingent Note. The
comparable yield is generally the yield at which we 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. income 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, we construct a projected schedule of
payments determined under the Contingent Debt Regulations for the Contingent
Note (the "Schedule"). The Schedule is determined as
S-8
<PAGE>
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 Contingent Debt 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
Contingent Debt 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 Contingent Debt
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.
We are required to provide each holder of a Contingent Note with the
Schedule described above. If we do 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 medium-term 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 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 OID will depend, in part, on the particular terms and the particular
features of the purchased medium-term 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, we do
not expect to treat different types of medium-term notes as being subject to the
aggregation rules for purposes of computing OID.
MARKET DISCOUNT
If a United States Holder acquires a medium-term note having a maturity
date of more than one year from the date of its issuance and has a tax basis in
the medium-term note that is, in the case of a medium-term note that does not
have OID, less than its stated redemption price at maturity, or, in the case of
a medium-term 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
S-9
<PAGE>
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 medium-term 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 medium-term 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 medium-term 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 medium-term 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
medium-term 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 Contingent Debt 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
If a United States Holder purchases a medium-term note for an amount in
excess of the sum of all amounts payable on the medium-term note after the date
of acquisition (other than payments of qualified stated interest), such holder
will be considered to have purchased such note with "amortizable bond premium"
equal in amount to such excess, and generally will not be required to include
any OID in income. Generally, a United States Holder may elect to amortize such
premium as an offset to qualified stated interest income, using a constant
yield method similar to that described above (see "Original Issue Discount"),
over the remaining term of the medium-term note (where such note is not
redeemable prior to its maturity date). In the case of medium-term notes that
may be redeemed prior to maturity, the premium is calculated assuming that we
or the United States Holder will exercise or not exercise its redemption rights
in a manner that maximizes the United States Holder's yield. A United States
Holder who elects to amortize bond premium must reduce such holder's tax basis
in the medium-term note by the amount of the premium used to offset qualified
stated interest income as set forth above. An election to amortize bond premium
applies to all taxable debt obligations then owned and thereafter acquired by
such holder and may be revoked only with the consent of the IRS.
If a United States Holder purchases a medium-term 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
medium-term 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 medium-term note after the purchase date other than
payments of qualified stated interest and (b) greater than the medium-term
note's "adjusted issue price" (as described above under "Original Issue
Discount--Fixed Rate Notes").
S-10
<PAGE>
If a medium-term 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 medium-term note immediately after its
acquisition by the purchaser over the adjusted issue price of the medium-term
note and the denominator of which is the excess of the sum of all amounts
payable on the medium-term note after the purchase date, other than payments of
qualified stated interest, over the medium-term 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 under special rules
set out in the Contingent Debt 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 medium-term 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 medium-term 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 medium-term 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
S-11
<PAGE>
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 medium-term 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
medium-term note, we 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" described in the prospectus on pages 15
and 16. In addition, we may have the option to reset the interest rate, the
Spread or the Spread Multiplier with respect to a medium-term note. See
"Description of Notes--Reset Notes," in the prospectus on page 14. The
treatment of a United States Holder of medium-term notes to which such options
apply will depend, in part, on the terms we establish for such notes pursuant
to the exercise of such option by us 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 us 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 medium-term note, if we have an unconditional option or
combination of options to require payments to be made on the medium-term note
under an alternative payment schedule or schedules (e.g., an option to extend
or an option to call the medium-term note at a fixed premium), we will be
deemed to exercise or not exercise an option or combination of options in a
manner that minimizes the yield on the medium-term note. Conversely, a holder
having such option or combination of such options will be deemed to exercise or
not exercise such
S-12
<PAGE>
option or combination of options in a manner that maximizes the yield on such
note. If both we 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
medium-term note are redetermined by treating the medium-term 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 such options may instead cause the
medium-term notes to be taxable as Contingent Notes. See "Original Issue
Discount--Floating Rates 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 ADVISORS REGARDING THE TAX CONSEQUENCES OF THE OWNERSHIP OF SUCH
NOTES.
INTEGRATION OF NOTES WITH OTHER FINANCIAL INSTRUMENTS
Any United States Holder of medium-term 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 Contingent Debt
Regulations, the IRS may require in certain circumstances that a United States
Holder who owns medium-term 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 medium-term note equal to the difference between the amount
realized upon such sale or exchange and the United States Holder's adjusted
basis in the medium-term note. Such adjusted basis in the medium-term note
generally will equal the cost of the medium-term 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 medium-term 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 medium-term 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. For non-corporate
taxpayers, capital gain realized on the disposition of an asset (including a
medium-term note) held for more than one year is taxed at a maximum rate of
20%. Capital gain on the disposition of an asset (including a medium-term note)
held for not more than one year is taxed at the rates applicable to ordinary
income (i.e., up to 39.6%). The distinction between capital gain or loss and
ordinary income or loss is relevant for purposes of, among other things,
limitations on the deductibility of capital losses.
NON-UNITED STATES HOLDERS
PAYMENT OF INTEREST
Generally, interest income (including OID) of a Non-United States Holder
that is not effectively connected with a United States trade or business will
be subject to a withholding tax at a 30% rate (or,
S-13
<PAGE>
if applicable, a lower treaty rate). However, interest paid on a medium-term
note by us or our paying agent to a Non-United States Holder will qualify for
the "portfolio interest exemption" and therefore will not be subject to United
States federal income tax or withholding tax, provided that such interest
income is not effectively connected with a United States trade or business of
the Non-United States Holder and the Non-United States Holder (i) does not
actually or constructively own 10% or more of the total combined voting power
of all classes of our stock entitled to vote, (ii) is not for federal income
tax purposes a controlled foreign corporation related, directly or indirectly,
to us through stock ownership, (iii) is not a bank which acquired the
medium-term notes in consideration for an extension of credit made pursuant to
a loan agreement entered into in the ordinary course of business, and (iv)
either (A) provides to us or our paying agent an IRS Form W-8 (or a suitable
substitute form) signed under penalties of perjury that certifies as to its
status as a Non-United States Holder and provides its name and address, or (B)
is a securities clearing organization, bank or other financial institution that
holds customers' securities in the ordinary course of its trade or business and
provides a statement to us or our paying agent under penalties of perjury in
which it certifies that an IRS Form W-8 (or a suitable substitute form) has
been received by it from the Non-United States Holder or qualifying
intermediary and furnishes us or our paying agent with a copy thereof.
Except to the extent that an applicable treaty otherwise provides, a
Non-United States Holder generally will be taxed in the same manner as a United
States Holder with respect to interest if the interest income is effectively
connected with a United States trade or business of the Non-United States
Holder. Effectively connected interest received by a corporate Non-United
States Holder may also, under certain circumstances, be subject to an
additional "branch profits tax" at a 30% rate (or, if applicable, a lower
treaty rate). Even though such effectively connected interest is subject to
income tax, and may be subject to the branch profits tax, it is not subject to
withholding tax if the holder delivers a properly executed IRS Form 4224 to us
or our paying agent.
The Treasury Department recently promulgated final regulations regarding
the withholding and information reporting rules with respect to Non-United
States Holders. In general, the final regulations do not significantly alter
the substantive withholding and information reporting requirements but rather
unify current certification procedures and forms and clarify reliance
standards. In addition, the final regulations will replace a number of current
tax certification forms (including IRS Form W-8 and IRS Form 4224, discussed
above) with a single, revised IRS Form W-8 (which, in certain circumstances,
requires information in addition to that previously required). The final
regulations are generally effective for payments made after December 31, 2000,
subject to certain transition rules.
SALE OR EXCHANGE OF NOTES
A Non-United States Holder of a medium-term note generally will not be
subject to United States federal income tax or withholding tax on any gain
realized on the sale or exchange of the note unless (i) the gain is effectively
connected with a United States trade or business of the Non-United States
Holder, (ii) in the case of a Non-United States Holder who is an individual,
such holder is present in the United States for a period or periods aggregating
183 days or more during the taxable year of the disposition and certain other
conditions are met, or (iii) the holder is subject to tax pursuant to the
provisions of the Code applicable to certain United States expatriates.
BACKUP WITHHOLDING AND INFORMATION REPORTING
UNITED STATES HOLDERS
Under section 3406 of the Code and applicable Treasury regulations, a
United States Holder of a medium-term note may be subject to backup withholding
at the rate of 31% with respect to "reportable payments" unless the holder (1)
is a corporation or comes within other exempt categories and, when required,
demonstrates this fact, or (2) provides a taxpayer identification number,
certifies as to no loss of exemption from backup withholding, and otherwise
complies with applicable requirements of the backup withholding rules.
"Reportable payments" include (i) dividend payments, (ii) interest payments
(including OID), (iii) under some circumstances, principal payments on the
medium-term notes, and (iv) certain proceeds of a taxable sale or exchange of
the medium-term notes. The payor will be required
S-14
<PAGE>
to deduct and withhold the prescribed amounts if (i) the payee fails to furnish
a taxpayer identification number (TIN) to the payor in the manner required by
the Code and applicable Treasury regulations, (ii) the IRS notifies the payor
that the TIN furnished by the payee is incorrect, (iii) there has been a
"notified payee underreporting" described in section 3406(c) of the Code, or
(iv) there has been a failure of the payee to certify under penalty of perjury
that the payee is not subject to withholding under section 3406(a)(1)(C) of the
Code. In such event, the payor will be required to withhold an amount equal to
31% from any interest payment made with respect to the United States Holder's
medium-term notes, any payment to the United States Holder of proceeds of a
taxable sale or exchange of the medium-term notes, or any other "reportable
payments." Amounts paid as backup withholding do not constitute an additional
tax and will be credited against the United States Holder's United States
federal income tax liabilities, so long as the required information is provided
to the IRS. The payor will report to United States Holders of the medium-term
notes and to the IRS the amount of any "reportable payments" for each calendar
year and the amount of tax withheld, if any, with respect to payment on the
medium-term notes. A United States Holder of medium-term notes who does not
provide the payor with his or her correct taxpayer identification number may be
subject to penalties imposed by the IRS.
NON-UNITED STATES HOLDERS
No backup withholding or information reporting will generally be required
with respect to interest on medium-term notes paid to Non-United States Holders
if the beneficial owner of the medium-term note provides a statement described
above in "Non-United States Holders--Payment of Interest" or the holder is an
exempt recipient and, in each case, the payor does not have actual knowledge
that the beneficial owner is a U.S. person.
Information reporting requirements and backup withholding tax will not
apply to any payment of the proceeds of the sale of a medium-term note effected
outside of the United States by a foreign office of a "broker" (as defined in
applicable Treasury Regulations), unless such broker (i) is a United States
person, (ii) is a foreign person that derives 50% or more of its gross income
for certain periods from the conduct of a trade or business in the United
States, or (iii) is a controlled foreign corporation for United States federal
income tax purposes. Payment of the proceeds of any such sale effected outside
the United States by a foreign office of any broker that is described in (i),
(ii) or (iii) of the preceding sentence will not be subject to backup
withholding tax but will be subject to information reporting requirements
unless such broker has documentary evidence in its records that the beneficial
owner is a Non-United States Holder and certain other conditions are met, or
the beneficial owner otherwise establishes an exemption. Payment of the
proceeds of any such sale to or through the United States office of a broker is
subject to information reporting and backup withholding requirements, unless
the beneficial owner of the medium-term note provides the statement described
above in "Non-United States Holders--Payment of Interest" or otherwise
establishes an exemption.
Non-United States Holders of medium-term notes should consult their tax
advisors regarding the application of information reporting and backup
withholding in their particular situations, the availability of an exemption
therefrom, and the procedure for obtaining such an exemption, if available. Any
amounts withheld from payment to a Non-United States Holder under the backup
withholding rules will be allowed as a refund or a credit against such holder's
United States federal income tax liability, provided that the required
information is furnished to the IRS.
THE FOREGOING DISCUSSION IS INCLUDED FOR GENERAL INFORMATION ONLY.
ACCORDINGLY, EACH PROSPECTIVE PURCHASER IS URGED TO CONSULT WITH HIS OR HER TAX
ADVISOR WITH RESPECT TO THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF
THE OWNERSHIP AND DISPOSITION OF THE MEDIUM-TERM NOTES, INCLUDING THE
APPLICATION AND EFFECT OF THE LAWS OF ANY STATE, LOCAL, FOREIGN, OR OTHER
JURISDICTION.
S-15
<PAGE>
PLAN OF DISTRIBUTION
GENERAL INFORMATION
Unless otherwise specified in the applicable pricing supplement, we will
sell medium-term notes at 100% of their principal amount.
We may sell the medium-term notes in and/or outside of the United States
using one or more of the following distribution methods:
o sales of medium-term notes directly to investors on our own behalf;
o sales of medium-term notes to one or more underwriters for their own
account that will resell the medium-term notes at a fixed public
offering price or at varying prices determined at the time of the sale;
or
o sales of medium-term notes through one or more agents that will sell
the medium-term notes on our behalf.
The names of, and the compensation paid to, any underwriters or agents will be
specified in the applicable pricing supplement. After any initial offering of
medium-term notes by underwriters, the offering price (in the case of
medium-term notes resold at a fixed offering price), any concession and the
discount may be changed.
We reserve the right to withdraw, cancel or modify any offer to sell
medium-term notes at any time without notice.
The underwriters, if any, may engage in over-allotment, stabilizing
transactions, syndicate covering transactions and penalty bids in accordance
with Regulation M under the Exchange Act. Over-allotment involves syndicate
sales in excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so long
as the stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of medium-term notes in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the distributors of the medium-term notes to reclaim a
selling concession from a syndicate member when the medium-term notes originally
sold by the syndicate member are purchased in a syndicate covering transaction
to cover syndicate short positions. Stabilizing transactions, syndicate covering
transactions and penalty bids may cause the price of the medium-term notes to be
higher than it would otherwise be in the absence of such transactions. These
transactions, if commenced, may be discontinued at any time.
EXISTING DISTRIBUTION AGREEMENT
We have entered into a distribution agreement dated as of June 16, 1998
with CIBC World Markets Corp. (formerly CIBC Oppenheimer Corp.), Lehman Brothers
Inc., Morgan Stanley Dean Witter (formerly Morgan Stanley & Co. Incorporated),
PaineWebber Incorporated and Salomon Smith Barney (formerly Salomon Brothers
Inc.), as agents. We have appointed Credit Suisse First Boston Corporation, Banc
One Capital Markets, Inc. and Chase Securities Inc. as additional agents under
the distribution agreement. The agents under the distribution agreement,
including the additional agents, are referred to below as the "Named Agents". We
can also add additional persons as Named Agents under the distribution
agreement. The Named Agents have agreed in the distribution agreement to act as
our agents with respect to the sale of the medium-term notes and to use their
reasonable best efforts to solicit offers to purchase medium-term notes. We will
pay a commission of from 0.125% to 0.750% of the principal amount of each
medium-term note, depending on its stated maturity, sold through any Named
Agent. We will have the sole right to accept offers to purchase medium-term
notes and may reject any offer in whole or in part. Each Named Agent will have
the right, in its discretion reasonably exercised, to reject in whole or in part
any offer to purchase medium-term notes received by the Named Agent. The Named
Agents for any issuance of medium-term notes will be specified in the applicable
pricing supplement.
We may also sell medium-term notes to one or more Named 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
S-16
<PAGE>
acting as principal for purposes of the resale. The medium-term notes may be
resold by the applicable Named Agents either (1) at varying prices related to
prevailing market prices at the time of resale, as determined by the applicable
Named Agents, or (2) if so agreed, at a fixed offering price. Unless otherwise
specified in the applicable pricing supplement, if any medium-term note is
resold by a Named Agent to any broker-dealer at a discount, the discount will
not be in excess of the discount or commission received by the Named Agent from
us. In addition, unless otherwise specified in the applicable pricing
supplement, any medium-term note purchased by a Named Agent as principal will
be purchased at 100% of the principal amount less a percentage equal to the
commission which would be applicable to any agency sale of a medium-term note
having an identical stated maturity.
The Named Agents may be deemed to be "underwriters" within the meaning of
the Securities Act. We have agreed to indemnify the Named Agents against
liabilities specified in the distribution agreement, including liabilities
under the Securities Act, or to contribute to payments the Named Agents may be
required to make in respect of these liabilities. We have also agreed in the
distribution agreement to reimburse the Named Agents for their expenses,
including the fees and expenses of counsel to the Named Agents.
We have been advised by the Named Agents that they may from time to time
purchase and sell the medium-term notes in the secondary market. However, they
are not obligated to do so. We cannot assure you that there will be a secondary
market for the medium-term notes or that there will be liquidity in the
secondary market if one does develop. At this time we do not plan to list the
medium-term notes on any securities exchange.
The Named Agents and their affiliates may engage in transactions with, and
perform other services for, us in the ordinary course of business. Bank One
Trust Company, National Association, which serves as the trustee under the
indenture, is an affiliate of Banc One Capital Markets, Inc., which is one of
the Named Agents.
The distribution agreement does not in any way prohibit us from selling
the medium-term notes directly to investors on our own behalf, through agents
other than the Named Agents or to underwriters other than the Named Agents.
LEGAL MATTERS
The legality of the medium-term notes will be passed upon for us by Paul J.
Leighton, our Vice President and Assistant General Counsel, and for the Named
Agents by Chadbourne & Parke LLP. Chadbourne & Parke LLP will rely on the
opinion of Mr. Leighton as to matters of Iowa law. Chadbourne & Parke LLP
regularly serves as special counsel to us and to our affiliates on various
matters. Mr. Leighton is an officer and full-time employee of us.
EXPERTS
The consolidated balance sheet and consolidated statement of
capitalization of us and our subsidiaries as of December 31, 1999, and the
related consolidated statements of income, retained earnings and cash flows for
the year then ended, and the related financial statement schedule, incorporated
by reference in the prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports, which are incorporated by
reference in the prospectus, and have been so incorporated in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
The consolidated balance sheet and consolidated statement of
capitalization of us and our subsidiaries as of December 31, 1998, and the
related consolidated statements of income, retained earnings and cash flows for
the two years then ended, and the related financial statement schedule for such
periods, incorporated by reference in the prospectus have been audited by
PricewaterhouseCoopers LLP, independent auditors, as stated in their reports,
which are included, or incorporated by reference, in our registration statement
(No. 333-40766) filed with the Securities and Exchange Commission on July 3,
2000, and have been so included in reliance upon the reports of such firm given
upon their authority as experts in accounting and auditing.
S-17
<PAGE>
With respect to the unaudited interim financial information for the
periods ended March 31, 2000 and 1999, June 30, 1999 and September 31, 1999,
which is incorporated in the prospectus by reference, Deloitte & Touche LLP
have applied limited procedures in accordance with professional standards for a
review of such information. However, as stated in their reports included in our
Quarterly Reports on Form 10-Q for the quarters ended March 31, 2000, June 30,
1999 and September 31, 1999, and incorporated by reference in the prospectus,
they did not audit and they do not express an opinion on that interim financial
information. Accordingly, the degree of reliance on their reports on such
information should be restricted in light of the limited nature of the review
procedures applied. Deloitte & Touche LLP are not subject to the liability
provisions of Section 11 of the Securities Act for their reports on the
unaudited interim financial information because those reports are not "reports"
of a "part" of the registration statement prepared or certified by an
accountant within the meaning of Sections 7 and 11 of the Securities Act.
S-18
<PAGE>
PROSPECTUS
[MIDAMERICAN ENERGY 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 June 16, 1998.
<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, 1997, the Quarterly Report of the Company on Form 10-Q for
the period ended March 31, 1998, and Current Reports of the Company on Form
8-K reporting events occurring on May 27, 1998, May 29, 1998, June 9, 1998
and June 16, 1998 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. MidAmerican Energy is a subsidiary of MidAmerican Energy Holdings
Company.
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).
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the unaudited ratios of earnings to fixed
charges and ratios of earnings to fixed charges and Cooper Nuclear Station
debt service of MidAmerican Energy for each of the years 1993 through 1997
and for the twelve months ended March 31, 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, TWELVE MONTHS
------------------------------------- ENDED
1993 1994 1995 1996 1997 MARCH 31, 1998
------ ------ ------ ------ ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges(1) ........ 3.4x 3.3x 3.4x 4.1x 3.1x 3.1x
Ratio of earnings to fixed charges and Cooper
Nuclear Station debt service(2).............. 3.3x 3.2x 3.3x 3.9x 3.0x 3.0x
</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) Ratios of earnings to fixed charges and Cooper Nuclear Station debt
service 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
<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)
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."
4
<PAGE>
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 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
5
<PAGE>
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 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
6
<PAGE>
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)
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
7
<PAGE>
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.
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
8
<PAGE>
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 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
9
<PAGE>
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 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
10
<PAGE>
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 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:
D x 360
Money Market Yield = ------------ x 100
360 -(D x M)
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
11
<PAGE>
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 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.
12
<PAGE>
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, 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.
13
<PAGE>
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 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
14
<PAGE>
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 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.
15
<PAGE>
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 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
16
<PAGE>
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 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
17
<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).
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
18
<PAGE>
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
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)
19
<PAGE>
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 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
20
<PAGE>
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 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
21
<PAGE>
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)
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
22
<PAGE>
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)
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.
23
<PAGE>
"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 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.
24
<PAGE>
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 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 Internal Revenue
Service ("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 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, or (iii) an estate or trust described
in Section 7701(a)(30) of the Code. 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
25
<PAGE>
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 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
26
<PAGE>
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 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.
27
<PAGE>
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.
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.
28
<PAGE>
Floating Rate Notes that are not VRDIs
Floating Rate Notes that are not VRDIs ("Contingent Notes") will be
taxable under the rules applicable to contingent payment debt instruments
(the "Contingent Debt Regulations"), 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 Contingent Debt 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 Contingent Debt 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 Contingent Debt 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 Contingent
Debt 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.
29
<PAGE>
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 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 Contingent Debt Regulations). Accordingly, prospective
purchasers of Contingent Notes should consult with their tax advisors with
respect to the application of such rules to such Notes.
30
<PAGE>
PREMIUM AND ACQUISITION PREMIUM
If a United States Holder purchases a Note for an amount in excess of the
sum of all amounts payable on the Note after the date of acquisition (other
than payments of qualified stated interest), such Holder will be considered
to have purchased such Note with "amortizable bond premium" equal in amount
to such excess, and generally will not be required to include any original
issue discount in income. Generally, a United States Holder may elect to
amortize such premium as an offset to qualified stated interest income, using
a constant yield method similar to that described above (see "--Original
Issue Discount"), over the remaining term of the Note (where such Note is not
redeemable prior to its maturity date). In the case of Notes that may be
redeemed prior to maturity, the premium is calculated assuming that the
Company or United States Holder will exercise or not exercise its redemption
rights in a manner that maximizes the United States Holder's yield. A United
States Holder who elects to amortize bond premium must reduce such Holder's
tax basis in the Note by the amount of the premium used to offset qualified
stated interest income as set forth above. An election to amortize bond
premium applies to all taxable debt obligations then owned and thereafter
acquired by such Holder and may be revoked only with the consent of the IRS.
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 under special
rules set out in the Contingent Debt 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
31
<PAGE>
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 "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.
32
<PAGE>
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 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 Contingent Debt
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,
33
<PAGE>
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. For non-corporate taxpayers,
capital gain realized on the disposition of an asset (including a Note) held
for more than one year but not more than 18 months is taxed at a maximum rate
of 28% and capital gain realized on the disposition of an asset (including a
Note) held for more than 18 months is taxed at a maximum rate of 20%. Capital
gain on the disposition of an asset (including a Note) held for not more than
one year is taxed at the rates applicable to ordinary income (i.e., up to
39.6%). The distinction between capital gain or loss and ordinary income or
loss is relevant for purposes of, among other things, limitations on the
deductibility of capital losses.
FOREIGN HOLDERS
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 a beneficial owner of a Note that is
not a United States Holder (a "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.
On October 14, 1997, the IRS published in the Federal Register final
regulations (the "1997 Final Regulations") which affect the United States
taxation of Non-United States Holders. The 1997 Final Regulations are
currently expected to become effective for payments after December 31, 1999,
regardless of the issue date of the instrument with respect to which such
payments are made, subject to certain transition rules (see below). The
discussion under this heading and under "Backup Withholding and Information
Reporting," below, is not intended to be a complete discussion of the
provisions of the 1997 Final Regulations, and prospective purchasers of the
Notes are urged to consult their tax advisors concerning the tax consequences
of their acquiring, holding and disposing of the Notes in light of the 1997
Final Regulations.
The 1997 Final Regulations provide documentation procedures designed to
simplify compliance by withholding agents. The 1997 Final Regulations
generally do not affect the documentation rules described above, but add
other certification options. Under one such option, a withholding agent will
be allowed to rely on an intermediary withholding certificate furnished by a
"qualified intermediary" (as defined below) on behalf of one or more
beneficial owners (or other intermediaries) without having to obtain the
beneficial owner certificate described above. "Qualified intermediaries"
include: (i) foreign financial institutions or foreign clearing organizations
(other than a United States branch or United States office of such
institution or organization) or (ii) foreign branches or offices of United
States financial institutions
34
<PAGE>
or foreign branches or offices of United States clearing organizations,
which, as to both (i) and (ii), have entered into withholding agreements with
the IRS. In addition to certain other requirements, qualified intermediaries
must obtain withholding certificates, such as revised IRS Form W-8 (see
below), from each beneficial owner. Under another option, an authorized
foreign agent of a United States withholding agent will be permitted to act
on behalf of the United States withholding agent, provided certain conditions
are met.
For purposes of the certification requirements, the 1997 Final Regulations
generally 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, rather than persons such as nominees or agents
legally entitled to such payments. In the case of payment to an entity
classified as a foreign partnership under United States tax principles, the
partners, rather than the partnership, generally will be required to provide
the required certifications to qualify for the withholding exemption
described above. A payment to a United States partnership, however, is
treated for these purposes as payment to a United States payee, even if the
partnership has one or more foreign partners. The 1997 Final Regulations
provide certain presumptions with respect to withholding for holders not
furnishing the required certifications to qualify for the withholding
exemption described above. In addition, the 1997 Final Regulations will
replace a number of current tax certification forms (including IRS Form W-8
and IRS Form 4224, discussed below) with a single, revised IRS Form W-8
(which, in certain circumstances, requires information in addition to that
previously required). Under the 1997 Final Regulations, this Form W-8 will
remain valid until the last day of the third calendar year following the year
in which the certificate is signed.
The 1997 Final Regulations provide transition rules concerning existing
certificates, such as IRS Form W-8 and IRS Form 4224. Valid withholding
certificates that are held on December 31, 1998 will generally remain valid
until the earlier of December 31, 1999 or the date of expiration of the
certificate under the law in effect prior to January 1, 1999. Further,
certificates dated prior to January 1, 1998 will generally remain valid until
the end of 1998, irrespective of the date that their validity expires during
1998. The IRS has announced that the 1997 Final Regulations will be amended
to provide that valid withholding certificates that are held on December 31,
1999 will generally remain valid until the earlier of December 31, 2000 or
the expiration of the certificate under the law in effect prior to January 1,
2000.
Under the 1997 Final Regulations, withholding of United States federal
income tax with respect to accrued original issue discount may apply to
payments on a taxable sale or other disposition of a Note by a Non-United
States Holder who does not provide appropriate certification to the
withholding agent with respect to such transaction.
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.
35
<PAGE>
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, a 31% backup
withholding tax and information reporting requirements apply to certain
payments of principal, premium and interest (including OID) made to, and to
the proceeds of sale before maturity by, certain holders of the Notes.
In the case of a non-corporate United States Holder, backup withholding
will apply only if (i) such Holder fails to furnish its Taxpayer
Identification Number ("TIN") (which, for an individual, would be his Social
Security number) to the payor in the manner required, (ii) such Holder
furnishes an incorrect TIN and the payor is so notified by the IRS, (iii) the
payor is notified by the IRS that such Holder has failed to properly report
payments of interest or dividends or (iv) under certain circumstances, such
Holder fails to certify, under penalties of perjury, that it has furnished a
correct TIN and has not been notified by the IRS that it is subject to backup
withholding for failure to report interest or dividend payments. Backup
withholding does not apply with respect to payments made to certain exempt
recipients, such as a corporation (within the meaning of Section 7701(a) of
the Code) and tax-exempt organizations. United States Holders should consult
their tax advisors regarding their qualification for exemption from backup
withholding and the procedure for obtaining such an exemption if applicable.
The amount of any backup withholding from a payment to a United States
Holder will be allowed as a credit against such Holder's United States
federal income tax liability and may entitle such Holder to a refund,
provided that the required information is furnished to the IRS.
In the case of a Non-United States Holder, under current Treasury
Regulations, backup withholding and information reporting will not apply to
payments of principal, premium or interest made by the Company or any paying
agent thereof on a Note if such Holder has provided the required
certification under penalties of perjury that it is not a United States
Holder (as defined above) or has otherwise established an exemption.
Under current Treasury Regulations, if payments of principal, premium or
interest (including OID) are 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, such custodian, nominee or other agent will not
be required to apply backup withholding to such payments made to such
beneficial owner, and generally will not be subject to information reporting
requirements. However, if such custodian, nominee or other agent is a United
States person, a controlled foreign corporation for United States tax
purposes or a foreign person 50 percent or more of whose gross income is
effectively connected with a United States trade or business for a specified
there-year period, information reporting (but not backup withholding) will be
required unless such custodian, nominee or other agent has in its records
documentary evidence that the beneficial owner is not a United States Holder
and certain other conditions are met or the beneficial owner otherwise
establishes an exemption.
Under current Treasury Regulations, payments on the sale, exchange or
other disposition of a Note made to or through a foreign office of a broker
generally will not be subject to backup withholding, and generally will not
be subject to information reporting requirements. However, if such broker is
a United States person, a controlled foreign corporation for United States
tax purposes or a foreign person 50 percent or more of whose gross income is
effectively connected with a United States trade or business for a specified
three-year period, information reporting (but not backup withholding) will be
required unless the broker has in its records documentary evidence that the
beneficial owner is not a United States Holder
36
<PAGE>
and certain other conditions are met or the beneficial owner otherwise
establishes an exemption. Payments made to or through the United States
office of a broker will be subject to backup withholding and information
reporting unless the Non-United States Holder certifies, under penalties of
perjury, that it is not a United States person or otherwise establishes an
exemption.
In general, the 1997 Final Regulations do not significantly alter the
substantive backup withholding and information reporting requirements
described above. As under current law, backup withholding and information
reporting will not apply to (i) payments to a Non-United States Holder of
principal, premium and interest (including OID, if any) and (ii) payments to
a Non-United States Holder on the sale, exchange or other disposition of a
Note, in each case if such Non-United States Holder provides the required
certification to establish an exemption from the withholding of the United
States federal income tax or otherwise establishes an exemption. Similarly,
unless the payor has actual knowledge that the payee is a United States
Holder, backup withholding will not apply to (i) payments of principal,
premium and interest (including OID, if any) made outside the United States
to certain offshore accounts and (ii) payments on the sale, exchange,
redemption, retirement or other disposition of a Note effected outside the
United States. However, information reporting may apply with respect to such
payments by a payor that is, for United States federal income tax purposes,
(i) a United States person, (ii) a controlled foreign corporation, (iii) a
United States branch of a foreign bank or foreign insurance company, (iv) a
foreign partnership controlled by United States persons or engaged in a
United States trade or business or (v) 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, unless such payor has in
its records documentary evidence that the beneficial owner is not a United
States Holder and certain other conditions are met or the beneficial owner
otherwise establishes an exemption.
Non-United States Holders of Notes should consult their tax advisors
regarding the application of information reporting and backup withholding in
their particular situations, the availability of an exemption therefrom, and
the procedure for obtaining such an exemption, if available. Any amounts
withheld from payment to a Non-United States Holder under the backup
withholding rules will be allowed as a credit against such Holder's United
States federal income tax liability and may entitle such Holder to a refund,
provided that the required information is furnished to the IRS.
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
37
<PAGE>
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.
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 June 12, 1998, he owned directly and/or beneficially 6,606
shares of common stock of MidAmerican Energy Holdings Company and had been
granted, pursuant to and subject to the terms of MidAmerican Energy Holdings
Company's Long-Term Incentive Plan, options to purchase 20,000 shares of
MidAmerican Energy Holdings Company common stock and 10,543 performance
shares.
EXPERTS
The consolidated balance sheets and statements of capitalization as of
December 31, 1997 and 1996 and the consolidated statements of income,
retained earnings and cash flows for each of the three years in the period
ended December 31, 1997, incorporated by reference in this prospectus, have
been incorporated herein in reliance on the report of Coopers & Lybrand
L.L.P., independent accountants, given on the authority of that firm as
experts in acounting and auditing.
38
