PROSPECTUS SUPPLEMENT
- ---------------------
(To Prospectus dated August 18, 1997) Reg # 333-33413
424(b)(2)
$200,000,000
THE POTOMAC EDISON COMPANY
SECURED MEDIUM-TERM NOTES, SERIES A
(A SERIES OF FIRST MORTGAGE BONDS)
AND
UNSECURED MEDIUM-TERM NOTES, SERIES A
EACH DUE NINE MONTHS OR MORE FROM DATE OF ISSUE
------------------
The Potomac Edison Company (the "Company") may offer from time to time
up to $200,000,000 aggregate principal amount, or the equivalent thereof in one
or more foreign or composite currencies, of its Medium-Term Notes Due Nine
Months or More From Date of Issue (the "Notes"), consisting of its Unsecured
Medium-Term Notes, Series A, Due Nine Months or More From Date of Issue (the
"Unsecured Notes") and its Secured Medium-Term Notes, Series A (a series of its
First Mortgage Bonds), Due Nine Months or More From Date of Issue (the "Secured
Notes"). Such aggregate principal amount is subject to reduction as a result of
the sale by the Company of other New Bonds and New Debt Securities described in
the accompanying Prospectus. Each Note will mature on any day nine months or
more from the date of issue, as specified in the applicable pricing supplement
hereto (each, a "Pricing Supplement"), and may be subject to redemption under
other circumstances at the option of the Company or repayment at the option of
the Holder thereof, in each case, in whole or in part, prior to its Stated
Maturity Date, if specified in the applicable Pricing Supplement. In addition,
the Secured Notes will be subject to redemption under certain circumstances at
the option of the Company.
The Company may issue Unsecured Notes and Secured Notes that bear
interest at fixed rates ("Fixed Rate Notes") or Unsecured Notes that bear
interest at floating rates ("Floating Rate Notes"). The applicable Pricing
Supplement will specify whether a Floating Rate Note is a Regular Floating Rate
Note, a Floating Rate/Fixed Rate Note or an Inverse Floating Rate Note and
whether the rate of interest thereon is determined by reference to one or more
of the CD Rate, the CMT Rate, the Commercial Paper Rate, the Eleventh District
Cost of Funds Rate, the Federal Funds Rate, LIBOR, the Prime Rate or the
Treasury Rate (each, an "Interest Rate Basis"), or any other interest rate basis
or formula, as adjusted by any Spread and/or Spread Multiplier. Interest on each
Floating Rate Note will accrue from its date of issue and, unless otherwise
specified in the applicable Pricing Supplement, will be payable monthly,
quarterly, semiannually or annually in arrears, as specified in the applicable
Pricing Supplement, and on the Maturity Date. Unless otherwise specified in the
applicable Pricing Supplement, the rate of interest on each Floating Rate Note
will be reset daily, weekly, monthly, quarterly, semiannually or annually, as
specified in the applicable Pricing Supplement. Interest on each Fixed Rate Note
will accrue from its date of issue and, unless otherwise specified in the
applicable Pricing Supplement, will be payable semiannually in arrears on March
1 and September 1 of each year and on the Maturity Date. The Company may also
issue Notes as Discount Notes and Unsecured Notes as Indexed Notes and
Amortizing Notes.
Each Note will be denominated and/or payable in United States dollars
or, in the case of Unsecured Notes, a foreign or composite currency, as
specified in the applicable Pricing Supplement. The Notes, other than Foreign
Currency Unsecured Notes, will be issued in minimum denominations of $1,000 and
integral multiples thereof, unless otherwise specified in the applicable Pricing
Supplement, while Foreign Currency Unsecured Notes will be issued in the minimum
denominations specified in the applicable Pricing Supplement. The interest rate,
or formula for the determination of the interest rate, if any, applicable to
each Note and the other variable terms thereof will be established by the
Company on the date of issue of such Note and will be specified in the
applicable Pricing Supplement. Interest rates or formulas and other terms of
Notes are subject to change by the Company, but no such change will affect any
Note previously issued or as to which an offer to purchase has been accepted by
the Company.
Each Note will be issued in book-entry form (a "Book-Entry Note") or in
fully registered certificated form (a "Certificated Note"), as specified in the
applicable Pricing Supplement. Each Book-Entry Note will be represented by one
or more fully registered global securities (the "Global Securities") deposited
with or on behalf of The Depository Trust Company (or such other depositary
identified in the applicable Pricing Supplement) (the "Depositary") and
registered in the name of the Depositary or the Depositary's nominee. Interests
in the Global Securities will be shown on, and transfers thereof will be
effected only through, records maintained by the Depositary (with respect to its
participants) and the Depositary's participants (with respect to beneficial
owners). Except in limited circumstances, Book-Entry Notes will not be
exchangeable for Certificated Notes.
SEE "RISK FACTORS" COMMENCING ON PAGE S-2 FOR A DISCUSSION OF CERTAIN
RISKS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES
OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT, THE PROSPECTUS
OR ANY SUPPLEMENT HERETO. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
===============================================================================================================
Price to Agents' Discounts Proceeds to
Public(1) and Commissions(1)(2) Company (1)(3)
- ---------------------------------------------------------------------------------------------------------------
Per Note................ 100% .125%-.750% 99.875%-99.250%
===============================================================================================================
Total(4)................ $200,000,000 $250,000-$1,500,000 $199,750,000-$198,500,000
===============================================================================================================
(1) Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated,
First Chicago Capital Markets, Inc. and Goldman, Sachs & Co. (the
"Agents"), individually or in a syndicate, may purchase Notes, as
principal, from the Company for resale to investors and other purchasers at
varying prices relating to prevailing market prices at the time of resale
as determined by the applicable Agent or, if so specified in the applicable
Pricing Supplement, for resale at a fixed offering price. Unless otherwise
specified in the applicable Pricing Supplement, any Note sold to an Agent
as principal will be purchased by such Agent at a price equal to 100% of
the principal amount thereof less a percentage of the principal amount
equal to the commission applicable to an agency sale (as described below)
of a Note of identical maturity. If agreed to by the Company and an Agent,
such Agent will utilize its reasonable efforts on an agency basis to
solicit offers to purchase the Notes at 100% of the principal amount
thereof, unless otherwise specified in the applicable Pricing Supplement.
The Company will pay a commission to an Agent, ranging from .125% to .750%
of the principal amount of a Note, depending upon its stated maturity, sold
through an Agent. Commissions with respect to Notes with stated maturities
in excess of 30 years that are sold through such Agent will be negotiated
between the Company and such Agent at the time of such sale. See "Plan of
Distribution."
(2) The Company has agreed to indemnify the Agents against, and to provide
contribution with respect to, certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Plan of Distribution."
(3) Before deducting expenses payable by the Company estimated at $319,992.
(4) Or the equivalent thereof in one or more foreign or composite currencies.
---------------
The Notes are being offered on a continuing basis by the Company to or
through the Agents. Unless otherwise specified in the applicable Pricing
Supplement, the Notes will not be listed on any securities exchange. There is no
assurance that the Notes offered hereby will be sold or, if sold, that there
will be a secondary market for the Notes or liquidity in the secondary market if
one develops. The Company reserves the right to cancel or modify the offer made
hereby without notice. The Company or an Agent, if it solicits the offer on an
agency basis, may reject any offer to purchase Notes in whole or in part. See
"Plan of Distribution."
-------------------
MERRILL LYNCH & CO.
FIRST CHICAGO CAPITAL MARKETS, INC.
GOLDMAN, SACHS & CO.
-------------------
The date of this Prospectus Supplement is November 14, 1997.
IN CONNECTION WITH AN OFFERING OF NOTES PURCHASED BY ONE OR MORE AGENTS
AS PRINCIPAL ON A FIXED PRICE OFFERING BASIS, SUCH AGENT(S) MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF NOTES.
SUCH TRANSACTIONS MAY INCLUDE STABILIZING AND THE PURCHASE OF NOTES TO COVER
SHORT POSITIONS OF SUCH AGENT(S). FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"PLAN OF DISTRIBUTION."
--------------------
RISK FACTORS
THIS PROSPECTUS SUPPLEMENT DOES NOT DESCRIBE ALL OF THE RISKS OF AN
INVESTMENT IN NOTES, WHETHER RESULTING FROM SUCH NOTES BEING DENOMINATED OR
PAYABLE IN OR DETERMINED BY REFERENCE TO A CURRENCY OR COMPOSITE CURRENCY OTHER
THAN UNITED STATES DOLLARS OR TO ONE OR MORE INTEREST RATE, CURRENCY OR OTHER
INDICES OR FORMULAS, OR OTHERWISE. THE COMPANY AND THE AGENTS DISCLAIM ANY
RESPONSIBILITY TO ADVISE PROSPECTIVE INVESTORS OF SUCH RISKS AS THEY EXIST AT
THE DATE OF THIS PROSPECTUS SUPPLEMENT OR AS THEY CHANGE FROM TIME TO TIME.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN FINANCIAL AND LEGAL ADVISORS AS
TO THE RISKS ENTAILED BY AN INVESTMENT IN SUCH NOTES AND THE SUITABILITY OF
INVESTING IN SUCH NOTES IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES. SUCH NOTES
ARE NOT AN APPROPRIATE INVESTMENT FOR INVESTORS WHO ARE UNSOPHISTICATED WITH
RESPECT TO FOREIGN CURRENCY TRANSACTIONS OR TRANSACTIONS INVOLVING THE
APPLICABLE INTEREST RATE OR CURRENCY INDEX OR OTHER INDICES OR FORMULAS.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER, AMONG OTHER FACTORS, THE
MATTERS DESCRIBED BELOW.
STRUCTURE RISKS
An investment in Notes indexed, as to principal, premium, if any,
and/or interest, if any, to one or more interest rate, currency (including
exchange rates and swap indices between currencies or composite currencies) or
other indices or formulas, either directly or inversely, entails significant
risks that are not associated with similar investments in a conventional fixed
rate or floating rate debt security. Such risks include, without limitation, the
possibility that such indices or formulas may be subject to significant changes,
that no interest will be payable in respect of such Notes or will be payable at
a rate lower than one applicable to a conventional fixed rate or floating rate
debt security issued by the Company at the same time, that repayment of the
principal and/or premium, if any, in respect of such Notes may occur at times
other than that expected by the Holders (as defined in the accompanying
Prospectus), and that the Holders could lose all or a substantial portion of
principal and/or premium, if any, payable with respect to such Notes on the
Maturity Date (as defined under "Description of Notes--General"). Such risks
depend on a number of interrelated factors, including economic, financial and
political events, over which the Company has no control. Additionally, if the
formula used to determine the amount of principal, premium, if any, and/or
interest, if any, payable with respect to such Notes contains a multiplier or
leverage factor, the effect of any change in the applicable index or indices or
formula or formulas will be magnified. In recent years, values of certain
indices and formulas have been highly volatile and such volatility may be
expected to continue in the future. Fluctuations in the value of any particular
index or formula that have occurred in the past are not necessarily indicative,
however, of fluctuations that may occur in the future.
Any optional redemption feature of Notes might affect the market value
of such Notes. Since the Company may be expected to redeem such Notes when
prevailing interest rates are relatively low, Holders generally will not be able
to reinvest the redemption proceeds in a comparable security at an effective
interest rate as high as the current interest rate on such Notes.
The Notes will not have an established trading market when issued, and
there can be no assurance of a secondary market for the Notes or the liquidity
of the secondary market if one develops. See "Plan of Distribution."
The secondary market, if any, for Notes will be affected by a number of
factors independent of the creditworthiness of the Company and the value of the
applicable index or indices or formula or formulas, including the complexity and
volatility of each such index or formula, the method of calculating the
principal, premium, if any, and/or interest, if any, in respect of such Notes,
the time remaining to the maturity of such Notes, the outstanding amount of such
Notes, any redemption features of such Notes, the amount of other debt
securities linked to such index or formula and the level, direction and
volatility of market interest rates generally. Such factors also
S-2
will affect the market value of such Notes. In addition, certain Notes may be
designed for specific investment objectives or strategies and, therefore, may
have a more limited secondary market and experience more price volatility than
conventional debt securities. Holders may not be able to sell such Notes readily
or at prices that will enable them to realize their anticipated yield. No
investor should purchase Notes unless such investor understands and is able to
bear the risk that such Notes may not be readily saleable, that the value of
such Notes will fluctuate over time and that such fluctuations may be
significant.
EXCHANGE RATES AND EXCHANGE CONTROLS
An investment in Foreign Currency Unsecured Notes (as defined under
"Description of Notes--General") entails significant risks that are not
associated with a similar investment in a debt security denominated and payable
in United States dollars. Such risks include, without limitation, the
possibility of significant changes in the rate of exchange between the United
States dollar and the Specified Currency (as defined under "Description of Notes
- -- General") and the possibility of the imposition or modification of exchange
controls by the applicable governments or monetary authorities. Such risks
generally depend on factors over which the Company has no control, such as
economic, financial and political events and the supply and demand for the
applicable currencies or composite currencies. In addition, if the formula used
to determine the amount of principal, premium, if any, and/or interest, if any,
payable with respect to Foreign Currency Unsecured Notes contains a multiplier
or leverage factor, the effect of any change in the applicable currencies or
composite currencies will be magnified. In recent years, rates of exchange
between the United States dollar and foreign or composite currencies have been
highly volatile and such volatility may be expected to continue in the future.
Fluctuations in any particular exchange rate that have occurred in the past are
not necessarily indicative, however, of fluctuations that may occur in the
future. Depreciation of the Specified Currency applicable to a Foreign Currency
Note against the United States dollar would result in a decrease in the United
States dollar-equivalent yield of such Foreign Currency Note, in the United
States dollar-equivalent value of the principal and premium, if any, payable on
the Maturity Date of such Foreign Currency Note, and, generally, in the United
States dollar-equivalent market value of such Foreign Currency Note.
Governments or monetary authorities have imposed from time to time, and
may in the future impose or revise, exchange controls at or prior to the date on
which any payment of principal of, or premium, if any, or interest, if any, on,
a Foreign Currency Note is due, which could affect exchange rates as well as the
availability of the Specified Currency on such date. Even if there are no
exchange controls, it is possible that the Specified Currency would not be
available on the applicable payment date due to other circumstances beyond the
control of the Company. In such cases, the Company will be entitled to satisfy
its obligations in respect of such Foreign Currency Note in United States
dollars. See "Special Provisions Relating to Foreign Currency Unsecured
Notes--Availability of Specified Currency."
CREDIT RATINGS
The credit ratings assigned to the Company's medium-term note program
may not reflect the potential impact of all risks related to structure and other
factors on the value of the Notes. Accordingly, prospective investors should
consult their own financial and legal advisors as to the risks entailed by an
investment in the Notes and the suitability of investing in such Notes in light
of their particular circumstances.
S-3
DESCRIPTION OF NOTES
The Secured Notes will be issued as a series of New Bonds under an
Indenture, dated as of October 1, 1944, as amended or modified from time to time
(the "Secured Indenture"), between the Company and The Chase Manhattan Bank, as
trustee (the "Secured Trustee"). The Unsecured Notes will be issued as a series
of New Debt Securities under an Indenture, dated as of May 31, 1995, as amended
or modified from time to time (the "Unsecured Indenture"), between the Company
and The Bank of New York, as trustee (the "Unsecured Trustee"). The Secured
Indenture and the Unsecured Indenture are subject to, and governed by, the Trust
Indenture Act of 1939, as amended. The following summary of certain provisions
of the Notes, the Secured Indenture and the Unsecured Indenture does not purport
to be complete and is qualified in its entirety by reference to the actual
provisions of the Notes and the Secured Indenture and the Unsecured Indenture,
as the case may be. Capitalized terms used but not defined herein shall have the
meanings given to them in the accompanying Prospectus, the Notes, the Secured
Indenture and the Unsecured Indenture, as the case may be. The following
description of Notes will apply to each Note offered hereby unless otherwise
specified in the applicable Pricing Supplement.
GENERAL
All Unsecured Notes will be unsecured general obligations of the
Company and will rank PARI PASSU with all other unsecured and unsubordinated
indebtedness of the Company from time to time outstanding. The Secured Notes
will be equally and ratably secured with all other First Mortgage Bonds issued
or to be issued under the Secured Indenture. For further information concerning
the security for the Secured Notes, see "Description of the New Bonds--Security"
in the accompanying Prospectus. Debt securities may be issued under the Secured
Indenture and the Unsecured Indenture from time to time in one or more series up
to the aggregate principal amount from time to time authorized by the Company
for each series. The Company may, from time to time, without the consent of the
registered holders (the "Holders") of the Notes, provide for the issuance of
Notes in addition to the $200,000,000 aggregate principal amount of Notes
offered hereby.
The Notes are currently limited to an aggregate principal amount not to
exceed $200,000,000 or, in the case of Unsecured Notes, the equivalent thereof
in one or more foreign or composite currencies. Each Note will mature on any day
nine months or more from its date of issue (the "Stated Maturity Date"), as
specified in the applicable Pricing Supplement, unless the principal thereof (or
any installment of principal thereof) becomes due and payable prior to the
Stated Maturity Date, whether by the declaration of acceleration of maturity,
notice of redemption at the option of the Company, notice of the Holder's option
to elect repayment or otherwise (the Stated Maturity Date or such prior date, as
the case may be, is herein referred to as the "Maturity Date" with respect to
the principal of such Note repayable on such date). Interest-bearing Unsecured
Notes will be Fixed Rate Notes or Floating Rate Notes, while interest-bearing
Secured Notes will be Fixed Rate Notes, in each case as specified in the
applicable Pricing Supplement. The Company may also issue Unsecured Notes and
Secured Notes as Discount Notes (as hereinafter defined) and Unsecured Notes as
Indexed Notes and Amortizing Notes (as such terms are hereinafter defined).
Unless otherwise specified in the applicable Pricing Supplement, the
Notes will be denominated in, and payments of principal, premium, if any, and/or
interest, if any, in respect thereof will be made in, United States dollars.
Unsecured Notes also may be denominated in, and payments of principal, premium,
if any, and/or interest, if any, in respect thereof may be made in, one or more
foreign or composite currencies ("Foreign Currency Unsecured Notes"). See
"Special Provisions Relating to Foreign Currency Unsecured Notes--Payment of
Principal, Premium, if any, and Interest, if any." The currency or composite
currency in which a particular Note is denominated (or, if such currency or
composite currency is no longer legal tender for the payment of public and
private debts in the relevant country, such other currency or composite currency
which is then legal tender for the payment of such debts) is herein referred to
as the "Specified Currency" with respect to such Note. References herein to
"United States dollars", "U.S. dollars" or "$" are to the lawful currency of the
United States of America (the "United States").
S-4
Unless otherwise specified in the applicable Pricing Supplement,
purchasers are required to pay for the Notes in the applicable Specified
Currencies. At the present time, there are limited facilities in the United
States for the conversion of United States dollars into foreign or composite
currencies and vice versa, and commercial banks do not generally offer
non-United States dollar checking or savings account facilities in the United
States. The Agent from or through which a Foreign Currency Note is purchased may
be prepared to arrange for the conversion of United States dollars into the
Specified Currency in order to enable the purchaser to pay for such Foreign
Currency Note, provided that a request is made to such Agent on or prior to the
fifth Business Day (as hereinafter defined) preceding the date of delivery of
such Foreign Currency Note, or by such other day as determined by such Agent.
Each such conversion will be made by such Agent on such terms and subject to
such conditions, limitations and charges as such Agent may from time to time
establish in accordance with its regular foreign exchange practices. All costs
of exchange will be borne by the purchaser of each such Foreign Currency Note.
See "Special Provisions Relating to Foreign Currency Unsecured Notes."
Interest rates offered by the Company with respect to the Notes may
differ depending upon, among other factors, the aggregate principal amount of
Notes purchased in any single transaction. Notes with different variable terms
other than interest rates may also be offered concurrently to different
investors. Interest rates or formulas and other terms of Notes are subject to
change by the Company from time to time, but no such change will affect any Note
previously issued or as to which an offer to purchase has been accepted by the
Company.
Each Note will be issued as a Book-Entry Note represented by one or
more fully registered Global Securities or as a fully registered Certificated
Note. The minimum denominations of each Note other than a Foreign Currency Note
will be $1,000 and integral multiples thereof, unless otherwise specified in the
applicable Pricing Supplement, while the minimum denominations of each Foreign
Currency Note will be specified in the applicable Pricing Supplement.
Payments of principal of, and premium, if any, and interest, if any,
on, Book-Entry Notes will be made by the Company through the Unsecured Trustee
or the Secured Trustee, as the case may be, to the Depositary. See "--Book-Entry
Notes." In the case of Certificated Notes, payment of principal and premium, if
any, due on the Maturity Date will be made in immediately available funds upon
presentation and surrender thereof (and, in the case of any repayment on an
Optional Repayment Date, upon submission of a duly completed election form in
accordance with the provisions described below) at the offices or agencies
maintained by the Company for such purpose in the Borough of Manhattan, The City
of New York, currently the principal corporate trust office of the Unsecured
Trustee (in the case of the Unsecured Notes) located at 101 Barclay Street,
Floor 21 West, New York, New York 10286, or the corporate trust office of the
Secured Trustee (in the case of the Secured Notes) located at 450 West 33rd
Street, 15th Floor, New York, New York 10001. Payment of interest, if any, due
on the Maturity Date of a Certificated Note will be made to the person to whom
payment of the principal thereof and premium, if any, thereon shall be made.
Payment of interest, if any, due on a Certificated Note on any Interest Payment
Date (as hereinafter defined) other than the Maturity Date will be made by check
mailed to the address of the Holder entitled thereto as such address shall
appear in the Security Register of the Company. Notwithstanding the foregoing, a
Holder of $10,000,000 (or, if the Specified Currency is other than United States
dollars, the equivalent thereof in such Specified Currency) or more in aggregate
principal amount of Certificated Notes (whether having identical or different
terms and provisions) will be entitled to receive interest payments, if any, on
any Interest Payment Date other than the Maturity Date by wire transfer of
immediately available funds if appropriate wire transfer instructions have been
received in writing by the Unsecured Trustee or the Secured Trustee, as
applicable, not less than 15 days prior to such Interest Payment Date. Any such
wire transfer instructions received by the Unsecured Trustee or the Secured
Trustee, as applicable, shall remain in effect until revoked by such Holder. For
special payment terms applicable to Foreign Currency Unsecured Notes, see
"Special Provisions Relating to Foreign Currency Unsecured Notes--Payment of
Principal, Premium, if any, and Interest, if any."
As used herein, "Business Day" means any day, other than a Saturday or
Sunday, that is neither a legal holiday nor a day on which banking institutions
are authorized or required by law, regulation or executive order to close in The
City of New York; provided, however, that, with respect to Foreign Currency
Unsecured Notes, such day is also not a day on which banking institutions are
authorized or required by law, regulation or executive order to close in the
Principal Financial Center (as hereinafter defined) of the country issuing the
Specified Currency
S-5
(unless the Specified Currency is European Currency Units ("ECU"), in which case
such day is also not a day that appears as an ECU non-settlement day on the
display designated as "ISDE" on the Reuter Monitor Money Rates Service (or is
not a day designated as an ECU non-settlement day by the ECU Banking
Association) or, if ECU non-settlement days do not appear on that page (and are
not so designated), a day that is not a day on which payments in ECU cannot be
settled in the international interbank market); provided, further, that, with
respect to Notes as to which LIBOR is an applicable Interest Rate Basis, such
day is also a London Business Day (as hereinafter defined). "London Business
Day" means a day on which dealings in the Designated LIBOR Currency (as
hereinafter defined) are transacted in the London interbank market.
"Principal Financial Center" means (i) the capital city of the country
issuing the Specified Currency (except as described in the immediately preceding
paragraph with respect to ECU) or (ii) the capital city of the country to which
the Designated LIBOR Currency relates (or, in the case of ECU, Luxembourg), as
applicable, except, in the case of (i) or (ii), that with respect to United
States dollars, Australian dollars, Canadian dollars, Deutsche marks, Dutch
guilders, Italian lire and Swiss francs, the "Principal Financial Center" shall
be The City of New York, Sydney, Toronto, Frankfurt, Amsterdam, Milan (solely in
the case of the Specified Currency) and Zurich, respectively.
Book-Entry Notes may be transferred or exchanged only through the
Depositary. See "--Book-Entry Notes." Registration of transfer or exchange of
Certificated Notes will be made at the offices or agencies maintained by the
Company for such purpose in the Borough of Manhattan, The City of New York,
currently the corporate trust offices of the Unsecured Trustee and the Secured
Trustee, respectively, referred to above. No service charge will be made by the
Company, the Unsecured Trustee or the Secured Trustee for any such registration
of transfer or exchange of Notes, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection therewith (other than exchanges pursuant to the Secured Indenture and
the Unsecured Indenture not involving any transfer).
REDEMPTION AT THE OPTION OF THE COMPANY
Unless otherwise specified in the applicable Pricing 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 Date only as specified
below.
If an Initial Redemption Date is specified in the applicable Pricing
Supplement, the Notes will be subject to redemption at the option of the Company
on any date on and after such Initial Redemption Date in whole or from time to
time in part in increments of $1,000 or any other integral multiple of an
authorized denomination specified in such Pricing Supplement (provided that any
remaining principal amount thereof shall be at least $1,000 or the minimum
authorized denomination applicable thereto), at the applicable Redemption Price
(as hereinafter defined), together with unpaid interest accrued thereon to the
date of redemption, on written notice given to the Holders thereof not more than
60 nor less than 30 calendar days prior to the date of redemption and in
accordance with the provisions of the Secured Indenture or the Unsecured
Indenture, as the case may be. "Redemption Price", with respect to a Note, means
an amount equal to the Initial Redemption Percentage specified in the applicable
Pricing Supplement (as adjusted by the Annual Redemption Percentage Reduction,
if applicable) multiplied by the unpaid principal amount to be redeemed. The
Initial Redemption Percentage, if any, applicable to a Note shall decline at
each anniversary of the Initial Redemption Date by an amount equal to the
applicable Annual Redemption Percentage Reduction, if any, until the Redemption
Price is equal to 100% of the unpaid principal amount to be redeemed.
In addition, the Secured Notes will be subject to redemption at a
Special Redemption Price of 100%, plus accrued interest with cash deposited in
the trust estate, such as proceeds of released property, property taken by
eminent domain or insurance. Redemptions of the Secured Notes during any
12-month period beginning April 30 at the Special Redemption Price with cash
included in the trust estate may not exceed the greater of (a) 1% of the
principal amount of Secured Notes issued and outstanding from time to time or
(b) the lowest percentage so redeemed of First Mortgage Bonds of any other
series under the Secured Indenture then redeemable during such period relative
to the respective aggregate principal amount of First Mortgage Bonds of such
series originally issued.
S-6
For a discussion of the redemption of Discount Notes, see "--Discount
Notes."
REPAYMENT AT THE OPTION OF THE HOLDER
The Notes will be repayable by the Company at the option of the Holders
thereof prior to the Stated Maturity Date only if one or more Optional Repayment
Dates are specified in the applicable Pricing Supplement. If so specified, the
Notes will be subject to repayment at the option of the Holders thereof on any
Optional Repayment Date in whole or from time to time in part in increments of
$1,000 or any other integral multiple of an authorized denomination specified in
the applicable Pricing Supplement (provided that any remaining principal amount
thereof shall be at least $1,000 or the minimum authorized denomination
applicable thereto), at a repayment price equal to 100% of the unpaid principal
amount to be repaid, together with unpaid interest accrued thereon to the date
of repayment. For any Note to be repaid, such Note must be received, together
with the form thereon entitled "Option to Elect Repayment" duly completed, by
the Unsecured Trustee or the Secured Trustee, as applicable, at its office, not
more than 60 nor less than 30 calendar days prior to the date of repayment.
Exercise of such repayment option by the Holder will be irrevocable. For a
discussion of the repayment of Discount Notes, see "--Discount Notes."
Only the Depositary may exercise the repayment option in respect of
Global Securities representing Book-Entry Notes. Accordingly, Beneficial Owners
(as hereinafter defined) of Global Securities that desire to have all or any
portion of the Book-Entry Notes represented by such Global Securities repaid
must instruct the Participant (as hereinafter defined) through which they own
their interest to direct the Depositary to exercise the repayment option on
their behalf by delivering the related Global Security and duly completed
election form to either the Unsecured Trustee or the Secured Trustee, as
applicable, as aforesaid. In order to ensure that such Global Security and
election form are received by the Unsecured Trustee or the Secured Trustee, as
applicable, on a particular day, the applicable Beneficial Owner must so
instruct the Participant through which it owns its interest before such
Participant's deadline for accepting instructions for that day. Different firms
may have different deadlines for accepting instructions from their customers.
Accordingly, Beneficial Owners should consult the Participants through which
they own their interest for the respective deadlines for such Participants. All
instructions given to Participants from Beneficial Owners of Global Securities
relating to the option to elect repayment shall be irrevocable. In addition, at
the time such instructions are given, each such Beneficial Owner shall cause the
Participant through which it owns its interest to transfer such Beneficial
Owner's interest in the Global Security or Securities representing the related
Book-Entry Notes, on the Depositary's records, to the Unsecured Trustee or the
Secured Trustee, as applicable. See "--Book-Entry Notes."
If applicable, the Company will comply with the requirements of Section
14(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and the rules promulgated thereunder, and any other securities laws or
regulations in connection with any such repayment.
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, at the
discretion of the Company, be held, resold or surrendered to the Unsecured
Trustee or the Secured Trustee, as applicable, for cancellation.
INTEREST
GENERAL
Unless otherwise specified in the applicable Pricing Supplement, each
interest-bearing Note will bear interest from its date of issue at the rate per
annum, in the case of a Fixed Rate Note, or pursuant to the interest rate
formula, in the case of a Floating Rate Note, in each case as specified in the
applicable Pricing Supplement, until the principal thereof is paid or duly made
available for payment. Unless otherwise specified in the applicable Pricing
Supplement, interest payments in respect of Fixed Rate Notes and Floating Rate
Notes will be made in an amount equal to the interest accrued from and including
the immediately preceding Interest Payment Date in respect of which interest has
been paid or duly made available for payment (or from and including the date of
issue, if no
S-7
interest has been paid or duly made available for payment) to but excluding the
applicable Interest Payment Date or the Maturity Date, as the case may be (each,
an "Interest Period").
Interest on Fixed Rate Notes and Floating Rate Notes will be payable in
arrears on each Interest Payment Date and on the Maturity Date. Unless otherwise
specified in the applicable Pricing Supplement, the first payment of interest on
any such Note originally issued between a Record Date (as hereinafter defined)
and the related Interest Payment Date will be made on the Interest Payment Date
immediately following the next succeeding Record Date to the Holder on such next
succeeding Record Date. Unless otherwise specified in the applicable Pricing
Supplement, a "Record Date" shall be the fifteenth calendar day (whether or not
a Business Day) immediately preceding the related Interest Payment Date.
FIXED RATE NOTES
Interest on Fixed Rate Notes will be payable in arrears on March 1 and
September 1 of each year or on such other date(s) specified in the applicable
Pricing Supplement (each, an "Interest Payment Date" with respect to Fixed Rate
Notes) and on the Maturity Date. Unless otherwise specified in the applicable
Pricing Supplement, interest on Fixed Rate Notes will be computed on the basis
of a 360-day year of twelve 30-day months.
If any Interest Payment Date or the Maturity Date of a Fixed Rate Note
falls on a day that is not a Business Day, the required payment of principal,
premium, if any, and/or interest will be made on the next succeeding Business
Day as if made on the date such payment was due, and no interest will accrue on
such payment for the period from and after such Interest Payment Date or the
Maturity Date, as the case may be, to the date of such payment on the next
succeeding Business Day.
FLOATING RATE NOTES
Interest on Floating Rate Notes will be determined by reference to the
applicable Interest Rate Basis or Interest Rate Bases, which may, as described
below, include (i) the CD Rate, (ii) the CMT Rate, (iii) the Commercial Paper
Rate, (iv) the Eleventh District Cost of Funds Rate, (v) the Federal Funds Rate,
(vi) LIBOR, (vii) the Prime Rate, (viii) the Treasury Rate, or (ix) such other
Interest Rate Basis or interest rate formula as may be specified in the
applicable Pricing Supplement. The applicable Pricing Supplement will specify
certain terms with respect to which each Floating Rate Note is being delivered,
including: whether such Floating Rate Note is a "Regular Floating Rate Note," a
"Floating Rate/Fixed Rate Note" or an "Inverse Floating Rate Note," the Fixed
Rate Commencement Date, if applicable, Fixed Interest Rate, if applicable,
Interest Rate Basis or Bases, Initial Interest Rate, if any, Initial Interest
Reset Date, Interest Reset Dates, Interest Payment Dates, Index Maturity,
Maximum Interest Rate and/or Minimum Interest Rate, if any, and Spread and/or
Spread Multiplier, if any, as such terms are defined below. If one or more of
the applicable Interest Rate Bases is LIBOR or the CMT Rate, the applicable
Pricing Supplement will also specify the Designated LIBOR Currency and
Designated LIBOR Page or the Designated CMT Maturity Index and Designated CMT
Telerate Page, respectively, as such terms are defined below.
The interest rate borne by the Floating Rate Notes will be determined
as follows:
(i) Unless such Floating Rate Note is designated as a
"Floating Rate/Fixed Rate Note" or an "Inverse Floating Rate Note", or
as having an Addendum attached or having "Other/Additional Provisions"
apply, in each case relating to a different interest rate formula, such
Floating Rate Note will be designated as a "Regular Floating Rate Note"
and, except as described below or in the applicable Pricing Supplement,
will bear interest at the rate determined by reference to the
applicable Interest Rate Basis or Bases (a) plus or minus the
applicable Spread, if any, and/or (b) multiplied by the applicable
Spread Multiplier, if any. Commencing on the Initial Interest Reset
Date, the rate at which interest on such Regular Floating Rate Note
shall be payable shall be reset as of each Interest Reset Date;
provided, however, that the interest rate in effect for the period, if
any, from the date of issue to the Initial Interest Reset Date will be
the Initial Interest Rate.
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(ii) If such Floating Rate Note is designated as a "Floating
Rate/Fixed Rate Note," then, except as described below or in the
applicable Pricing Supplement, such Floating Rate Note will bear
interest at the rate determined by reference to the applicable Interest
Rate Basis or Bases (a) plus or minus the applicable Spread, if any,
and/or (b) multiplied by the applicable Spread Multiplier, if any.
Commencing on the Initial Interest Reset Date, the rate at which
interest on such Floating Rate/Fixed Rate Note shall be payable shall
be reset as of each Interest Reset Date; provided, however, that (y)
the interest rate in effect for the period, if any, from the date of
issue to the Initial Interest Reset Date will be the Initial Interest
Rate and (z) the interest rate in effect for the period commencing on
the Fixed Rate Commencement Date to the Maturity Date shall be the
Fixed Interest Rate, if such rate is specified in the applicable
Pricing Supplement or, if no such Fixed Interest Rate is specified, the
interest rate in effect thereon on the day immediately preceding the
Fixed Rate Commencement Date.
(iii) If such Floating Rate Note is designated as an "Inverse
Floating Rate Note," then, except as described below or in the
applicable Pricing Supplement, such Floating Rate Note will bear
interest at the Fixed Interest Rate minus the rate determined by
reference to the applicable Interest Rate Basis or Bases (a) plus or
minus the applicable Spread, if any, and/or (b) multiplied by the
applicable Spread Multiplier, if any; provided, however, that, unless
otherwise specified in the applicable Pricing Supplement, the interest
rate thereon will not be less than zero. Commencing on the Initial
Interest Reset Date, the rate at which interest on such Inverse
Floating Rate Note shall be payable shall be reset as of each Interest
Reset Date; provided, however, that the interest rate in effect for the
period, if any, from the date of issue to the Initial Interest Reset
Date will be the Initial Interest Rate.
The "Spread" is the number of basis points to be added to or subtracted
from the related Interest Rate Basis or Bases applicable to such Floating Rate
Note. The "Spread Multiplier" is the percentage of the related Interest Rate
Basis or Bases applicable to such Floating Rate Note by which such Interest Rate
Basis or Bases will be multiplied to determine the applicable interest rate on
such Floating Rate Note. The "Index Maturity" is the period to maturity of the
instrument or obligation with respect to which the related Interest Rate Basis
or Bases will be calculated.
Unless otherwise specified in the applicable Pricing Supplement, the
interest rate with respect to each Interest Rate Basis will be determined in
accordance with the applicable provisions below. Except as set forth above or in
the applicable Pricing Supplement, the interest rate in effect on each day shall
be (i) if such day is an Interest Reset Date, the interest rate determined as of
the Interest Determination Date (as hereinafter defined) immediately preceding
such Interest Reset Date or (ii) if such day is not an Interest Reset Date, the
interest rate determined as of the Interest Determination Date immediately
preceding the most recent Interest Reset Date.
The applicable Pricing Supplement will specify whether the rate of
interest on the related Floating Rate Note will be reset daily, weekly, monthly,
quarterly, semiannually or annually or on such other specified basis (each, an
"Interest Reset Period") and the dates on which such rate of interest will be
reset (each, an "Interest Reset Date"). Unless otherwise specified in the
applicable Pricing Supplement, the Interest Reset Dates will be, in the case of
Floating Rate Notes which reset: (i) daily, each Business Day; (ii) weekly, the
Wednesday of each week (with the exception of weekly reset Floating Rate Notes
as to which the Treasury Rate is an applicable Interest Rate Basis, which will
reset the Tuesday of each week, except as described below); (iii) monthly, the
third Wednesday of each month (with the exception of monthly reset Floating Rate
Notes as to which the Eleventh District Cost of Funds Rate is an applicable
Interest Rate Basis, which will reset on the first calendar day of the month);
(iv) quarterly, the third Wednesday of March, June, September and December of
each year; (v) semiannually, the third Wednesday of the two months specified in
the applicable Pricing Supplement; and (vi) annually, the third Wednesday of the
month specified in the applicable Pricing Supplement; provided however, that,
with respect to Floating Rate/Fixed Rate Notes, the rate of interest thereon
will not reset after the applicable Fixed Rate Commencement Date. If any
Interest Reset Date for any Floating Rate Note would otherwise be a day that is
not a Business Day, such Interest Reset Date will be postponed to the next
succeeding Business Day, except that in the case of a Floating Rate Note as to
which LIBOR is an applicable Interest Rate Basis and such Business Day falls in
the next succeeding calendar month, such Interest Reset Date will be the
immediately preceding Business Day.
S-9
The interest rate applicable to each Interest Reset Period commencing
on the related Interest Reset Date will be the rate determined by the
Calculation Agent (as hereinafter defined) as of the applicable Interest
Determination Date and calculated on or prior to the Calculation Date (as
hereinafter defined), except with respect to LIBOR and the Eleventh District
Cost of Funds Rate, which will be calculated on such Interest Determination
Date. The "Interest Determination Date" with respect to the CD Rate, the CMT
Rate, the Commercial Paper Rate, the Federal Funds Rate and the Prime Rate will
be the second Business Day immediately preceding the applicable Interest Reset
Date; the "Interest Determination Date" with respect to the Eleventh District
Cost of Funds Rate will be the last working day of the month immediately
preceding the applicable Interest Reset Date on which the Federal Home Loan Bank
of San Francisco (the "FHLB of San Francisco") publishes the Index (as
hereinafter defined); and the "Interest Determination Date" with respect to
LIBOR will be the second London Business Day immediately preceding the
applicable Interest Reset Date, unless the Designated LIBOR Currency is British
pounds sterling, in which case the "Interest Determination Date" will be the
applicable Interest Reset Date. With respect to the Treasury Rate, the "Interest
Determination Date" will be the day in the week in which the applicable Interest
Reset Date falls on which day Treasury Bills (as hereinafter defined) are
normally auctioned (Treasury Bills are normally sold at an auction held on
Monday of each week, unless that day is a legal holiday, in which case the
auction is normally held on the following Tuesday, except that such auction may
be held on the preceding Friday); provided, however, that if an auction is held
on the Friday of the week preceding the applicable Interest Reset Date, the
"Interest Determination Date" will be such preceding Friday; provided, further,
that if the Interest Determination Date would otherwise fall on an Interest
Reset Date, then such Interest Reset Date will be postponed to the next
succeeding Business Day. The "Interest Determination Date" pertaining to a
Floating Rate Note the interest rate of which is determined by reference to two
or more Interest Rate Bases will be the most recent Business Day which is at
least two Business Days prior to the applicable Interest Reset Date for such
Floating Rate Note on which each Interest Rate Basis is determinable. Each
Interest Rate Basis will be determined as of such date, and the applicable
interest rate will take effect on the applicable Interest Reset Date.
Notwithstanding the foregoing, a Floating Rate Note may also have
either or both of the following: (i) a Maximum Interest Rate, or ceiling, that
may accrue during any Interest Period and (ii) a Minimum Interest Rate, or
floor, that may accrue during any Interest Period. In addition to any Maximum
Interest Rate that may apply to any Floating Rate Note, the interest rate on
Floating Rate Notes will in no event be higher than the maximum rate permitted
by New York law, as the same may be modified by United States law of general
application.
Except as provided below or in the applicable Pricing Supplement,
interest will be payable in arrears, in the case of Floating Rate Notes which
reset: (i) daily, weekly or monthly, on the third Wednesday of each month or on
the third Wednesday of March, June, September and December of each year, as
specified in the applicable Pricing Supplement; (ii) quarterly, on the third
Wednesday of March, June, September and December of each year; (iii)
semiannually, on the third Wednesday of the two months of each year specified in
the applicable Pricing Supplement; and (iv) annually, on the third Wednesday of
the month of each year specified in the applicable Pricing Supplement (each, an
"Interest Payment Date" with respect to Floating Rate Notes) and, in each case,
on the Maturity Date. If any Interest Payment Date other than the Maturity Date
for any Floating Rate Note would otherwise be a day that is not a Business Day,
such Interest Payment Date will be postponed to the next succeeding Business
Day, except that in the case of a Floating Rate Note as to which LIBOR is an
applicable Interest Rate Basis and such Business Day falls in the next
succeeding calendar month, such Interest Payment Date will be the immediately
preceding Business Day. If the Maturity Date of a Floating Rate Note falls on a
day that is not a Business Day, the required payment of principal, premium, if
any, and interest will be made on the next succeeding Business Day as if made on
the date such payment was due, and no interest will accrue on such payment for
the period from and after the Maturity Date to the date of such payment on the
next succeeding Business Day.
All percentages resulting from any calculation on Floating Rate Notes
will be rounded to the nearest one hundred-thousandth of a percentage point,
with five-one millionths of a percentage point rounded upwards (E.G., 9.876545%
(or .09876545) would be rounded to 9.87655% (or .0987655)), and all amounts used
in or resulting from such calculation on Floating Rate Notes will be rounded, in
the case of United States dollars, to the nearest cent or, in the case of a
foreign or composite currency, to the nearest unit (with one-half cent or unit
being rounded upwards).
S-10
With respect to each Floating Rate Note, accrued interest is calculated
by multiplying its principal amount by an accrued interest factor. Such accrued
interest factor is computed by adding the interest factor calculated for each
day in the applicable Interest Period. Unless otherwise specified in the
applicable Pricing Supplement, the interest factor for each such day will be
computed by dividing the interest rate applicable to such day by 360, in the
case of Floating Rate Notes for which an applicable Interest Rate Basis is the
CD Rate, the Commercial Paper Rate, the Eleventh District Cost of Funds Rate,
the Federal Funds Rate, LIBOR or the Prime Rate, or by the actual number of days
in the year in the case of Floating Rate Notes for which an applicable Interest
Rate Basis is the CMT Rate or the Treasury Rate. Unless otherwise specified in
the applicable Pricing Supplement, the interest factor for Floating Rate Notes
for which the interest rate is calculated with reference to two or more Interest
Rate Bases will be calculated in each period in the same manner as if only the
applicable Interest Rate Basis specified in the applicable Pricing Supplement
applied.
Unless otherwise specified in the applicable Pricing Supplement, the
Unsecured Trustee will be the "Calculation Agent". Upon request of the Holder of
any Floating Rate Note, the Calculation Agent will disclose the interest rate
then in effect and, if determined, the interest rate that will become effective
as a result of a determination made for the next succeeding Interest Reset Date
with respect to such Floating Rate Note. Unless otherwise specified in the
applicable Pricing Supplement, the "Calculation Date," if applicable, pertaining
to any Interest Determination Date will be the earlier of (i) the tenth calendar
day after such Interest Determination Date or, if such day is not a Business
Day, the next succeeding Business Day or (ii) the Business Day immediately
preceding the applicable Interest Payment Date or the Maturity Date, as the case
may be.
Unless otherwise specified in the applicable Pricing Supplement, the
Calculation Agent shall determine each Interest Rate Basis in accordance with
the following provisions.
CD RATE. Unless otherwise specified in the applicable Pricing
Supplement, "CD Rate" means, with respect to any Interest Determination Date
relating to a Floating Rate Note for which the interest rate is determined with
reference to the CD Rate (a "CD Rate Interest Determination Date"), the rate on
such date for negotiable United States dollar certificates of deposit having the
Index Maturity specified in the applicable Pricing Supplement as published by
the Board of Governors of the Federal Reserve System in "Statistical Release
H.15(519), Selected Interest Rates" or any successor publication ("H.15(519)")
under the heading "CDs (Secondary Market)," or, if not published by 3:00 P.M.,
New York City time, on the related Calculation Date, the rate on such CD Rate
Interest Determination Date for negotiable United States dollar certificates of
deposit of the Index Maturity specified in the applicable Pricing Supplement as
published by the Federal Reserve Bank of New York in its daily statistical
release "Composite 3:30 P.M. Quotations for U.S. Government Securities" or any
successor publication ("Composite Quotations") under the heading "Certificates
of Deposit." If such rate is not yet published in either H.15(519) or Composite
Quotations by 3:00 P.M., New York City time, on the related Calculation Date,
then the CD Rate on such CD Rate Interest Determination Date will be calculated
by the Calculation Agent and will be the arithmetic mean of the secondary market
offered rates as of 10:00 A.M., New York City time, on such CD Rate Interest
Determination Date, of three leading nonbank dealers in negotiable United States
dollar certificates of deposit in The City of New York (which may include the
Agents or their affiliates) selected by the Calculation Agent, after
consultation with the Company, for negotiable United States dollar certificates
of deposit of major United States money center banks for negotiable certificates
of deposit with a remaining maturity closest to the Index Maturity specified in
the applicable Pricing Supplement in an amount that is representative for a
single transaction in that market at that time; provided, however, that if the
dealers so selected by the Calculation Agent, after consultation with the
Company, are not quoting as mentioned in this sentence, the CD Rate determined
as of such CD Rate Interest Determination Date will be the CD Rate in effect on
such CD Rate Interest Determination Date.
CMT RATE. Unless otherwise specified in the applicable Pricing
Supplement, "CMT Rate" means, with respect to any Interest Determination Date
relating to a Floating Rate Note for which the interest rate is determined with
reference to the CMT Rate (a "CMT Rate Interest Determination Date"), the rate
displayed on the Designated CMT Telerate Page under the caption "...Treasury
Constant Maturities...Federal Reserve Board Release H.15...Mondays Approximately
3:45 P.M.," under the column for the Designated CMT Maturity Index for (i) if
the Designated CMT Telerate Page is 7055, the rate on such CMT Rate Interest
Determination Date and (ii) if the Designated CMT Telerate Page is 7052, the
weekly or monthly average, as specified in the applicable Pricing
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Supplement, for the week or the month, as applicable, ended immediately
preceding the week or the month, as applicable, in which the related CMT Rate
Interest Determination Date falls. If such rate is no longer displayed on the
relevant page or is not displayed by 3:00 P.M., New York City time, on the
related Calculation Date, then the CMT Rate for such CMT Rate Interest
Determination Date will be such treasury constant maturity rate for the
Designated CMT Maturity Index as published in H.15(519). If such rate is no
longer published or is not published by 3:00 P.M., New York City time, on the
related Calculation Date, then the CMT Rate on such CMT Rate Interest
Determination Date will be such treasury constant maturity rate for the
Designated CMT Maturity Index (or other United States Treasury rate for the
Designated CMT Maturity Index) for the CMT Rate Interest Determination Date with
respect to such Interest Reset Date as may then be published by either the Board
of Governors of the Federal Reserve System or the United States Department of
the Treasury that the Calculation Agent determines to be comparable to the rate
formerly displayed on the Designated CMT Telerate Page and published in
H.15(519). If such information is not provided by 3:00 P.M., New York City time,
on the related Calculation Date, then the CMT Rate on the CMT Rate Interest
Determination Date will be calculated by the Calculation Agent and will be a
yield to maturity, based on the arithmetic mean of the secondary market offered
rates as of approximately 3:30 P.M., New York City time, on such CMT Rate
Interest Determination Date reported, according to their written records, by
three leading primary United States government securities dealers in The City of
New York (which may include the Agents or their affiliates) (each, a "Reference
Dealer") selected by the Calculation Agent, after consultation with the Company,
(from five such Reference Dealers selected by the Calculation Agent, after
consultation with the Company, and eliminating the highest quotation (or, in the
event of equality, one of the highest) and the lowest quotation (or, in the
event of equality, one of the lowest)), for the most recently issued direct
noncallable fixed rate obligations of the United States ("Treasury Notes") with
an original maturity of approximately the Designated CMT Maturity Index and a
remaining term to maturity of not less than such Designated CMT Maturity Index
minus one year. If the Calculation Agent is unable to obtain three such Treasury
Note quotations, the CMT Rate on such CMT Rate Interest Determination Date will
be calculated by the Calculation Agent and will be a yield to maturity based on
the arithmetic mean of the secondary market offered rates as of approximately
3:30 P.M., New York City time, on such CMT Rate Interest Determination Date of
three Reference Dealers in The City of New York (from five such Reference
Dealers selected by the Calculation Agent, after consultation with the Company,
and eliminating the highest quotation (or, in the event of equality, one of the
highest) and the lowest quotation (or, in the event of equality, one of the
lowest)), for Treasury Notes with an original maturity of the number of years
that is the next highest to the Designated CMT Maturity Index and a remaining
term to maturity closest to the Designated CMT Maturity Index and in an amount
of at least $100 million. If three or four (and not five) of such Reference
Dealers are quoting as described above, then the CMT Rate will be based on the
arithmetic mean of the offered rates obtained and neither the highest nor the
lowest of such quotes will be eliminated; provided, however, that if fewer than
three Reference Dealers so selected by the Calculation Agent, after consultation
with the Company, are quoting as mentioned herein, the CMT Rate determined as of
such CMT Rate Interest Determination Date will be the CMT Rate in effect on such
CMT Rate Interest Determination Date. If two Treasury Notes with an original
maturity as described in the second preceding sentence have remaining terms to
maturity equally close to the Designated CMT Maturity Index, the Calculation
Agent will obtain quotations for the Treasury Note with the shorter remaining
term to maturity.
"Designated CMT Telerate Page" means the display on the Dow Jones
Markets Limited (or any successor service) on the page specified in the
applicable Pricing Supplement (or any other page as may replace such page on
such service) for the purpose of displaying Treasury Constant Maturities as
reported in H.15(519) or, if no such page is specified in the applicable Pricing
Supplement, page 7052.
"Designated CMT Maturity Index" means the original period to maturity
of the U.S. Treasury securities (either 1, 2, 3, 5, 7, 10, 20 or 30 years)
specified in the applicable Pricing Supplement with respect to which the CMT
Rate will be calculated or, if no such maturity is specified in the applicable
Pricing Supplement, 2 years.
COMMERCIAL PAPER RATE. Unless otherwise specified in the applicable
Pricing Supplement, "Commercial Paper Rate" means, with respect to any Interest
Determination Date relating to a Floating Rate Note for which the interest rate
is determined with reference to the Commercial Paper Rate (a "Commercial Paper
Rate Interest Determination Date"), the Money Market Yield (as hereinafter
defined) on such date of the rate for commercial paper having the Index Maturity
specified in the applicable Pricing Supplement as published in H.15(519) under
the
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caption "Commercial Paper -- Nonfinancial". In the event that such rate is not
published by 3:00 P.M., New York City time, on the related Calculation Date,
then the Commercial Paper Rate on such Commercial Paper Rate Interest
Determination Date will be the Money Market Yield of the rate for commercial
paper having the Index Maturity specified in the applicable Pricing Supplement
as published in Composite Quotations under the heading "Commercial Paper" (with
an Index Maturity of one month or three months being deemed to be equivalent to
an Index Maturity of 30 days or 90 days, respectively). If such rate is not yet
published in either H.15(519) or Composite Quotations by 3:00 P.M., New York
City time, on the related Calculation Date, then the Commercial Paper Rate on
such Commercial Paper Rate Interest Determination Date will be calculated by the
Calculation Agent and will be the Money Market Yield of the arithmetic mean of
the offered rates at approximately 11:00 A.M., New York City time, on such
Commercial Paper Rate Interest Determination Date of three leading dealers of
commercial paper in The City of New York (which may include the Agents or their
affiliates) selected by the Calculation Agent, after consultation with the
Company, for commercial paper having the Index Maturity specified in the
applicable Pricing Supplement placed for a non-financial entity whose bond
rating is "Aa", or the equivalent, from a nationally recognized statistical
rating organization; provided, however, that if the dealers so selected by the
Calculation Agent, after consultation with the Company, are not quoting as
mentioned in this sentence, the Commercial Paper Rate determined as of such
Commercial Paper Rate Interest Determination Date will be the Commercial Paper
Rate in effect on such Commercial Paper Rate Interest Determination Date.
"Money Market Yield" means a yield (expressed as a percentage)
calculated in accordance with the following formula:
D X 360 X 100
Money Market Yield = -----------------
360 - (D x M)
where "D" refers to the applicable per annum rate for commercial paper quoted on
a bank discount basis and expressed as a decimal, and "M" refers to the actual
number of days in the applicable Interest Reset Period.
ELEVENTH DISTRICT COST OF FUNDS RATE. Unless otherwise specified in the
applicable Pricing Supplement, "Eleventh District Cost of Funds Rate" means,
with respect to any Interest Determination Date relating to a Floating Rate Note
for which the interest rate is determined with reference to the Eleventh
District Cost of Funds Rate (an "Eleventh District Cost of Funds Rate Interest
Determination Date"), the rate equal to the monthly weighted average cost of
funds for the calendar month immediately preceding the month in which such
Eleventh District Cost of Funds Rate Interest Determination Date falls, as set
forth under the caption "11th District" on Telerate Page 7058 as of 11:00 A.M.,
San Francisco time, on such Eleventh District Cost of Funds Rate Interest
Determination Date. If such rate does not appear on Telerate Page 7058 on such
Eleventh District Cost of Funds Rate Interest Determination Date, then the
Eleventh District Cost of Funds Rate on such Eleventh District Cost of Funds
Rate Interest Determination Date shall be the monthly weighted average cost of
funds paid by member institutions of the Eleventh Federal Home Loan Bank
District that was most recently announced (the "Index") by the FHLB of San
Francisco as such cost of funds for the calendar month immediately preceding
such Eleventh District Cost of Funds Rate Interest Determination Date. If the
FHLB of San Francisco fails to announce the Index on or prior to such Eleventh
District Cost of Funds Rate Interest Determination Date for the calendar month
immediately preceding such Eleventh District Cost of Funds Rate Interest
Determination Date, the Eleventh District Cost of Funds Rate determined as of
such Eleventh District Cost of Funds Rate Interest Determination Date will be
the Eleventh District Cost of Funds Rate in effect on such Eleventh District
Cost of Funds Rate Interest Determination Date.
FEDERAL FUNDS RATE. Unless otherwise specified in the applicable
Pricing Supplement, "Federal Funds Rate" means, with respect to any Interest
Determination Date relating to a Floating Rate Note for which the interest rate
is determined with reference to the Federal Funds Rate (a "Federal Funds Rate
Interest Determination Date"), the rate on such date for United States dollar
federal funds as published in H.15(519) under the heading "Federal Funds
(Effective)" or, if not published by 3:00 P.M., New York City time, on the
related Calculation Date, the rate on such Federal Funds Rate Interest
Determination Date as published in Composite Quotations under the heading
"Federal Funds/Effective Rate." If such rate is not published in either
H.15(519) or Composite Quotations by 3:00 P.M., New York City time, on the
related Calculation Date, then the Federal Funds Rate on such Federal Funds Rate
Interest Determination Date will be calculated by the Calculation Agent and will
be the arithmetic mean of the rates for the last transaction in overnight United
States dollar federal funds arranged by three leading brokers
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of federal funds transactions in The City of New York (which may include the
Agents or their affiliates) selected by the Calculation Agent, after
consultation with the Company, prior to 9:00 A.M., New York City time, on such
Federal Funds Rate Interest Determination Date; provided, however, that if the
brokers so selected by the Calculation Agent, after consultation with the
Company, are not quoting as mentioned in this sentence, the Federal Funds Rate
determined as of such Federal Funds Rate Interest Determination Date will be the
Federal Funds Rate in effect on such Federal Funds Rate Interest Determination
Date.
LIBOR. Unless otherwise specified in the applicable Pricing Supplement,
"LIBOR" means the rate determined in accordance with the following provisions:
(i) With respect to any Interest Determination Date relating
to a Floating Rate Note for which the interest rate is determined with
reference to LIBOR (a "LIBOR Interest Determination Date"), LIBOR will
be either: (a) if "LIBOR Reuters" is specified in the applicable
Pricing Supplement, the arithmetic mean of the offered rates (unless
the Designated LIBOR Page by its terms provides only for a single rate,
in which case such single rate shall be used) for deposits in the
Designated LIBOR Currency having the Index Maturity specified in such
Pricing Supplement, commencing on the applicable Interest Reset Date,
that appear (or, if only a single rate is required as aforesaid,
appears) on the Designated LIBOR Page as of 11:00 A.M., London time, on
such LIBOR Interest Determination Date, or (b) if "LIBOR Telerate" is
specified in the applicable Pricing Supplement or if neither "LIBOR
Reuters" nor "LIBOR Telerate" is specified in the applicable Pricing
Supplement as the method for calculating LIBOR, the rate for deposits
in the Designated LIBOR Currency having the Index Maturity specified in
such Pricing Supplement, commencing on such Interest Reset Date, that
appears on the Designated LIBOR Page as of 11:00 A.M., London time, on
such LIBOR Interest Determination Date. If fewer than two such offered
rates so appear, or if no such rate so appears, as applicable, LIBOR on
such LIBOR Interest Determination Date will be determined in accordance
with the provisions described in clause (ii) below.
(ii) With respect to a LIBOR Interest Determination Date on
which fewer than two offered rates appear, or no rate appears, as the
case may be, on the Designated LIBOR Page as specified in clause (i)
above, the Calculation Agent will request the principal London offices
of each of four major reference banks (which may include affiliates of
the Agents) in the London interbank market, as selected by the
Calculation Agent, after consultation with the Company, to provide the
Calculation Agent with its offered quotation for deposits in the
Designated LIBOR Currency for the period of the Index Maturity
specified in the applicable Pricing Supplement, commencing on the
applicable Interest Reset Date, to prime banks in the London interbank
market at approximately 11:00 A.M., London time, on such LIBOR Interest
Determination Date and in a principal amount that is representative for
a single transaction in the Designated LIBOR Currency in such market at
such time. If at least two such quotations are so provided, then LIBOR
on such LIBOR Interest Determination Date will be the arithmetic mean
of such quotations. If fewer than two such quotations are so provided,
then LIBOR on such LIBOR Interest Determination Date will be the
arithmetic mean of the rates quoted at approximately 11:00 A.M., in the
applicable Principal Financial Center, on such LIBOR Interest
Determination Date by three major banks (which may include affiliates
of the Agents) in such Principal Financial Center selected by the
Calculation Agent, after consultation with the Company, for loans in
the Designated LIBOR Currency to leading European banks, having the
Index Maturity specified in the applicable Pricing Supplement and in a
principal amount that is representative for a single transaction in the
Designated LIBOR Currency in such market at such time; provided,
however, that if the banks so selected by the Calculation Agent, after
consultation with the Company, are not quoting as mentioned in this
sentence, LIBOR determined as of such LIBOR Interest Determination Date
will be LIBOR in effect on such LIBOR Interest Determination Date.
"Designated LIBOR Currency" means the currency or composite currency
specified in the applicable Pricing Supplement as to which LIBOR shall be
calculated or, if no such currency or composite currency is specified in the
applicable Pricing Supplement, United States dollars.
"Designated LIBOR Page" means (a) if "LIBOR Reuters" is specified in
the applicable Pricing Supplement, the display on the Reuter Monitor Money Rates
Service (or any successor service) on the page specified in such
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Pricing Supplement (or any other page as may replace such page on such service)
for the purpose of displaying the London interbank rates of major banks for the
Designated LIBOR Currency, or (b) if "LIBOR Telerate" is specified in the
applicable Pricing Supplement or neither "LIBOR Reuters" nor "LIBOR Telerate" is
specified in the applicable Pricing Supplement as the method for calculating
LIBOR, the display on the Dow Jones Markets Limited (or any successor service)
on the page specified in such Pricing Supplement (or any other page as may
replace such page on such service) for the purpose of displaying the London
interbank rates of major banks for the Designated LIBOR Currency.
PRIME RATE. Unless otherwise specified in the applicable Pricing
Supplement, "Prime Rate" means, with respect to any Interest Determination Date
relating to a Floating Rate Note for which the interest rate is determined with
reference to the Prime Rate (a "Prime Rate Interest Determination Date"), the
rate on such date as such rate is published in H.15(519) under the heading "Bank
Prime Loan." If such rate is not published prior to 3:00 P.M., New York City
time, on the related Calculation Date, then the Prime Rate shall be the
arithmetic mean of the rates of interest publicly announced by each bank that
appears on the Reuters Screen USPRIME1 Page (as hereinafter defined) as such
bank's prime rate or base lending rate as in effect for such Prime Rate Interest
Determination Date. If fewer than four such rates appear on the Reuters Screen
USPRIME1 Page for such Prime Rate Interest Determination Date, then the Prime
Rate shall be the arithmetic mean of the prime rates or base lending rates
quoted on the basis of the actual number of days in the year divided by a
360-day year as of the close of business on such Prime Rate Interest
Determination Date by four major money center banks (which may include
affiliates of the Agents) in The City of New York selected by the Calculation
Agent, after consultation with the Company. If fewer than four such quotations
are so provided, then the Prime Rate shall be the arithmetic mean of four prime
rates quoted on the basis of the actual number of days in the year divided by a
360-day year as of the close of business on such Prime Rate Interest
Determination Date as furnished in The City of New York by the major money
center banks, if any, that have provided such quotations and by a reasonable
number of substitute banks or trust companies (which may include affiliates of
the Agents) to obtain four such prime rate quotations, provided such substitute
banks or trust companies are organized and doing business under the laws of the
United States, or any State thereof, each having total equity capital of at
least $500 million and being subject to supervision or examination by Federal or
State authority, selected by the Calculation Agent, after consultation with the
Company, to provide such rate or rates; provided, however, that if the banks or
trust companies so selected by the Calculation Agent, after consultation with
the Company, are not quoting as mentioned in this sentence, the Prime Rate
determined as of such Prime Rate Interest Determination Date will be the Prime
Rate in effect on such Prime Rate Interest Determination Date.
"Reuters Screen USPRIME1 Page" means the display on the Reuter Monitor
Money Rates Service (or any successor service) on the "USPRIME1" page (or such
other page as may replace the USPRIME1 page on such service) for the purpose of
displaying prime rates or base lending rates of major United States banks.
TREASURY RATE. Unless otherwise specified in the applicable Pricing
Supplement, "Treasury Rate" means, with respect to any Interest Determination
Date relating to a Floating Rate Note for which the interest rate is determined
by reference to the Treasury Rate (a "Treasury Rate Interest Determination
Date"), the rate from the auction held on such Treasury Rate Interest
Determination Date (the "Auction") of direct obligations of the United States
("Treasury Bills") having the Index Maturity specified in the applicable Pricing
Supplement, as such rate is published in H.15(519) under the heading "Treasury
Bills-auction average (investment)" or, if not published by 3:00 P.M., New York
City time, on the related Calculation Date, the auction average rate of such
Treasury Bills (expressed as a bond equivalent on the basis of a year of 365 or
366 days, as applicable, and applied on a daily basis) as otherwise announced by
the United States Department of the Treasury. In the event that the results of
the Auction of Treasury Bills having the Index Maturity specified in the
applicable Pricing Supplement are not reported as provided by 3:00 P.M., New
York City time, on the related Calculation Date, or if no such Auction is held,
then the Treasury Rate will be calculated by the applicable Calculation Agent
and will be a yield to maturity (expressed as a bond equivalent on the basis of
a year of 365 or 366 days, as applicable, and applied on a daily basis) of the
arithmetic mean of the secondary market bid rates, as of approximately 3:30
P.M., New York City time, on such Treasury Rate Interest Determination Date, of
three leading primary United States government securities dealers (which may
include the Agents or their affiliates) selected by the Calculation Agent, after
consultation with the Company, for the issue of Treasury Bills with a remaining
maturity closest to the Index Maturity specified in the
S-15
applicable Pricing Supplement; provided, however, that if the dealers so
selected by the applicable Calculation Agent are not quoting as mentioned in
this sentence, the Treasury Rate determined as of such Treasury Rate Interest
Determination Date will be the Treasury Rate in effect on such Treasury Rate
Interest Determination Date.
OTHER/ADDITIONAL PROVISIONS; ADDENDUM
Any provisions with respect to the Notes, including the specification
and determination of one or more Interest Rate Bases, the calculation of the
interest rate applicable to a Floating Rate Note, the Interest Payment Dates,
the Stated Maturity Date, any redemption or repayment provisions or any other
term relating thereto, may be modified and/or supplemented as specified under
"Other/Additional Provisions" on the face thereof or in an Addendum relating
thereto, if so specified on the face thereof and described in the applicable
Pricing Supplement.
DISCOUNT NOTES
The Company may from time to time offer Notes ("Discount Notes") that
have an Issue Price (as specified in the applicable Pricing Supplement) that is
less than 100% of the principal amount thereof (I.E., par) by more than a
percentage equal to the product of 0.25% and the number of full years to the
Stated Maturity Date. Discount Notes may not bear any interest currently or may
bear interest at a rate that is below market rates at the time of issuance. The
difference between the Issue Price of a Discount Note and par is referred to
herein as the "Discount." In the event of redemption, repayment or acceleration
of maturity of a Discount Note, the amount payable to the Holder of such
Discount Note will be equal to the sum of (i) the Issue Price (increased by any
accruals of Discount) and, in the event of any redemption of such Discount Note
(if applicable) (other than a redemption of a Secured Note at the Special
Redemption Price), multiplied by the Initial Redemption Percentage (as adjusted
by the Annual Redemption Percentage Reduction, if applicable) and (ii) any
unpaid interest accrued thereon to the date of such redemption, repayment or
acceleration of maturity, as the case may be.
Unless otherwise specified in the applicable Pricing Supplement, for
purposes of determining the amount of Discount that has accrued as of any date
on which a redemption, repayment or acceleration of maturity occurs for a
Discount Note, such Discount will be accrued using a constant yield method. The
constant yield will be calculated using a 30-day month, 360-day year convention,
a compounding period that, except for the Initial Period (as hereinafter
defined), corresponds to the shortest period between Interest Payment Dates for
the applicable Discount Note (with ratable accruals within a compounding
period), and an assumption that the maturity of such Discount Note will not be
accelerated. If the period from the date of issue to the initial Interest
Payment Date for a Discount Note (the "Initial Period") is shorter than the
compounding period for such Discount Note, a proportionate amount of the yield
for an entire compounding period will be accrued. If the Initial Period is
longer than the compounding period, then such period will be divided into a
regular compounding period and a short period with the short period being
treated as provided in the preceding sentence. The accrual of the applicable
Discount may differ from the accrual of original issue discount for purposes of
the Internal Revenue Code of 1986, as amended (the "Code"), certain Discount
Notes may not be treated as having original issue discount within the meaning of
the Code, and Notes other than Discount Notes may be treated as issued with
original issue discount for federal income tax purposes. See "United States
Taxation".
INDEXED NOTES
The Company may from time to time offer Unsecured Notes as Indexed
Notes ("Indexed Notes") with the amount of principal, premium and/or interest
payable in respect thereof to be determined with reference to the price or
prices of specified commodities or stocks, to the exchange rate of one or more
designated currencies (including a composite currency such as the ECU) relative
to an indexed currency or to other items, in each case as specified in the
applicable Pricing Supplement. In certain cases, Holders of Indexed Notes may
receive a principal payment on the Maturity Date that is greater than or less
than the principal amount of such Indexed Notes depending upon the relative
value on the Maturity Date of the specified indexed item. Information as to the
method for determining the amount of principal, premium, if any, and/or
interest, if any, payable in respect of Indexed Notes, certain historical
information with respect to the specified indexed item and any material tax
considerations associated with an investment in Indexed Notes will be specified
in the applicable Pricing Supplement. See also "Risk Factors."
S-16
AMORTIZING NOTES
The Company may from time to time offer Unsecured Notes as Amortizing
Notes ("Amortizing Notes") with the amount of principal thereof and interest
thereon payable in installments over the term of such Notes. Unless otherwise
specified in the applicable Pricing Supplement, interest on each Amortizing Note
will be computed on the basis of a 360-day year of twelve 30-day months.
Payments with respect to Amortizing Notes will be applied first to interest due
and payable thereon and then to the reduction of the unpaid principal amount
thereof. Further information concerning additional terms and provisions of
Amortizing Notes will be specified in the applicable Pricing Supplement,
including a table setting forth repayment information for such Amortizing Notes.
BOOK-ENTRY NOTES
The Company has established a depositary arrangement with The
Depository Trust Company with respect to the Book-Entry Notes, the terms of
which are summarized below. Any additional or differing terms of the depositary
arrangement with respect to the Book-Entry Notes will be described in the
applicable Pricing Supplement.
Upon issuance, all Book-Entry Notes of like tenor and terms up to
$200,000,000 aggregate principal amount will be represented by a single Global
Security. Each Global Security representing Book-Entry Notes will be deposited
with, or on behalf of, the Depositary and will be registered in the name of the
Depositary or a nominee of the Depositary. No Global Security may be transferred
except as a whole by a nominee of the Depositary to the Depositary or to another
nominee of the Depositary, or by the Depositary or such nominee to a successor
of the Depositary or a nominee of such successor.
So long as the Depositary or its nominee is the registered owner of a
Global Security, the Depositary or its nominee, as the case may be, will be the
sole Holder of the Book-Entry Notes represented thereby for all purposes under
the Secured Indenture or the Unsecured Indenture, as applicable. Except as
otherwise provided below, the Beneficial Owners of the Global Security or
Securities representing Book-Entry Notes will not be entitled to receive
physical delivery of Certificated Notes and will not be considered the Holders
thereof for any purpose under the Secured Indenture or the Unsecured Indenture,
as applicable, and no Global Security representing Book-Entry Notes shall be
exchangeable or transferable. Accordingly, each Beneficial Owner must rely on
the procedures of the Depositary and, if such Beneficial Owner is not a
Participant, on the procedures of the Participant through which such Beneficial
Owner owns its interest in order to exercise any rights of a Holder under such
Global Security or the Secured Indenture or the Unsecured Indenture, as
applicable. The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of such securities in certificated form. Such
limits and laws may impair the ability to transfer beneficial interests in a
Global Security representing Book-Entry Notes.
Unless otherwise specified in the applicable Pricing Supplement, each
Global Security representing Book-Entry Notes will be exchangeable for
Certificated Notes of like tenor and terms and of differing authorized
denominations in a like aggregate principal amount, only if (i) the Depositary
notifies the Company that it is unwilling or unable to continue as Depositary
for the Global Securities or the Company becomes aware that the Depositary has
ceased to be a clearing agency registered under the Exchange Act, (ii) the
Company, in its sole discretion, determines that the Global Securities shall be
exchangeable for Certificated Notes or (iii) an Event of Default shall have
occurred and be continuing with respect to the particular series of Notes under
the Secured Indenture or Unsecured Indenture, as applicable. Upon any such
exchange, the Certificated Notes shall be registered in the names of the
Beneficial Owners of the Global Security or Securities representing Book-Entry
Notes, which names shall be provided by the Depositary's relevant Participants
(as identified by the Depositary) to the Unsecured Trustee or the Secured
Trustee, as applicable.
The following is based on information furnished by the Depositary:
The Depositary will act as securities depository for the
Book-Entry Notes. The Book-Entry Notes will be issued as fully
registered securities registered in the name of Cede & Co. (the
Depositary's partnership nominee). One fully registered Global Security
will be issued for each issue of Book-Entry Notes, each in the
aggregate principal amount of such issue, and will be deposited with
the Depositary.
S-17
If, however, the aggregate principal amount of any issue exceeds
$200,000,000, one Global Security will be issued with respect to each
$200,000,000 of principal amount and an additional Global Security will
be issued with respect to any remaining principal amount of such issue.
The Depositary is a limited-purpose trust company organized
under the New York Banking Law, a "banking organization" within the
meaning of the New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the New York
Uniform Commercial Code, and a "clearing agency" registered pursuant to
the provisions of Section 17A of the Exchange Act. The Depositary holds
securities that its participants ("Participants") deposit with the
Depositary. The Depositary also facilitates the settlement among
Participants of securities transactions, such as transfers and pledges,
in deposited securities through electronic computerized book-entry
changes in Participants' accounts, thereby eliminating the need for
physical movement of securities certificates. Direct Participants of
the Depositary ("Direct Participants") include securities brokers and
dealers (including the Agents), banks, trust companies, clearing
corporations and certain other organizations. The Depositary 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 the Depositary'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 the
Depositary and its Participants are on file with the Securities and
Exchange Commission.
Purchases of Book-Entry Notes under the Depositary's system
must be made by or through Direct Participants, which will receive a
credit for such Book-Entry Notes on the Depositary's records. The
ownership interest of each actual purchaser of each Book-Entry Note
represented by a Global Security ("Beneficial Owner") is in turn to be
recorded on the records of Direct Participants and Indirect
Participants. Beneficial Owners will not receive written confirmation
from the Depositary of their purchase, but Beneficial Owners are
expected to receive written confirmations providing details of the
transaction, as well as periodic statements of their holdings, from the
Direct Participants or Indirect Participants through which such
Beneficial Owner entered into the transaction. Transfers of ownership
interests in a Global Security representing Book-Entry Notes are to be
accomplished by entries made on the books of Participants acting on
behalf of Beneficial Owners. Beneficial Owners of a Global Security
representing Book-Entry Notes will not receive Certificated Notes
representing their ownership interests therein, except in the event
that use of the book-entry system for such Book-Entry Notes is
discontinued.
To facilitate subsequent transfers, all Global Securities
representing Book-Entry Notes which are deposited with, or on behalf
of, the Depositary are registered in the name of the Depositary's
nominee, Cede & Co. The deposit of Global Securities with, or on behalf
of, the Depositary and their registration in the name of Cede & Co.
effect no change in beneficial ownership. The Depositary has no
knowledge of the actual Beneficial Owners of the Global Securities
representing the Book-Entry Notes; the Depositary'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 the
Depositary to Direct Participants, by Direct Participants to Indirect
Participants, and by Direct Participants and Indirect Participants to
Beneficial Owners will be governed by arrangements among them, subject
to any statutory or regulatory requirements as may be in effect from
time to time.
Neither the Depositary nor Cede & Co. will consent or vote
with respect to the Global Securities representing the Book-Entry
Notes. Under its usual procedures, the Depositary mails an Omnibus
Proxy to the Company as soon as possible after the applicable record
date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting
rights to those Direct Participants to whose accounts the Book-Entry
Notes are credited on the applicable record date (identified in a
listing attached to the Omnibus Proxy).
S-18
Principal, premium, if any, and/or interest, if any, payments
on the Global Securities representing the Book-Entry Notes will be made
in immediately available funds to the Depositary. The Depositary's
practice is to credit Direct Participants' accounts on the applicable
payment date in accordance with their respective holdings shown on the
Depositary's records unless the Depositary has reason to believe that
it will not receive payment on such date. Payments by Participants to
Beneficial Owners will be governed by standing instructions and
customary practices, as is the case with securities held for the
accounts of customers in bearer form or registered in "street name",
and will be the responsibility of such Participant and not of the
Depositary, the Unsecured Trustee, the Secured Trustee or the Company,
subject to any statutory or regulatory requirements as may be in effect
from time to time. Payment of principal, premium, if any, and/or
interest, if any, to the Depositary is the responsibility of the
Company and the Unsecured Trustee or the Secured Trustee, as
applicable, disbursement of such payments to Direct Participants shall
be the responsibility of the Depositary, and disbursement of such
payments to the Beneficial Owners shall be the responsibility of Direct
Participants and Indirect Participants.
If applicable, redemption notices shall be sent to Cede & Co.
If less than all of the Book-Entry Notes of like tenor and terms are
being redeemed, the Depositary's practice is to determine by lot the
amount of the interest of each Direct Participant in such issue to be
redeemed.
A Beneficial Owner shall give notice of any option to elect to
have its Book-Entry Notes repaid by the Company, through its
Participant, to the Unsecured Trustee or the Secured Trustee, as
applicable, and shall effect delivery of such Book-Entry Notes by
causing the Direct Participant to transfer the Participant's interest
in the Global Security or Securities representing such Book-Entry
Notes, on the Depositary's records, to the Unsecured Trustee or the
Secured Trustee, as applicable. The requirement for physical delivery
of Book-Entry Notes in connection with a demand for repayment will be
deemed satisfied when the ownership rights in the Global Security or
Securities representing such Book-Entry Notes are transferred by Direct
Participants on the Depositary's records.
The Depositary may discontinue providing its services as
securities depository with respect to the Book-Entry Notes at any time
by giving reasonable notice to the Company and the Unsecured Trustee or
the Secured Trustee, as applicable. Under such circumstances, in the
event that a successor securities depository is not obtained,
Certificated Notes are required to be printed and delivered.
The Company may decide to discontinue use of the system of
book-entry transfers through the Depositary (or a successor securities
depository). In that event, Certificated Notes will be printed and
delivered.
The information in this section concerning the Depositary and the
Depositary's system has been obtained from sources that the Company believes to
be reliable, but neither the Company nor any Agent takes any responsibility for
the accuracy thereof.
SPECIAL PROVISIONS RELATING TO FOREIGN CURRENCY UNSECURED NOTES
GENERAL
Unless otherwise specified in the applicable Pricing Supplement,
Foreign Currency Unsecured Notes will not be sold in, or to residents of, the
country issuing the applicable currency. The information set forth in this
Prospectus Supplement is directed to prospective purchasers who are United
States residents and, with respect to Foreign Currency Unsecured Notes, is by
necessity incomplete. The Company and the Agents disclaim any responsibility to
advise prospective purchasers who are residents of countries other than the
United States with respect to any matters that may affect the purchase, holding
or receipt of payments of principal of, and premium, if any, and interest, if
any, on, Foreign Currency Unsecured Notes. Such persons should consult their own
financial and legal advisors with regard to such matters. See "Risk
Factors--Exchange Rates and Exchange Controls."
S-19
PAYMENT OF PRINCIPAL, PREMIUM, IF ANY, AND INTEREST, IF ANY
Unless otherwise specified in the applicable Pricing Supplement, the
Company is obligated to make payments of principal of, and premium, if any, and
interest, if any, on, a Foreign Currency Note in the Specified Currency. Any
such amounts payable by the Company in the Specified Currency will be converted
by the exchange rate agent named in the applicable Pricing Supplement (the
"Exchange Rate Agent") into United States dollars for payment to Holders unless
otherwise specified in the applicable Pricing Supplement or the Holder of such
Foreign Currency Note elects, in the manner hereinafter described, to receive
such amounts in the Specified Currency.
Any United States dollar amount to be received by a Holder of a Foreign
Currency Note will be based on the highest bid quotation in The City of New York
received by the Exchange Rate Agent at approximately 11:00 A.M., New York City
time, on the second Business Day preceding the applicable payment date from
three recognized foreign exchange dealers (one of whom may be the Exchange Rate
Agent) selected by the Exchange Rate Agent and approved by the Company for the
purchase by the quoting dealer of the Specified Currency for United States
dollars for settlement on such payment date in the aggregate amount of such
Specified Currency payable to all Holders of Foreign Currency Unsecured Notes
scheduled to receive United States dollar payments and at which the applicable
dealer commits to execute a contract. All currency exchange costs will be borne
by the Holders of such Foreign Currency Unsecured Notes by deductions from such
payments. If three such bid quotations are not available, payments will be made
in the Specified Currency.
Holders of Foreign Currency Unsecured Notes may elect to receive all or
a specified portion of any payment of principal, premium, if any, and/or
interest, if any, in the Specified Currency by submitting a written request for
such payment to the Unsecured Trustee at its corporate trust office in The City
of New York on or prior to the applicable Record Date or at least fifteen
calendar days prior to the Maturity Date, as the case may be. Such written
request may be mailed or hand delivered or sent by cable, telex or other form of
facsimile transmission. Holders of Foreign Currency Unsecured Notes may elect to
receive all or a specified portion of all future payments in the Specified
Currency and need not file a separate election for each payment. Such election
will remain in effect until revoked by written notice to the Unsecured Trustee
but written notice of any such revocation must be received by the Unsecured
Trustee on or prior to the applicable Record Date or at least fifteen calendar
days prior to the Maturity Date, as the case may be. Holders of Foreign Currency
Unsecured Notes to be held in the name of a broker or nominee should contact
such broker or nominee to determine whether and how an election to receive
payments in the Specified Currency may be made.
Unless otherwise specified in the applicable Pricing Supplement, if the
Specified Currency is other than United States dollars, a Beneficial Owner of
the related Global Security or Securities which elects to receive payments of
principal, premium, if any, and/or interest, if any, in the Specified Currency
must notify the Participant through which it owns its interest on or prior to
the applicable Record Date or at least fifteen calendar days prior to the
Maturity Date, as the case may be, of such Beneficial Owner's election. Such
Participant must notify the Depositary of such election on or prior to the third
Business Day after such Record Date or at least twelve calendar days prior to
the Maturity Date, as the case may be, and the Depositary will notify the
Unsecured Trustee of such election on or prior to the fifth Business Day after
such Record Date or at least ten calendar days prior to the Maturity Date, as
the case may be. If complete instructions are received by the Participant from
the Beneficial Owner and forwarded by the Participant to the Depositary, and by
the Depositary to the Unsecured Trustee on or prior to such dates, then such
Beneficial Owner will receive payments in the Specified Currency.
Payments of the principal of, and premium, if any, and/or interest, if
any, on, Foreign Currency Unsecured Notes which are to be made in United States
dollars will be made in the manner specified herein with respect to Notes
denominated in United States dollars. See "Description of Notes--General."
Unless otherwise specified in the applicable Pricing Supplement, payments of
interest, if any, on Foreign Currency Unsecured Notes which are to be made in
the Specified Currency on an Interest Payment Date other than the Maturity Date
will be made by check mailed to the address of the Holders of such Foreign
Currency Unsecured Notes as they appear in the Security Register, subject to the
right to receive such interest payments by wire transfer of immediately
available funds under the circumstances described under "Description of
Notes--General." Payments of principal of, and premium, if any, and/or interest,
if any, on, Foreign Currency Unsecured Notes which are to be made in the
Specified Currency on
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the Maturity Date will be made by wire transfer of immediately available funds
to an account with a bank designated at least fifteen calendar days prior to the
Maturity Date by each Holder thereof, provided that such bank has appropriate
facilities therefor and that the applicable Foreign Currency Note is presented
and surrendered at the office or agency maintained by the Company for such
purpose in the Borough of Manhattan, The City of New York, currently the
corporate trust office of the Unsecured Trustee referred to above, in time for
the Unsecured Trustee to make such payments in such funds in accordance with its
normal procedures.
AVAILABILITY OF SPECIFIED CURRENCY
Except as set forth below, if the Specified Currency for a Foreign
Currency Note is not available for the required payment of principal, premium,
if any, and/or interest, if any, in respect thereof due to the imposition of
exchange controls or other circumstances beyond the control of the Company, the
Company will be entitled to satisfy its obligations to the Holder of such
Foreign Currency Note by making such payment in United States dollars on the
basis of the Market Exchange Rate, computed by the Exchange Rate Agent, on the
second Business Day prior to such payment or, if such Market Exchange Rate is
not then available, on the basis of the most recently available Market Exchange
Rate, or as otherwise specified in the applicable Pricing Supplement.
If the Specified Currency for a Foreign Currency Note is a composite
currency that is not available for the required payment of principal, premium,
if any, and/or interest, if any, in respect thereof due to the imposition of
exchange controls or other circumstances beyond the control of the Company, the
Company will be entitled to satisfy its obligations to the Holder of such
Foreign Currency Note by making such payment in United States dollars on the
basis of the equivalent of the composite currency in United States dollars. The
component currencies of the composite currency for this purpose (the "Component
Currencies") shall be the currency amounts that were components of the composite
currency as of the last day on which the composite currency was used. The
equivalent of the composite currency in United States dollars shall be
calculated by aggregating the United States dollar equivalents of the Component
Currencies. The United States dollar equivalent of each of the Component
Currencies shall be determined by the Exchange Rate Agent on the basis of the
Market Exchange Rate on the second Business Day prior to the required payment
or, if such Market Exchange Rate is not then available, on the basis of the most
recently available Market Exchange Rate for each such Component Currency, or as
otherwise specified in the applicable Pricing Supplement.
If the official unit of any Component Currency is altered by way of
combination or subdivision, the number of units of the currency as a Component
Currency shall be divided or multiplied in the same proportion. If two or more
Component Currencies are consolidated into a single currency, the amounts of
those currencies as Component Currencies shall be replaced by an amount in such
single currency equal to the sum of the amounts of the consolidated Component
Currencies expressed in such single currency. If any Component Currency is
divided into two or more currencies, the amount of the original Component
Currency shall be replaced by the amounts of such two or more currencies, the
sum of which shall be equal to the amount of the original Component Currency.
The "Market Exchange Rate" for a Specified Currency other than United
States dollars means the noon dollar buying rate in The City of New York for
cable transfers for such Specified Currency as certified for customs purposes
(or, if not so certified, as otherwise determined) by the Federal Reserve Bank
of New York. Any payment made in United States dollars under such circumstances
where the required payment is in a Specified Currency other than United States
dollars will not constitute an Event of Default under the Unsecured Indenture
with respect to the Notes.
All determinations referred to above made by the Exchange Rate Agent
shall be at its sole discretion and shall, in the absence of manifest error, be
conclusive for all purposes and binding on the Holders of the Foreign Currency
Unsecured Notes.
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JUDGMENTS
Under current New York law, a state court in the State of New York
rendering a judgment in respect of a Foreign Currency Note would be required to
render such judgment in the Specified Currency, and such foreign currency
judgment would be converted into United States dollars at the exchange rate
prevailing on the date of entry of such judgment. Accordingly, the Holder of
such Foreign Currency Note would be subject to exchange rate fluctuations
between the date of entry of such foreign currency judgment and the time the
amount of such foreign currency judgment is paid to such Holder in United States
dollars and converted by such Holder into the Specified Currency. It is not
certain, however, whether a non-New York state court would follow the same rules
and procedures with respect to conversions of foreign currency judgments.
The Company will indemnify the Holder of any Note against any loss
incurred by such Holder as a result of any judgment or order being given or made
for any amount due under such Note and such judgment or order requiring payment
in a currency or composite currency (the "Judgment Currency") other than the
Specified Currency, and as a result of any variation between (i) the rate of
exchange at which the Specified Currency amount is converted into the Judgment
Currency for the purpose of such judgment or order, and (ii) the rate of
exchange at which the Holder of such Note, on the date of payment of such
judgment or order, is able to purchase the Specified Currency with the amount of
the Judgment Currency actually received by such Holder, as the case may be.
UNITED STATES TAXATION
The following summary of the principal United States federal
income tax consequences of ownership of Notes is based upon the opinion of
Sullivan & Cromwell, counsel to the Company. It deals only with Notes held as
capital assets by initial purchasers, and not with special classes of holders,
such as dealers in securities or currencies, traders in securities that elect to
mark to market, banks, tax-exempt organizations, life insurance companies,
persons that hold Notes that are a hedge or that are hedged against currency
risks or that are part of a straddle or conversion transaction, or persons whose
functional currency is not the U.S. dollar. Moreover, the summary deals only
with Notes that are due to mature 30 years or less from the date on which they
are issued. The United States federal income tax consequences of ownership of
Notes that are due to mature more than 30 years from their date of issue will be
discussed in an applicable Pricing Supplement. The summary is based on the
Internal Revenue Code of 1986, as amended (the "Code"), its legislative history,
existing and proposed regulations thereunder, published rulings and court
decisions, all as currently in effect and all subject to change at any time,
perhaps with retroactive effect.
Prospective purchasers of Notes should consult their own tax
advisors concerning the consequences, in their particular circumstances, under
the Code and the laws of any other taxing jurisdiction, of the ownership of
Notes.
UNITED STATES HOLDERS
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PAYMENTS OF INTEREST
Interest on a Note, whether payable in U.S. dollars or a
currency, composite currency or basket of currencies other than U.S. dollars (a
"foreign currency"), other than interest on a "Discount Note" that is not
"qualified stated interest" (each as defined below under "Original Issue
Discount -- General"), will be taxable to a United States Holder as ordinary
income at the time it is received or accrued, depending on the holder's method
of accounting for tax purposes. A United States Holder is a beneficial owner
that is (i) a citizen or resident of the United States, (ii) a domestic
corporation, (iii) an estate the income of which is subject to United States
federal income tax without regard to its source or (iv) a trust if a court
within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust.
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If an interest payment is denominated in, or determined by
reference to, a foreign currency, the amount of income recognized by a cash
basis United States Holder will be the U.S. dollar value of the interest
payment, based on the exchange rate in effect on the date of receipt, regardless
of whether the payment is in fact converted into U.S. dollars.
An accrual basis United States Holder may determine the amount
of income recognized with respect to an interest payment denominated in, or
determined by reference to, a foreign currency in accordance with either of two
methods. Under the first method, the amount of income accrued will be based on
the average exchange rate in effect during the interest accrual period (or, with
respect to an accrual period that spans two taxable years, the part of the
period within the taxable year).
Under the second method, the United States Holder may elect to
determine the amount of income accrued on the basis of the exchange rate in
effect on the last day of the accrual period or, in the case of an accrual
period that spans two taxable years, the exchange rate in effect on the last day
of the part of the period within the taxable year. Additionally, if a payment of
interest is actually received within five business days of the last day of the
accrual period or taxable year, an electing accrual basis United States Holder
may instead translate such accrued interest into U.S. dollars at the exchange
rate in effect on the day of actual receipt. Any such election will apply to all
debt instruments held by the United States Holder at the beginning of the first
taxable year to which the election applies or thereafter acquired by the United
States Holder, and will be irrevocable without the consent of the Internal
Revenue Service (the "Service").
Upon receipt of the interest payment (including a payment
attributable to accrued but unpaid interest upon the sale or retirement of a
Note) denominated in, or determined by reference to, a foreign currency, the
United States Holder will recognize ordinary income or loss measured by the
difference between (x) the average exchange rate used to accrue interest income,
or the exchange rate as determined under the second method described above if
the United States Holder elects that method, and (y) the exchange rate in effect
on the date of receipt, regardless of whether the payment is in fact converted
into U.S. dollars.
ORIGINAL ISSUE DISCOUNT
GENERAL. A Note, other than a Note with a term of one year or
less (a "short-term Note"), will be treated as issued at an original issue
discount (a "Discount Note") if the excess of the Note's "stated redemption
price at maturity" over its issue price is more than a "de minimis amount" (as
defined below). Generally, the issue price of a Note will be the first price at
which a substantial amount of Notes included in the issue of which the Note is a
part is sold to other than bond houses, brokers, or similar persons or
organizations acting in the capacity of underwriters, placement agents, or
wholesalers. The stated redemption price at maturity of a Note is the total of
all payments provided by the Note that are not payments of "qualified stated
interest". A qualified stated interest payment is generally any one of a series
of stated interest payments on a Note that are unconditionally payable at least
annually at a single fixed rate (with certain exceptions for lower rates paid
during some periods) applied to the outstanding principal amount of the Note.
Special rules for "Variable Rate Notes" (as defined below under "Original Issue
Discount -- Variable Rate Notes") are described below under "Original Issue
Discount -- Variable Rate Notes".
In general, if the excess of a Note's stated redemption price
at maturity over its issue price is less than 1/4 of 1 percent of the Note's
stated redemption price at maturity multiplied by the number oF complete years
to its maturity (the "de minimis amount"), then such excess, if any, constitutes
"de minimis original issue discount" and the Note is not a Discount Note. Unless
the election described below under "Election to Treat All Interest as Original
Issue Discount" is made, a United States Holder of a Note with de minimis
original issue discount must include such de minimis original issue discount in
income as stated principal payments on the Note are made. The includible amount
with respect to each such payment will equal the product of the total amount of
the Note's de minimis original issue discount and a fraction, the numerator of
which is the amount of the principal payment made and the denominator of which
is the stated principal amount of the Note.
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United States Holders of Discount Notes having a maturity of
more than one year from their date of issue must, generally, include original
issue discount ("OID") in income calculated on a constant-yield method before
the receipt of cash attributable to such income, and generally will have to
include in income increasingly greater amounts of OID over the life of the Note.
The amount of OID includible in income by a United States Holder of a Discount
Note is the sum of the daily portions of OID with respect to the Discount Note
for each day during the taxable year or portion of the taxable year on which the
United States Holder holds such Discount Note ("accrued OID"). The daily portion
is determined by allocating to each day in any "accrual period" a pro rata
portion of the OID allocable to that accrual period. Accrual periods with
respect to a Note may be of any length selected by the United States Holder and
may vary in length over the term of the Note as long as (i) no accrual period is
longer than one year and (ii) each scheduled payment of interest or principal on
the Note occurs on either the final or first day of an accrual period. The
amount of OID allocable to an accrual period equals the excess of (a) the
product of the Discount Note's adjusted issue price at the beginning of the
accrual period and such Note's yield to maturity (determined on the basis of
compounding at the close of each accrual period and properly adjusted for the
length of the accrual period) over (b) the sum of the payments of qualified
stated interest on the Note allocable to the accrual period. The "adjusted issue
price" of a Discount Note at the beginning of any accrual period is the issue
price of the Note increased by (x) the amount of accrued OID for each prior
accrual period and decreased by (y) the amount of any payments previously made
on the Note that were not qualified stated interest payments. For purposes of
determining the amount of OID allocable to an accrual period, if an interval
between payments of qualified stated interest on the Note contains more than one
accrual period, the amount of qualified stated interest payable at the end of
the interval (including any qualified stated interest that is payable on the
first day of the accrual period immediately following the interval) is allocated
pro rata on the basis of relative lengths to each accrual period in the
interval, and the adjusted issue price at the beginning of each accrual period
in the interval must be increased by the amount of any qualified stated interest
that has accrued prior to the first day of the accrual period but that is not
payable until the end of the interval. The amount of OID allocable to an initial
short accrual period may be computed using any reasonable method if all other
accrual periods other than a final short accrual period are of equal length. The
amount of OID allocable to the final accrual period is the difference between
(x) the amount payable at the maturity of the Note (other than any payment of
qualified stated interest) and (y) the Note's adjusted issue price as of the
beginning of the final accrual period.
ACQUISITION PREMIUM. A United States Holder that purchases a
Note for an amount 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
but in excess of its adjusted issue price (as determined above under "Original
Issue Discount -- General")(any such excess being "acquisition premium") and
that does not make the election described below under "Election to Treat All
Interest as Original Issue Discount" shall reduce the daily portions of OID by a
fraction, the numerator of which is the excess of the United States Holder's
adjusted basis in the Note immediately after its purchase 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.
MARKET DISCOUNT. A Note, other than a short-term Note, will be
treated as purchased at a market discount (a "Market Discount Note") if (i) the
amount for which a United States Holder purchased the Note is less than the
Note's issue price (as determined above under "Original Issue Discount --
General") and (ii) the Note's stated redemption price at maturity or, in the
case of a Discount Note, the Note's "revised issue price", exceeds the amount
for which the United States Holder purchased the Note by at least 1/4 of 1
percent of sucH Note's stated redemption price at maturity or revised issue
price, respectively, multiplied by the number of complete years to the Note's
maturity. If such excess is not sufficient to cause the Note to be a Market
Discount Note, then such excess constitutes "de minimis market discount" and
such Note is not subject to the rules discussed in the following paragraphs. The
Code provides that, for these purposes, the "revised issue price" of a Note
generally equals its issue price, increased by the amount of any OID that has
accrued on the Note.
Any gain recognized on the maturity or disposition of a Market
Discount Note will be treated as ordinary income to the extent that such gain
does not exceed the accrued market discount on such Note. Alternatively, a
United States Holder of a Market Discount Note may elect to include market
discount in income currently over the life of the Note. Such an election shall
apply to all debt instruments with market discount
S-24
acquired by the electing United States Holder on or after the first day of the
first taxable year to which the election applies. This election may not be
revoked without the consent of the Service.
Market discount on a Market Discount Note will accrue on a
straight-line basis unless the United States Holder elects to accrue such market
discount on a constant-yield method. Such an election shall apply only to the
Note with respect to which it is made and may not be revoked. A United States
Holder of a Market Discount Note that does not elect to include market discount
in income currently generally will be required to defer deductions for interest
on borrowings allocable to such Note in an amount not exceeding the accrued
market discount on such Note until the maturity or disposition of such Note.
PRE-ISSUANCE ACCRUED INTEREST. If (i) a portion of the initial
purchase price of a Note is attributable to pre-issuance accrued interest, (ii)
the first stated interest payment on the Note is to be made within one year of
the Note's issue date and (iii) the payment will equal or exceed the amount of
pre-issuance accrued interest, then the United States Holder may elect to
decrease the issue price of the Note by the amount of pre-issuance accrued
interest. In that event, a portion of the first stated interest payment will be
treated as a return of the excluded pre-issuance accrued interest and not as an
amount payable on the Note.
NOTES SUBJECT TO CONTINGENCIES INCLUDING OPTIONAL REDEMPTION.
If a Note provides for an alternative payment schedule or schedules applicable
upon the occurrence of a contingency or contingencies (other than a remote or
incidental contingency), whether such contingency relates to payments of
interest or of principal, if the timing and amount of the payments that comprise
each payment schedule are known as of the issue date and if one of such
schedules is significantly more likely than not to occur, the yield and maturity
of the Note are determined by assuming that the payments will be made according
to that payment schedule. If there is no single payment schedule that is
significantly more likely than not to occur (other than because of a mandatory
sinking fund), the Note will be subject to the general rules that govern
contingent payment obligations. These rules will be discussed in an applicable
Pricing Supplement.
Notwithstanding the general rules for determining yield and
maturity in the case of Notes subject to contingencies, if the Company or the
holder has an unconditional option or options that, if exercised, would require
payments to be made on the Note under an alternative payment schedule or
schedules, then (i) in the case of an option or options of the Company, the
Company will be deemed to exercise or not exercise an option or combination of
options in the manner that minimizes the yield on the Note and (ii) in the case
of an option or options of the holder, the holder will be deemed to exercise or
not exercise an option or combination of options in the manner that maximizes
the yield on the Note. If both the Company and the holder have options described
in the preceding sentence, those rules apply to such options in the order in
which they may be exercised. For purposes of those calculations, the yield on
the Note is determined by using any date on which the Note may be redeemed or
repurchased as the maturity date and the amount payable on such date in
accordance with the terms of the Note as the principal amount payable at
maturity.
If a contingency (including the exercise of an option)
actually occurs or does not occur contrary to an assumption made according to
the above rules (a "change in circumstances") then, except to the extent that a
portion of the Note is repaid as a result of the change in circumstances and
solely for purposes of determining the amount and accrual of OID, the yield and
maturity of the Note are redetermined by treating the Note as having been
retired and reissued on the date of the change in circumstances for an amount
equal to the Note's adjusted issue price on that date.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT. A
United States Holder may elect to include in gross income all interest that
accrues on a Note using the constant-yield method described above under the
heading "Original Issue Discount -- General", with the modifications described
below. For purposes of this election, interest includes stated interest, OID, de
minimis original issue discount, market discount, de minimis market discount and
unstated interest, as adjusted by any amortizable bond premium (described below
under "Notes Purchased at a Premium") or acquisition premium.
S-25
In applying the constant-yield method to a Note with respect
to which this election has been made, the issue price of the Note will equal its
cost to the electing United States Holder, the issue date of the Note will be
the date of its acquisition by the electing United States Holder, and no
payments on the Note will be treated as payments of qualified stated interest.
This election will generally apply only to the Note with respect to which it is
made and may not be revoked without the consent of the Service. If this election
is made with respect to a Note with amortizable bond premium, then the electing
United States Holder will be deemed to have elected to apply amortizable bond
premium against interest with respect to all debt instruments with amortizable
bond premium (other than debt instruments the interest on which is excludible
from gross income) held by the electing United States Holder as of the beginning
of the taxable year in which the Note with respect to which the election is made
is acquired or thereafter acquired. The deemed election with respect to
amortizable bond premium may not be revoked without the consent of the Service.
If the election to apply the constant-yield method to all
interest on a Note is made with respect to a Market Discount Note, the electing
United States Holder will be treated as having made the election discussed above
under "Original Issue Discount -- Market Discount" to include market discount in
income currently over the life of all debt instruments held or thereafter
acquired by such United States Holder.
VARIABLE RATE NOTES. A "Variable Rate Note" is a Note that:
(i) has an issue price that does not exceed the total noncontingent principal
payments by more than the lesser of (1) the product of (x) the total
noncontingent principal payments, (y) the number of complete years to maturity
from the issue date and (z) .015, or (2) 15 percent of the total noncontingent
principal payments, and (ii) does not provide for stated interest other than
stated interest compounded or paid at least annually at (1) one or more
"qualified floating rates", (2) a single fixed rate and one or more qualified
floating rates, (3) a single "objective rate" or (4) a single fixed rate and a
single objective rate that is a "qualified inverse floating rate".
A qualified floating rate or objective rate in effect at any
time during the term of the instrument must be set at a "current value" of that
rate. A "current value" of a rate is the value of the rate on any day that is no
earlier than 3 months prior to the first day on which that value is in effect
and no later than 1 year following that first day.
A variable rate is a "qualified floating rate" if (i)
variations in the value of the rate can reasonably be expected to measure
contemporaneous variations in the cost of newly borrowed funds in the currency
in which the Note is denominated or (ii) it is equal to the product of such a
rate and either (a) a fixed multiple that is greater than 0.65 but not more than
1.35, or (b) a fixed multiple greater than 0.65 but not more than 1.35,
increased or decreased by a fixed rate. If a Note provides for two or more
qualified floating rates that (i) are within 0.25 percentage points of each
other on the issue date or (ii) can reasonably be expected to have approximately
the same values throughout the term of the Note, the qualified floating rates
together constitute a single qualified floating rate. A rate is not a qualified
floating rate, however, if the rate is subject to certain restrictions
(including caps, floors, governors, or other similar restrictions) unless such
restrictions are fixed throughout the term of the Note or are not reasonably
expected to significantly affect the yield on the Note.
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 not within the control of or
unique to the circumstances of the issuer or a related party. A variable rate is
not an objective rate, however, 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 (i) the rate is equal to a fixed rate minus a
qualified floating rate, and (ii) the variations in the rate can reasonably be
expected to inversely reflect contemporaneous variations in the cost of newly
borrowed funds.
If interest on a Note is stated at a fixed rate for an initial
period of one year or less followed by either a qualified floating rate or an
objective rate for a subsequent period and (i) the fixed rate and the qualified
floating rate or objective rate have values on the issue date of the Note that
do not differ by more than 0.25 percentage points or (ii) the value of the
qualified floating rate or objective rate is intended to approximate the fixed
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rate, the fixed rate and the qualified floating rate or the objective rate
constitute a single qualified floating rate or objective rate. Under these
rules, Notes bearing interest at the CD Rate, the CMT Rate, the Commercial Paper
Rate, the Eleventh District Cost of Funds Rate, the Federal Runds Rate, LIBOR,
the Prime Rate and the Treasury Rate will generally be treated as Variable Rate
Notes.
In general, if a Variable Rate Note provides for stated
interest at a single qualified floating rate or objective rate, all stated
interest on the Note is qualified stated interest and the amount of OID, if any,
is determined by using, in the case of a qualified floating rate or qualified
inverse floating rate, the value as of the issue date of the qualified floating
rate or qualified inverse floating rate, or, in the case of any other objective
rate, a fixed rate that reflects the yield reasonably expected for the Note.
If a Variable Rate Note does not provide for stated interest
at a single qualified floating rate or a single objective rate and also does not
provide for interest payable at a fixed rate (other than at a single fixed rate
for an initial period), the amount of interest and OID accruals on the Note are
generally determined by (i) determining a fixed rate substitute for each
variable rate provided under the Variable Rate Note (generally, the value of
each variable rate as of the issue date or, in the case of an objective rate
that is not a qualified inverse floating rate, a rate that reflects the
reasonably expected yield on the Note), (ii) constructing the equivalent fixed
rate debt instrument (using the fixed rate substitutes described above), (iii)
determining the amount of qualified stated interest and OID with respect to the
equivalent fixed rate debt instrument, and (iv) making the appropriate
adjustments for actual variable rates during the applicable accrual period.
If a Variable Rate Note provides for stated interest either at
one or more qualified floating rates or at a qualified inverse floating rate,
and in addition provides for stated interest at a single fixed rate (other than
at a single fixed rate for an initial period), the amount of interest and OID
accruals are determined as in the immediately preceding paragraph with the
modification that the Variable Rate Note is treated, for purposes of the first
three steps of the determination, as if it provided for a qualified floating
rate (or a qualified inverse floating rate, as the case may be) rather than the
fixed rate. The qualified floating rate (or qualified inverse floating rate)
replacing the fixed rate must be such that the fair market value of the Variable
Rate Note as of the issue date would be approximately the same as the fair
market value of an otherwise identical debt instrument that provides for the
qualified floating rate (or qualified inverse floating rate) rather than the
fixed rate.
SHORT-TERM NOTES. In general, an individual or other cash
basis United States Holder of a short-term Note is not required to accrue OID
(as specially defined below for the purposes of this paragraph) for United
States federal income tax purposes unless it elects to do so (but may be
required to include any stated interest in income as the interest is received).
Accrual basis United States Holders and certain other United States Holders,
including banks, regulated investment companies, dealers in securities, common
trust funds, United States Holders who hold Notes as part of certain identified
hedging transactions, certain pass-through entities and cash basis United States
Holders who so elect, are required to accrue OID on short-term Notes on either a
straight-line basis or under the constant-yield method (based on daily
compounding), at the election of the United States Holder. In the case of a
United States Holder not required and not electing to include OID in income
currently, any gain realized on the sale or retirement of the short-term Note
will be ordinary income to the extent of the OID accrued on a straight-line
basis (unless an election is made to accrue the OID under the constant-yield
method) through the date of sale or retirement. United States Holders who are
not required and do not elect to accrue OID on short-term Notes will be required
to defer deductions for interest on borrowings allocable to short-term Notes in
an amount not exceeding the deferred income until the deferred income is
realized.
For purposes of determining the amount of OID subject to these
rules, all interest payments on a short-term Note, including stated interest,
are included in the short-term Note's stated redemption price at maturity.
FOREIGN CURRENCY DISCOUNT NOTES. OID for any accrual period on
a Discount Note that is denominated in, or determined by reference to, a foreign
currency will be determined in the foreign currency and then translated into
U.S. dollars in the same manner as stated interest accrued by an accrual basis
United States Holder, as described under "Payments of Interest". Upon receipt of
an amount attributable to OID (whether in
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connection with a payment of interest or the sale or retirement of a Note), a
United States Holder may recognize ordinary income or loss.
NOTES PURCHASED AT A PREMIUM
A United States Holder that purchases a Note for an amount in
excess of its principal amount may elect to treat such excess as "amortizable
bond premium", in which case the amount required to be included in the United
States Holder's income each year with respect to interest on the Note will be
reduced by the amount of amortizable bond premium allocable (based on the Note's
yield to maturity) to such year. In the case of a Note that is denominated in,
or determined by reference to, a foreign currency, amortizable bond premium will
be computed in units of foreign currency, and amortizable bond premium will
reduce interest income in units of the foreign currency. At the time amortized
bond premium offsets interest income, exchange gain or loss (taxable as ordinary
income or loss) is realized measured by the difference between exchange rates at
that time and at the time of the acquisition of the Notes. Any election to
amortize bond premium shall apply to all bonds (other than bonds the interest on
which is excludible from gross income) held by the United States Holder at the
beginning of the first taxable year to which the election applies or thereafter
acquired by the United States Holder, and is irrevocable without the consent of
the Service. See also "Original Issue Discount -- Election to Treat All Interest
as Original Issue Discount".
PURCHASE, SALE AND RETIREMENT OF THE NOTES
A United States Holder's tax basis in a Note will generally be
its U.S. dollar cost (as defined below), increased by the amount of any OID or
market discount included in the United States Holder's income with respect to
the Note and the amount, if any, of income attributable to de minimis original
issue discount and de minimis market discount included in the United States
Holder's income with respect to the Note, and reduced by (i) the amount of any
payments that are not qualified stated interest payments, and (ii) the amount of
any amortizable bond premium applied to reduce interest on the Note. The U.S.
dollar cost of a Note purchased with a foreign currency will generally be the
U.S. dollar value of the purchase price on the date of purchase or, in the case
of Notes traded on an established securities market, as defined in the
applicable Treasury Regulations, that are purchased by a cash basis United
States Holder (or an accrual basis United States Holder that so elects), on the
settlement date for the purchase.
A United States Holder will generally recognize gain or loss
on the sale or retirement of a Note equal to the difference between the amount
realized on the sale or retirement and the tax basis of the Note. The amount
realized on a sale or retirement for an amount in foreign currency will be the
U.S. dollar value of such amount on (i) the date payment is received in the case
of a cash basis United States Holder, (ii) the date of disposition in the case
of an accrual basis United States Holder or (iii) in the case of Notes traded on
an established securities market, as defined in the applicable Treasury
Regulations, sold by a cash basis United States Holder (or an accrual basis
United States Holder that so elects), on the settlement date for the sale.
Except to the extent described above under "Original Issue Discount --
Short-Term Notes" or "Original Issue Discount -- Market Discount", described in
the next succeeding paragraph, attributable to accrued but unpaid interest or
subject to the general rules governing contingent payment obligations, gain or
loss recognized on the sale or retirement of a Note will be capital gain or
loss. Long-term capital gain of a non-corporate United States Holder is
generally subject to a maximum tax rate of 28% in respect of property held for
more than one year and to a maximum rate of 20% in respect of property held in
excess of 18 months.
Gain or loss recognized by a United States Holder on the sale
or retirement of a Note that is attributable to changes in exchange rates will
be treated as ordinary income or loss. However, exchange gain or loss is taken
into account only to the extent of total gain or loss realized on the
transaction.
EXCHANGE OF AMOUNTS IN OTHER THAN U.S. DOLLARS
Foreign currency received as interest on a Note or on the sale
or retirement of a Note will have a tax basis equal to its U.S. dollar value at
the time such interest is received or at the time of such sale or
S-28
retirement. Foreign currency that is purchased will generally have a tax basis
equal to the U.S. dollar value of the foreign currency on the date of purchase.
Gain or loss recognized on a sale or other disposition of a foreign currency
(including its use to purchase Notes or upon exchange for U.S. dollars) will
generally be ordinary income or loss.
INDEXED NOTES AND AMORTIZING NOTES
The applicable Pricing Supplement will contain a discussion of
any special United States federal income tax rules with respect to Notes that
are not subject to the rules governing Variable Rate Notes payments on which are
determined by reference to any index and other Notes that are subject to the
general rules governing contingent payment obligations and with respect to any
Notes providing for the periodic payment of principal over the life of the Note.
UNITED STATES ALIEN HOLDERS
- ---------------------------
For purposes of this discussion, a "United States Alien
Holder" is any holder of a Note who is (i) a nonresident alien individual or
(ii) a foreign corporation, partnership or estate or trust, in either case not
subject to United States federal income tax on a net income basis in respect of
income or gain from a Note. This discussion assumes that the Note is not subject
to the rules of Section 871(h)(4)(A) of the Code (relating to interest payments
that are determined by reference to the income, profits, changes in the value of
property or other attributes of the debtor or a related party).
Under present United States federal income and estate tax law,
and subject to the discussion of backup withholding below:
(i) payments of principal, premium (if any) and interest,
including OID, by the Company or any of its paying agents to any holder of a
Note that is a United States Alien Holder will not be subject to United States
federal withholding tax if, in the case of interest or OID, (a) the beneficial
owner of the Note 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, (b) the beneficial owner of the Note is not a controlled foreign
corporation that is related to the Company through stock ownership, and (c)
either (A) the beneficial owner of the Note certifies to the Company or its
agent, under penalties of perjury, that it is not a United States Holder and
provides its name and address or (B) a securities clearing organization, bank or
other financial institution that holds customers' securities in the ordinary
course of its trade or business (a "financial institution") and holds the Note
certifies to the Company or its agent under penalties of perjury that such
statement has been received from the beneficial owner by it or by a financial
institution between it and the beneficial owner and furnishes the payor with a
copy thereof;
(ii) a United States Alien Holder of a Note will not be
subject to United States federal withholding tax on any gain realized on the
sale or exchange of a Note; and
(iii) a Note held by an individual who at death is not a
citizen or resident of the United States will not be includible in the
individual's gross estate for purposes of the United States federal estate tax
as a result of the individual's death if (a) the individual did 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 and (b) the income on the Note would
not have been effectively connected with a United States trade or business of
the individual at the individual's death.
Recently finalized Internal Revenue Service Treasury
regulations (the "Final Withholding Regulations"), that are generally effective
with respect to payments after December 31, 1998, would provide alternative
methods for satisfying the certification requirement described in clause (i)(c)
above. The Final Withholding Regulations also would require, in the case of
Notes held by a foreign partnership, that (x) the certification described in
clause (i)(c) above be provided by the partners rather than by the foreign
partnership and (y) the partnership provide certain information, including a
United States taxpayer identification number. A look-through rule would apply in
the case of tiered partnerships.
S-29
BACKUP WITHHOLDING AND INFORMATION REPORTING
- --------------------------------------------
UNITED STATES HOLDERS
In general, information reporting requirements will apply to
payments of principal, any premium and interest on a Note and the proceeds of
the sale of a Note before maturity within the United States to, and to the
accrual of OID on a Discount Note with respect to, non-corporate United States
Holders, and "backup withholding" at a rate of 31% will apply to such payments
and to payments of OID if the United States Holder fails to provide an accurate
taxpayer identification number or is notified by the Internal Revenue Service
that it has failed to report all interest and dividends required to be shown on
its federal income tax returns.
UNITED STATES ALIEN HOLDERS
Under current law, information reporting on Internal Revenue
Service Form 1099 and backup withholding will not apply to payments of
principal, premium (if any) and interest (including OID) made by the Company or
a paying agent to a United States Alien Holder on a Note; provided, the
certification described in clause (i)(c) under "United States Alien Holders"
above is received; and provided further that the payor does not have actual
knowledge that the holder is a United States person. The Company or a paying
agent, however, may report (on Internal Revenue Service Form 1042S) payments of
interest (including OID) on Notes. See the discussion above with respect to the
rules under the Final Withholding Regulations.
Payments of the proceeds from the sale by a United States
Alien Holder of a Note made to or through a foreign office of a broker will not
be subject to information reporting or backup withholding, except that if the
broker is a United States person, a controlled foreign corporation for United
States tax purposes or a foreign person 50% or more of whose gross income is
effectively connected with a United States trade or business for a specified
three-year period, information reporting may apply to such payments. Payments of
the proceeds from the sale of a Note to or through the United States office of a
broker is subject to information reporting and backup withholding unless the
holder or beneficial owner certifies as to its non-United States status or
otherwise establishes an exemption from information reporting and backup
withholding.
PLAN OF DISTRIBUTION
The Notes are being offered on a continuing basis for sale by the
Company to or through Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, First Chicago Capital Markets, Inc. and Goldman, Sachs & Co. (the
"Agents"). The Agents, individually or in a syndicate, may purchase Notes, as
principal, from the Company from time to time for resale to investors and other
purchasers at varying prices relating to prevailing market prices at the time of
resale as determined by the applicable Agent or, if so specified in the
applicable Pricing Supplement, for resale at a fixed offering price. If agreed
to by the Company and an Agent, such Agent will utilize its reasonable efforts
on an agency basis to solicit offers to purchase the Notes at 100% of the
principal amount thereof, unless otherwise specified in the applicable Pricing
Supplement. The Company will pay a commission to an Agent, ranging from .125% to
.750% of the principal amount of each Note, depending upon its stated maturity,
sold through such Agent as an agent of the Company. Commissions with respect to
Notes with stated maturities in excess of 30 years that are sold through an
Agent as an agent of the Company will be negotiated between the Company and such
Agent at the time of such sale.
Unless otherwise specified in the applicable Pricing Supplement, any
Note sold to an Agent as principal will be purchased by such Agent at a price
equal to 100% of the principal amount thereof less a percentage of the principal
amount equal to the commission applicable to an agency sale of a Note of
identical maturity. An Agent may sell Notes it has purchased from the Company as
principal to certain dealers less a concession equal to all or any portion of
the discount received in connection with such purchase. Such Agent may allow,
and such dealers may reallow, a discount to certain other dealers. After the
initial offering of Notes, the offering price (in the case of Notes to be resold
on a fixed offering price basis), the concession and the reallowance may be
changed.
S-30
The Company reserves the right to withdraw, cancel or modify the offer
made hereby without notice and may reject offers in whole or in part (whether
placed directly with the Company or through an Agent). Each Agent will have the
right, in its discretion reasonably exercised, to reject in whole or in part any
offer to purchase Notes received by it on an agency basis.
Unless otherwise specified in the applicable Pricing Supplement,
payment of the purchase price of the Notes will be required to be made in
immediately available funds in the Specified Currency in The City of New York on
the date of settlement. See "Description of Notes--General."
Upon issuance, the Notes will not have an established trading market.
The Notes will not be listed on any securities exchange. The Agents may from
time to time purchase and sell Notes in the secondary market, but the Agents are
not obligated to do so, and there can be no assurance that there will be a
secondary market for the Notes or that there will be liquidity in the secondary
market if one develops. From time to time, the Agents may make a market in the
Notes, but the Agents are not obligated to do so and may discontinue any
market-making activity at any time.
In connection with an offering of Notes purchased by one or more Agents
as principal on a fixed offering price basis, such Agent(s) will be permitted to
engage in certain transactions that stabilize the price of Notes. Such
transactions may consist of bids or purchases for the purpose of pegging, fixing
or maintaining the price of Notes. If the Agent creates or Agents create, as the
case may be, a short position in Notes, I.E., if it sells or they sell Notes in
an aggregate principal amount exceeding that set forth in the applicable Pricing
Supplement, such Agent(s) may reduce that short position by purchasing Notes in
the open market. In general, purchases of Notes for the purpose of stabilization
or to reduce a short position could cause the price of Notes to be higher than
it might be in the absence of such purchases.
Neither the Company nor any of the Agents makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described in the immediately preceding paragraph may have on the price of Notes.
In addition, neither the Company nor any of the Agents makes any representation
that the Agents will engage in any such transactions or that such transactions,
once commenced, will not be discontinued without notice.
The Agents may be deemed to be "underwriters" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"). The Company has
agreed to indemnify the Agents against certain liabilities, including
liabilities under the Securities Act, or to contribute to payments the Agents
may be required to make in respect thereof. The Company has agreed to reimburse
the Agents for certain other expenses.
In the ordinary course of its business, the Agents and their affiliates
have engaged and may in the future engage in investment and commercial banking
transactions with the Company and certain of its affiliates.
From time to time, the Company may issue and sell other New Bonds and
New Debt Securities described in the accompanying Prospectus, and the aggregate
principal amount of Notes offered hereby is subject to reduction as a result of
such sales.
S-31
THE POTOMAC EDISON COMPANY
FIRST MORTGAGE BONDS
UNSECURED DEBT SECURITIES
The Potomac Edison Company (the "Company") may offer and sell, at one
time or from time to time in one or more series, its First Mortgage Bonds (the
"New Bonds") and its unsecured debt securities (the "New Debt Securities" and
together with the New Bonds, the "Securities") with an aggregate principal
amount (or if issued at a discount, the aggregate initial offering price) not to
exceed $200,000,000, at prices and on terms to be determined at the time of
sale. This Prospectus will be supplemented by one or more supplements hereto
(each, a "Prospectus Supplement") which will set forth: (i) in the case of an
offering of New Bonds, the aggregate principal amount, maturity, interest rate
(or method of calculating the interest rate), any redemption provisions, any
initial offering price, proceeds to the Company, and any other specific terms of
the particular series of New Bonds; and (ii) in the case of an offering of the
New Debt Securities, the aggregate principal amount, maturity, interest rate (or
method of calculating the interest rate), any redemption or repayment
provisions, any subordination provisions, any initial offering price, any
listing on a securities exchange, proceeds to the Company, and any other
specific terms of the particular series of the New Debt Securities. Unless
otherwise provided in a Prospectus Supplement, the sale of one series of
Securities will not be contingent upon the sale of any other series of
Securities.
The Company may sell the Securities to underwriters, through agents
and/or directly to other purchasers. The applicable Prospectus Supplement will
set forth the names of any underwriters or agents involved in the sale of the
Securities in respect of which this Prospectus is being delivered, the purchase
prices, if any, to be paid by underwriters and the compensation, if any, to be
paid to such underwriters or agents. See "Plan of Distribution".
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. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is August 18, 1997.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any jurisdiction in which such offer, solicitation or sale would be unlawful
prior to registration or qualification under the securities laws of any such
jurisdiction.
AVAILABLE INFORMATION
The Potomac Edison Company, 10435 Downsville Pike, Hagerstown, MD
21740-1766 (tel. 301-790-3400), is subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the Securities and
Exchange Commission (the "Commission"). Such reports and other information filed
by the Company can be inspected at the public reference facilities of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, 500 West Madison
Street, Chicago, Illinois 60661, and 7 World Trade Center, New York, New York
10048. Copies of such material can be obtained from the Public Reference Section
of the Commission at prescribed rates. Requests should be directed to the
Commission's Public Reference Section, 450 Fifth Street, N.W., Washington, D.C.
20549. Such material may also be accessed electronically by means of the
Commission's "home" page on the Internet at http://www.sec.gov. Certain
securities of the Company are listed on the New York Stock Exchange and the
Philadelphia Stock Exchange, and reports and other information concerning the
Company can be inspected at the offices of such Exchanges.
The Company filed with the Commission a registration statement on Form
S-3 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Securities. This Prospectus does not contain all the
information set forth in the Registration Statement, certain portions of which
have been omitted as permitted by the rules and regulations of the Commission.
For further information with respect to the Company and the Securities,
reference is made to the Registration Statement and the exhibits and the
financial statements, notes and schedules filed as a part thereof or
incorporated by reference therein, which may be inspected at the public
reference facilities of the Commission at the addresses set forth above or
through the Commission's home page on the Internet. Statements made in this
Prospectus concerning the contents of any documents referred to herein are not
necessarily complete, and in each instance are qualified in all respects by
reference to the copy of such document filed as an exhibit to the Registration
Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by the Company with the
Commission pursuant to the Exchange Act, are hereby incorporated by reference in
this Prospectus:
(i) The Annual Report of the Company on Form 10-K for the year
ended December 31, 1996 (the "Annual Report");
(ii) The Current Report of the Company on Form 8-K dated April 5,
1997; and
(iii) The Quarterly Reports of the Company on Form 10-Q for the
quarters ended March 31, 1997 and June 30, 1997.
All documents filed by the Company pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to
the termination of the offering of the applicable Securities shall be deemed to
be incorporated in this Prospectus by reference and to be a part hereof from the
date of filing of such documents. Any statement contained herein, in the
applicable Prospectus Supplement or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein,
in such 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 statement so modified or superseded shall not be deemed,
except as modified or superseded, to constitute a part of the Registration
Statement and/or this Prospectus.
THE COMPANY HEREBY UNDERTAKES TO PROVIDE WITHOUT CHARGE TO EACH PERSON
TO WHOM A COPY OF THIS PROSPECTUS AND THE APPLICABLE PROSPECTUS SUPPLEMENT HAS
BEEN DELIVERED, ON THE WRITTEN OR ORAL REQUEST OF ANY SUCH PERSON, A COPY OF ANY
OR ALL OF THE DOCUMENTS REFERRED TO ABOVE WHICH HAVE BEEN OR MAY BE INCORPORATED
BY REFERENCE IN THIS PROSPECTUS, OTHER THAN EXHIBITS TO SUCH DOCUMENTS. REQUESTS
FOR SUCH COPIES SHOULD BE DIRECTED TO: THE POTOMAC EDISON COMPANY, 10435
DOWNSVILLE PIKE, HAGERSTOWN, MD 21740-1766, ATTENTION: EILEEN M. BECK, SECRETARY
(TEL. 301-665-2704).
2
THE COMPANY
The Company, incorporated in Maryland in 1923 and in Virginia in 1974,
is an electric utility operating in portions of Maryland, Virginia and West
Virginia. It also owns generating capacity in Pennsylvania. The Company is a
wholly-owned subsidiary of Allegheny Energy, Inc. (formerly Allegheny Power
System, Inc.) and, together with Monongahela Power Company ("Monongahela"), West
Penn Power Company ("West Penn") and Allegheny Generating Company ("AGC")
(collectively, the "affiliates"), makes up the Allegheny Power integrated
electric utility system (the "System"). The Company owns 28% of the common stock
of AGC, and Monongahela and West Penn own the remainder of AGC's common stock.
AGC owns an undivided 40% interest (840 MW) in a pumped-storage hydroelectric
station in Bath County, Virginia, which is operated by a nonaffiliated company.
- --------------------------------------------------------------------------------
RATIOS OF EARNINGS TO FIXED CHARGES
For purposes of calculating the following ratios, (i) "earnings"
represent pretax income from continuing operations plus fixed charges, and (ii)
"fixed charges" represent interest expenses, amortization of debt expense and
discount or premium relating to any indebtedness, portion of rental expense as
can be demonstrated to be representative of the interest factor, and preferred
stock dividend requirements of majority-owned subsidiaries and 50-percent-owned
persons.
Fiscal Year Ended 12-Month Period Ended
December 31 June 30
1992 1993 1994 1995 1996 1996 1997
Ratio of Earnings
to Fixed Charges .............. 3.40 3.34 3.46 3.27 3.25 3.47 3.34
- --------------------------------------------------------------------------------
USE OF PROCEEDS
Unless otherwise specified in the applicable Prospectus Supplement,
the net proceeds from the sale of the Securities will be added to the Company's
general funds and, together with other funds available to the Company, will be
used to pay or prepay, to the extent desirable, debt and for other corporate
purposes, including the financing of the Company's construction program.
CONSTRUCTION AND FINANCING
Construction expenditures by the Company in 1996 amounted to $86.3
million and for 1997 and 1998 are expected to aggregate $97.8 million and $109.4
million, respectively. In 1996, these expenditures included $13.5 million for
environmental control technology, of which $.5 million was for compliance with
the Clean Air Act Amendments of 1990 (the "CAAA"). The 1997 and 1998 estimated
expenditures include $7.2 million and $11.3 million, respectively, for
environmental control technology of which $1.6 million and $5.7 million,
respectively, are to cover costs of compliance with the CAAA. Allowance for
funds used during construction (AFUDC)(shown below) has been reduced for
carrying charges on CAAA expenditures that are being collected through currently
approved base rates.
1996 1997 1998
---- ---- ----
(Millions of Dollars)
Generation.................................... $ 27.7 $ 24.0 $ 30.8
Transmission ................................. 15.9 25.0 33.8
Distribution.................................. 42.7 48.8 44.8
------ ------ ------
Total......................................... $ 86.3 $ 97.8 $109.4
====== ====== ======
Allowance for Funds used
During Construction
Included Above.............................. $ 2.5 $ 2.2 $ 2.7
3
In connection with its construction and demand-side management programs,
the Company must make estimates of the availability and cost of capital as well
as the future demands of its customers that are necessarily subject to regional,
national, and international developments, changing business conditions, and
other factors. The construction of facilities and their cost are affected by
laws and regulations, lead times in manufacturing, availability of labor,
materials and supplies, inflation, interest rates, and licensing, rate,
environmental, and other proceedings before regulatory authorities. Decisions
regarding construction of facilities must now also take into account retail
competition. As a result, the Company's future plans are subject to continuing
review and substantial change.
The Company has financed its construction program through internally
generated funds, first mortgage bonds, debentures, subordinated debt and
preferred stock issues, pollution control and solid waste disposal notes,
instalment loans, long-term lease arrangements, equity investments by its
parent, and, where necessary, interim short-term debt. The future ability of the
Company to finance its construction program by these means depends on many
factors, including creditworthiness, rate levels sufficient to provide
internally generated funds and adequate revenues to produce a satisfactory
return on the common equity portion of the Company's capital structure and to
support the issuance of senior and other securities.
DESCRIPTION OF THE NEW BONDS
GENERAL
The New Bonds are to be issued as First Mortgage Bonds (the "Bonds")
under an Indenture, dated as of October 1, 1944, between the Company and The
Chase Manhattan Bank and Thomas J. Foley, as Bond Trustees, as supplemented and
as to be supplemented as is necessary to create any series of New Bonds
(collectively, the "Bond Indenture"). The Chase Manhattan Bank is a depositary
of funds of and a lender to the Company and its affiliates.
The statements under this caption relating to the New Bonds and the
Bond Indenture are summaries and do not purport to be complete. They make use of
terms defined in the Bond Indenture and are qualified in their entirety by
express reference to the Bond Indenture, the form of which is filed as an
exhibit to the Registration Statement.
Reference is made to the Prospectus Supplement relating to the
particular New Bonds offered thereby (the "Offered New Bonds") for the terms of
the Offered New Bonds, including the date of maturity, the rate of interest (or
manner of calculation thereof), and the price at which, the period(s) within
which, and the terms and conditions upon which, the Offered New Bonds may,
pursuant to any optional or mandatory redemption provisions, be redeemed by the
Company.
Unless otherwise indicated in the Prospectus Supplement relating
thereto, the Offered New Bonds are to be issued as registered securities without
coupons in denominations of $1,000 and any integral multiple thereof. They will
be transferable and exchangeable without charge except for governmental charges,
if any.
The Bond Indenture does not contain any covenants or other provisions
that are specifically intended to afford holders of the New Bonds special
protection in the event of a highly leveraged or similar transaction involving
the Company.
RENEWAL AND REPLACEMENT FUND
So long as any series of Bonds issued before January 31, 1993 ("Prior
Bonds") are outstanding, the Company will, on or before April 30 in each year,
pay to the Bond Trustee in cash or Bonds an amount equal to 2-1/4% of the
average amount of Depreciable Property of the Company during the preceding year
less certain property additions and Bonds retired or to be retired. Cash
deposited may be used to acquire
4
Prior Bonds or be withdrawn against Prior Bonds or gross property additions.
Excess credits may be used in any subsequent year. The Company has reserved the
right to change the 2-1/4% with the approval of the Commission.
SECURITY
The New Bonds will be equally and ratably secured, together with all
other Bonds now or hereafter issued, by a direct first lien on all the fixed
properties and franchises now or hereafter owned by the Company. The lien is
subject to statutory liens and equitable priorities for taxes and other
permitted liens and encumbrances and, as to certain after-acquired property, to
preexisting liens and encumbrances, and to rights of others which may attach
prior to recordation of a supplemental indenture specifically mortgaging the
property. There are excepted from the lien all bills, notes, accounts
receivable, cash, agreements, unpledged securities, materials and supplies and
certain other assets.
ISSUANCE OF ADDITIONAL BONDS
Additional Bonds of any series may be issued in an amount equal to (1)
60% of the net bondable value (such value estimated to be in excess of
$717,000,000 as of June 30, 1997) of property additions not subject to an
unfunded prior lien, (2) certain Bonds retired or to be retired and (3) cash
deposited with the Trustee; provided, however, that, notwithstanding the
foregoing (except as to additional Bonds which are issued to refund Bonds within
two years of their maturity), additional Bonds may not be issued unless net
earnings of the Company available for interest (in 12 out of the 15 preceding
months), after a provision for depreciation (at the higher of (i) 2-1/4% of
Depreciable Property or (ii) book depreciation) but before income taxes, are at
least twice the annual interest charges on all Bonds and prior lien bonds then
outstanding or applied for. Cash deposited for an issue of Bonds may be
withdrawn in an amount equal to either 60% of net bondable value of property
additions not subject to a prior lien or the aggregate principal amount of
certain Bonds retired or to be retired and such property additions or Bonds may
not thereafter be used as a basis to issue additional Bonds.
Additional prior lien bonds (indebtedness secured by a prior lien on
after-acquired property) may be issued with the same limits as those applicable
to the issuance of the additional Bonds, on the basis of property subject to
such prior lien, the retirement of prior lien bonds or the deposit of cash.
The Company expects that the New Bonds will be issued on the basis of
property additions, cash deposited or Bonds retired or to be retired.
MODIFICATION
With the consent of the Company and the holders of 75% in aggregate
principal amount of the Bonds outstanding and (if less than all series are
affected) 75% in amount of each affected series, the Bond Indenture and the
rights of the Bondholders may be changed in any way except to affect the terms
of payment of principal or interest or to reduce said percentage.
DEFAULTS
Failure to pay principal or, for specified periods, to pay interest or
meet other Bond Indenture requirements constitutes an event of default. A
majority of the Bondholders may direct the time, method and place of exercising
any power conferred upon the Bond Trustee, but the Bond Trustee, subject during
default to the required standard of care, is first entitled to security or
indemnity satisfactory to it. Periodic evidence as to general compliance with
the Bond Indenture is not required to be furnished unless prescribed by the
Commission under the Trust Indenture Act of 1939, but certificates as to
compliance with certain provisions are required to be furnished annually and in
connection with action to be taken by the Bond Trustee at the Company's request.
5
REGARDING THE TRUSTEE
A Trustee under the Bond Indenture is The Chase Manhattan Bank. The
Company maintains normal banking arrangements with The Chase Manhattan Bank.
DESCRIPTION OF NEW DEBT SECURITIES
GENERAL
The New Debt Securities may be issued in one or more series under an
Indenture dated as of May 31, 1995, between the Company and The Bank of New
York, as Trustee (the "Trustee"). The following summary does not purport to be
complete and is subject in all respects to the provisions of, and is qualified
in its entirety by reference to, the Indenture and the New Debt Securities, the
forms of which are filed, or will be filed, as exhibits to the Registration
Statement of which this Prospectus forms a part, or as an exhibit to a Current
Report on Form 8-K to be incorporated by reference in such Prospectus. Whenever
particular provisions or defined terms in such documents are referred to herein
or in a Prospectus Supplement, such provisions or terms are incorporated by
reference herein or therein, as the case may be.
The New Debt Securities will be unsecured obligations of the Company
and, unless otherwise provided in a Prospectus Supplement relating to a
particular series of New Debt Securities, will be subordinated obligations of
the Company.
Reference is made to the Prospectus Supplement relating to any
particular issue of New Debt Securities for the following terms: (1) the title
of such New Debt Securities; (2) any limit on the aggregate principal amount of
such New Debt Securities or the series of which they are a part; (3) the date or
dates on which the principal of any of such New Debt Securities will be payable;
(4) the rate or rates at which any of such New Debt Securities will bear
interest, if any, the date or dates from which any such interest will accrue,
the Interest Payment Dates on which any such interest will be payable, including
the right to defer the payment of interest, and the Regular Record Date for any
such interest payable on any Interest Payment Date; (5) the place or places
where the principal of and any premium and interest on any of such New Debt
Securities will be payable; (6) the period or periods within which, the price or
prices at which and the terms and conditions on which any of such New Debt
Securities may be redeemed, in whole or in part, at the option of the Company;
(7) the obligation, if any, of the Company to redeem or purchase any of such New
Debt Securities pursuant to any sinking fund or analogous provision or at the
option of the Holder thereof, and the period or periods within which, the price
or prices at which and the terms and conditions on which any of such New Debt
Securities will be redeemed or purchased, in whole or in part, pursuant to any
such obligation; (8) the denominations in which any of such New Debt Securities
will be issuable, if other than denominations of $1,000 and any integral
multiple thereof; (9) if the amount of principal of or any premium or interest
on any of such New Debt Securities may be determined with reference to an index
or pursuant to a formula, the manner in which such amounts will be determined;
(10) if other than the currency of the United States of America, the currency,
currencies, or currency units in which the principal of or any premium or
interest on any of such New Debt Securities will be payable and the manner of
determining the equivalent thereof in the currency of the United States of
America for any purpose, including for purposes of determining the principal
amount deemed to be Outstanding at any time; (11) if the principal of or any
premium or interest on any of such New Debt Securities is to be payable, at the
election of the Company or the Holder thereof, in one or more currencies or
currency units other than those in which such New Debt Securities are stated to
be payable, the currency, currencies or currency units in which payment of any
such amount as to which such election is made will be payable, the periods
within which and the terms and
6
conditions upon which such election is to be made and the amount so payable (or
the manner in which such amount is to be determined); (12) if other than the
entire principal amount thereof, the portion of the principal amount of any of
such New Debt Securities which will be payable upon declaration of acceleration
of the Maturity thereof; (13) if the principal amount payable at the Stated
Maturity of any of such New Debt Securities will not be determinable as of any
one or more dates prior to the Stated Maturity, the amount which will be deemed
to be such principal amount as of any such date for any purpose, including the
principal amount thereof which will be due and payable upon any Maturity other
than the Stated Maturity or which will be deemed to be Outstanding as of any
such date (or, in any such case, the manner in which such deemed principal
amount is to be determined); (14) if applicable, that such New Debt Securities,
in whole or any specified part, are defeasible pursuant to the provisions of the
Indenture described under "--Defeasance and Covenant Defeasance - Defeasance and
Discharge" or "Defeasance and Covenant Defeasance - Defeasance of Certain
Covenants," or under both such captions; (15) whether any of such New Debt
Securities will be issuable in whole or in part in the form of one or more
Global Securities and, if so, the identity of the Depositary for such Global
Securities and disclosure of the form of any legend or legends to be borne by
any such Global Security in addition to or in lieu of the legend referred to
under "--Global Securities" and whether any transfer of such Global Security in
whole or in part may be registered in the names of Persons other than such
Depositary or its nominee; (16) any addition to or change in the Events of
Default applicable to any of such New Debt Securities and any change in the
right of the Trustee or the Holders to declare the principal amount of any of
such New Debt Securities due and payable; (17) any addition to or change in the
covenants in the Indenture; and (18) any other terms of such New Debt Securities
not inconsistent with the provisions of the Indenture. (Section 301).
New Debt Securities, including Original Issue Discount Securities, may
be sold at a substantial discount below their principal amount. Certain special
United States federal income tax considerations (if any) applicable to New Debt
Securities sold at an original issue discount may be described in the applicable
Prospectus Supplement. In addition, certain special United States federal income
tax or other considerations (if any) applicable to any New Debt Securities which
are denominated in a currency or currency unit other than United States dollars
may be described in the applicable Prospectus Supplement.
The Indenture does not contain any covenants or other provisions that
are specifically intended to afford holders of the New Debt Securities special
protection in the event of a highly leveraged or similar transaction involving
the Company.
SUBORDINATION
The Indenture provides that, unless otherwise provided in a
supplemental indenture or a Board Resolution and described in the applicable
Prospectus Supplement, the New Debt Securities will be subordinate and subject
in right of payment to the prior payment in full of all Senior Debt (as defined
below) of the Company, whether outstanding as of the date of the Indenture or
thereafter incurred. (Section 1401). If the relevant supplemental indenture or
Board Resolution results in the corresponding series of New Debt Securities
being subordinated obligations of the Company, the following provisions will
apply:
(i) No payment of principal (including redemption and
sinking fund payments) of, or premium, if any, or interest on, the New
Debt Securities may be made if any Senior Debt is not paid when due,
any applicable grace period with respect to such default has ended and
such default has not been cured or waived, or if the maturity of any
Senior Debt has been accelerated because of a default. (Section 1402).
(ii) Upon any distribution of assets of the Company to
creditors upon any dissolution, winding-up, liquidation or
reorganization, whether voluntary or involuntary or in bankruptcy,
7
insolvency, receivership or other proceedings, all principal of, and
premium, if any, and interest due or to become due on, all Senior Debt
must be paid in full before the holders of the New Debt Securities are
entitled to receive or retain any payment. (Section 1403).
(iii) Subject to the payment in full of all Senior Debt, the
rights of the holders of the New Debt Securities will be subrogated to
the rights of the holders of Senior Debt to receive payments or
distributions applicable to Senior Debt until all amounts owing on the
New Debt Securities are paid in full. (Section 1404).
The term "Senior Debt" means the principal of, and premium, if any,
interest on, and any other payment due pursuant to, any of the following items
of indebtedness, whether outstanding at the date of execution of the Indenture
or thereafter incurred, created or assumed:
(a) all indebtedness of the Company evidenced by notes,
debentures, bonds, or other securities sold by the Company for money,
including all Bonds of the Company outstanding from time to time;
(b) all indebtedness of others of the kinds described in the
preceding clause (a) assumed by or guaranteed in any manner by the
Company, including through an agreement to purchase, contingent or
otherwise; and
(c) all renewals, extensions, or refundings of indebtedness
of the kinds described in any of the preceding clauses (a) and (b);
unless, in the case of any particular indebtedness, renewal, extension or
refunding, the instrument creating or evidencing the same or the assumption or
guarantee of the same expressly provides that such indebtedness, renewal,
extension or refunding is not superior in right of payment to or is pari passu
with the New Debt Securities. (Section 101).
The Indenture does not limit the aggregate amount of Senior Debt that
the Company may issue. As of June 30, 1997, outstanding Senior Debt of the
Company aggregated approximately $590,700,000.
FORM, EXCHANGE, AND TRANSFER
The New Debt Securities of each series will be issuable only in fully
registered form without coupons and, unless otherwise specified in the
applicable Prospectus Supplement, in denominations of $1,000 and any integral
multiple thereof. (Section 302).
At the option of the Holder, subject to the terms of the Indenture and
the limitations applicable to Global Securities, New Debt Securities of any
series will be exchangeable for other New Debt Securities of the same series, of
any authorized denomination and of like tenor and aggregate principal amount.
(Section 305).
Subject to the terms of the Indenture and the limitations applicable
to Global Securities, New Debt Securities may be presented for exchange as
provided above or for registration of transfer (duly endorsed or with the form
of transfer endorsed thereon duly executed) at the office of the Security
Registrar or at the office of any transfer agent designated by the Company for
such purpose. No service charge will be made for any registration of transfer or
exchange of New Debt Securities, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
therewith. Such transfer or exchange will be effected upon the Security
Registrar or such transfer agent, as the case may be, being satisfied with the
documents of title and identity of the person making the request. The Company
has appointed the Trustee as Security Registrar. Any transfer agent (in addition
to the Security Registrar) initially designated by the Company for any New
8
Debt Securities will be named in the applicable Prospectus Supplement. (Section
305). The Company may at any time designate additional transfer agents or
rescind the designation of any transfer agent or approve a change in the office
through which any transfer agent acts, except that the Company will be required
to maintain a transfer agent in each Place of Payment for the New Debt
Securities of each series. (Section 1002).
If the New Debt Securities of any series (or of any series and
specified tenor) are to be redeemed in part, the Company will not be required to
(i) issue, register the transfer of, or exchange any Debt Security of that
series (or of that series and specified tenor, as the case may be) during a
period beginning at the opening of business 15 days before the day of mailing of
a notice of redemption of any such Debt Security that may be selected for
redemption and ending at the close of business on the day of such mailing or
(ii) register the transfer of or exchange any Debt Security so selected for
redemption, in whole or in part, except the unredeemed portion of any such Debt
Security being redeemed in part. (Section 305).
GLOBAL SECURITIES
Some or all of the New Debt Securities of any series may be
represented, in whole or in part, by one or more Global Securities which will
have an aggregate principal amount equal to that of the New Debt Securities
represented thereby. Each Global Security will be registered in the name of a
Depositary or a nominee thereof identified in the applicable Prospectus
Supplement, will be deposited with such Depositary or nominee or a custodian
therefor and will bear a legend regarding the restrictions on exchanges and
registration of transfer thereof referred to below and any such other matters as
may be provided for pursuant to the Indenture.
Notwithstanding any provision of the Indenture or any Debt Security
described herein, no Global Security may be exchanged in whole or in part for
New Debt Securities registered, and no transfer of a Global Security in whole or
in part may be registered, in the name of any Person other than the Depositary
for such Global Security or any nominee of such Depositary unless (i) the
Depositary has notified the Company that it is unwilling or unable to continue
as Depositary for such Global Security or has ceased to be qualified to act as
such as required by the Indenture, (ii) there shall have occurred and be
continuing an Event of Default with respect to the New Debt Securities
represented by such Global Security or (iii) there shall exist such
circumstances, if any, in addition to or in lieu of those described above as may
be described in the applicable Prospectus Supplement. All securities issued in
exchange for a Global Security or any portion thereof will be registered in such
names as the Depositary may direct. (Sections 204 and 305).
As long as the Depositary, or its nominee, is the registered Holder of
a Global Security, the Depositary or such nominee, as the case may be, will be
considered the sole owner and Holder of such Global Security and the New Debt
Securities represented thereby for all purposes under the New Debt Securities
and the Indenture. Except in the limited circumstances referred to above, owners
of beneficial interests in a Global Security will not be entitled to have such
Global Security or any New Debt Securities represented thereby registered in
their names, will not receive or be entitled to receive physical delivery of
certificated New Debt Securities in exchange therefor and will not be considered
to be the owners or Holders of such Global Security or any New Debt Securities
represented thereby for any purpose under the New Debt Securities or the
Indenture. All payments of principal of and any premium and interest on a Global
Security will be made in immediately available funds to the Depositary or its
nominee, as the case may be, as the Holder thereof. The laws of some
jurisdictions require that certain purchasers of securities take physical
delivery of such securities in certificated form. These laws may impair the
ability to transfer beneficial interests in a Global Security.
Ownership of beneficial interests in a Global Security will be limited
to institutions that have accounts with the Depositary or its nominee
("participants") and to persons that may hold beneficial interests through
participants. In connection
9
with the issuance of any Global Security, the Depositary will credit, on its
book-entry registration and transfer system, the respective principal amounts of
New Debt Securities represented by the Global Security to the accounts of its
participants. Ownership of beneficial interests in a Global Security will be
shown only on, and the transfer of those ownership interests will be effected
only through, records maintained by the Depositary (with respect to
participants' interests) or such participants (with respect to interests of
persons held by such participants on their behalf). Payments, transfers,
exchanges, and other matters relating to beneficial interests in a Global
Security may be subject to various policies and procedures adopted by the
Depositary from time to time. None of the Company, the Trustee or any agent of
the Company or the Trustee will have any responsibility or liability for any
aspect of the Depositary's or any participant's records relating to, or for
payments made on account of, beneficial interests in a Global Security, or for
maintaining, supervising, or reviewing any records relating to such beneficial
interests.
Beneficial interests in a Global Security will trade in the
Depositary's same-day funds settlement system, and secondary market trading
activity in such beneficial interests will settle in immediately available
funds, subject in all cases to the rules and procedures of the Depositary and
its participants.
PAYMENT AND PAYING AGENTS
Unless otherwise indicated in the applicable Prospectus Supplement,
payment of interest on a New Debt Security on any Interest Payment Date will be
made to the Person in whose name such New Debt Security (or one or more
Predecessor New Debt Securities) is registered at the close of business on the
Regular Record Date for such interest. (Section 307).
Unless otherwise indicated in the applicable Prospectus Supplement,
principal of and any premium and interest on the New Debt Securities of a
particular series will be payable at the office of such Paying Agent or Paying
Agents as the Company may designate for such purpose from time to time, except
that at the option of the Company payment of any interest may be made by check
mailed to the address of the Person entitled thereto as such address appears in
the Security Register. Unless otherwise indicated in the applicable Prospectus
Supplement, the principal corporate trust office of The Bank of New York will be
designated as the Company's sole Paying Agent for payments with respect to New
Debt Securities of each series. Any other Paying Agents initially designated by
the Company for the New Debt Securities of a particular series will be named in
the applicable Prospectus Supplement. The Company may at any time designate
additional Paying Agents or rescind the designation of any Paying Agent or
approve a change in the office through which any Paying Agent acts, except that
the Company will be required to maintain a Paying Agent in each Place of Payment
for the New Debt Securities of a particular series. (Section 1002).
All moneys paid by the Company to a Paying Agent for the payment of
the principal of or any premium or interest on any New Debt Security which
remain unclaimed at the end of two years after such principal, premium or
interest has become due and payable will be repaid to the Company, and the
Holder of such New Debt Security thereafter may look only to the Company for
payment thereof. (Section 1003).
CONSOLIDATION, MERGER, AND SALE OF ASSETS
The Company may not consolidate with or merge into any other Person or
convey, transfer or lease its properties and assets substantially as an entirety
to any Person, and may not permit any Person to consolidate with or merge into
the Company or convey, transfer, or lease its properties and assets
substantially as an entirety to the Company, unless (i) the successor Person (if
any) is a corporation, partnership, trust or other entity organized and validly
existing under the laws of any domestic jurisdiction and expressly assumes the
Company's obligations on the New Debt Securities and under the Indenture, (ii)
immediately after giving effect to the transaction, no Event of Default, and no
event which, after notice or lapse of time or
10
both, would become an Event of Default, shall have occurred and be continuing
and (iii) certain other conditions are met. (Section 801).
EVENTS OF DEFAULT
Each of the following will constitute an Event of Default under the
Indenture with respect to New Debt Securities of any series: (a) failure to pay
principal of or any premium on any Debt Security of that series when due; (b)
failure to pay any interest on any New Debt Securities of that series when due,
continued for 30 days; (c) failure to deposit any sinking fund payment, when
due, in respect of any Debt Security of that series; (d) failure to perform any
other covenant of the Company in the Indenture (other than a covenant included
in the Indenture solely for the benefit of a series other than that series),
continued for 60 days after written notice has been given by the Trustee, or the
Holders of at least 10% in principal amount of the Outstanding New Debt
Securities of that series, as provided in the Indenture; provided, however, that
no notice by the Trustee to the Holders of such an occurrence shall be given
until at least 30 days after the occurrence of such failure to perform; and (e)
certain events in bankruptcy, insolvency or reorganization. (Section 501).
If an Event of Default (other than an Event of Default described in
clause (e) above) with respect to the New Debt Securities of any series at the
time Outstanding shall occur and be continuing, either the Trustee or the
Holders of at least 25% in aggregate principal amount of the Outstanding New
Debt Securities of that series by notice as provided in the Indenture may
declare the principal amount of the New Debt Securities of that series (or, in
the case of any Debt Security that is an Original Issue Discount Security or the
principal amount of which is not then determinable, such portion of the
principal amount of such Debt Security, or such other amount in lieu of such
principal amount, as may be specified in the terms of such Debt Security) to be
due and payable immediately. If an Event of Default described in clause (e)
above with respect to the New Debt Securities of any series at the time
Outstanding shall occur, the principal amount of all the New Debt Securities of
that series (or, in the case of any such Original Issue Discount Debt Security
or other Debt Security, such specified amount) will automatically, and without
any action by the Trustee or any Holder, become immediately due and payable.
After any such acceleration, but before a judgment or decree based on
acceleration, the Holders of a majority in aggregate principal amount of the
Outstanding New Debt Securities of that series may, under certain circumstances,
rescind and annul such acceleration if all Events of Default, other than the
non-payment of accelerated principal (or other specified amount), have been
cured or waived as provided in the Indenture. (Section 502). For information as
to waiver of defaults, see "Modification and Waiver."
Subject to the provisions of the Indenture relating to the duties of
the Trustee in case an Event of Default shall occur and be continuing, the
Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request or direction of any of the Holders, unless
such Holders shall have offered to the Trustee reasonable indemnity. (Section
603). Subject to such provisions for the indemnification of the Trustee, the
Holders of a majority in principal amount of the Outstanding New Debt Securities
of any series will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or exercising
any trust or power conferred on the Trustee, with respect to the New Debt
Securities of that series. (Section 512).
No Holder of a Debt Security of any series will have any right to
institute any proceeding with respect to the Indenture, or for the appointment
of a receiver or a trustee, or for any other remedy thereunder, unless (i) such
Holder has previously given to the Trustee written notice of a continuing Event
of Default with respect to the New Debt Securities of that series, (ii) the
Holders of at least 25% in aggregate principal amount of the Outstanding New
Debt Securities of that series have made written request, and such Holder or
Holders have offered reasonable indemnity, to the Trustee to institute such
proceeding as trustee and (iii) the Trustee has failed to institute such
proceeding, and has not received from the Holders of a majority in aggregate
principal amount of the Outstanding New Debt Securities of that series a
11
direction inconsistent with such request, within 60 days after such notice,
request and offer. (Section 507). However, such limitations do not apply to a
suit instituted by a Holder of a Debt Security for the enforcement of payment of
the principal of or any premium or interest on such Debt Security on or after
the applicable due date specified in such Debt Security. (Section 508).
The Company will be required to furnish to the Trustee annually a
statement by certain of its officers as to whether or not the Company, to their
knowledge, is in default in the performance or observance of any of the terms,
provisions and conditions of the Indenture and, if so, specifying all such known
defaults. (Section 1004).
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the
Company and the Trustee with the consent of the Holders of a majority in
aggregate principal amount of the Outstanding New Debt Securities of each series
affected by such modification or amendment; provided, however, that no such
modification or amendment may, without the consent of the Holder of each
Outstanding Debt Security affected thereby, (a) change the Stated Maturity of
the principal of, or any instalment of principal of or interest on, any Debt
Security, (b) reduce the principal amount of, or any premium or interest on, any
Debt Security, (c) reduce the amount of principal of an Original Issue Discount
Security or any other Debt Security payable upon acceleration of the Maturity
thereof, (d) change the place or currency of payment of principal of, or any
premium or interest on, any Debt Security, (e) impair the right to institute
suit for the enforcement of any payment on or with respect to any Debt Security,
(f) modify the subordination provisions in a manner adverse to the Holders of
the New Debt Securities, (g) reduce the percentage in principal amount of
Outstanding New Debt Securities of any series, the consent of whose Holders is
required for modification or amendment of the Indenture, (h) reduce the
percentage in principal amount of Outstanding New Debt Securities of any series
necessary for waiver of compliance with certain provisions of the Indenture or
for waiver of certain defaults or (i) modify such provisions with respect to
modification and waiver. (Section 902).
The Holders of a majority in principal amount of the Outstanding New
Debt Securities of any series may waive compliance by the Company with certain
restrictive provisions of the Indenture with respect to such series. (Section
1008). The Holders of a majority in aggregate principal amount of the
Outstanding New Debt Securities of any series may waive any past default under
the Indenture with respect to such series, except a default in the payment of
principal, premium, or interest and certain covenants and provisions of the
Indenture which cannot be amended without the consent of the Holder of each
Outstanding Debt Security of such series affected. (Section 513).
The Indenture provides that in determining whether the Holders of the
requisite principal amount of the Outstanding New Debt Securities have given or
taken any direction, notice, consent, waiver, or other action under the
Indenture as of any date, (i) the principal amount of an Original Issue Discount
Security that will be deemed to be Outstanding will be the amount of the
principal thereof that would be due and payable as of such date upon
acceleration of the Maturity thereof to such date, (ii) if, as of such date, the
principal amount payable at the Stated Maturity of a Debt Security is not
determinable (for example, because it is based on an index), the principal
amount of such Debt Security deemed to be Outstanding as of such date will be an
amount determined in the manner prescribed for such Debt Security and (iii) the
principal amount of a Debt Security denominated in one or more foreign
currencies or currency units that will be deemed to be Outstanding will be the
U.S. dollar equivalent, determined as of such date in the manner prescribed for
such Debt Security, of the principal amount of such Debt Security (or, in the
case of a Debt
12
Security described in clause (i) or (ii) above, of the amount described in such
clause). Certain New Debt Securities, including those for whose payment or
redemption money has been deposited or set aside in trust for the Holders and
those that have been fully defeased, as described under "Defeasance and Covenant
Defeasance--Defeasance and Discharge" below, will not be deemed to be
Outstanding. (Section 101).
Except in certain limited circumstances, the Company will be entitled
to set any day as a record date for the purpose of determining the Holders of
Outstanding New Debt Securities of any series entitled to give or take any
direction, notice, consent, waiver, or other action under the Indenture, in the
manner and subject to the limitations provided in the Indenture. In certain
limited circumstances, the Trustee will be entitled to set a record date for
action by Holders. If a record date is set for any action to be taken by Holders
of a particular series, such action may be taken only by persons who are Holders
of Outstanding New Debt Securities of that series on the record date. To be
effective, such action must be taken by Holders of the requisite principal
amount of such New Debt Securities within a specified period following the
record date. For any particular record date, this period will be 180 days or
such shorter period as may be specified by the Company (or the Trustee, if it
set the record date), and may be shortened or lengthened (but not beyond 180
days) from time to time. (Section 104).
DEFEASANCE AND COVENANT DEFEASANCE
If and to the extent indicated in the applicable Prospectus
Supplement, the Company may elect, at its option at any time, to have the
provisions of Section 1302, relating to defeasance and discharge of
indebtedness, or Section 1303, relating to defeasance of certain restrictive
covenants in the Indenture, applied to the New Debt Securities of any series, or
to any specified part of a series. (Section 1301).
DEFEASANCE AND DISCHARGE. The Indenture will provide that, upon the
Company's exercise of its option (if any) to have Section 1302 applied to any
New Debt Securities, the Company will be discharged from all its obligations
with respect to such New Debt Securities (except for certain obligations to
exchange or register the transfer of New Debt Securities, to replace stolen,
lost or mutilated New Debt Securities, to maintain paying agencies and to hold
moneys for payment in trust) upon the deposit in trust for the benefit of the
Holders of such New Debt Securities of money or U.S. Government Obligations, or
both, which, through the payment of principal and interest in respect thereof in
accordance with their terms, will provide money in an amount sufficient to pay
the principal of and any premium and interest of such New Debt Securities on the
respective Stated Maturities in accordance with the terms of the Indenture and
such New Debt Securities. Such defeasance or discharge may occur only if, among
other things, the Company has delivered to the Trustee an Opinion of Counsel to
the effect that the Company has received from, or there has been published by,
the United States Internal Revenue Service a ruling, or there has been a change
in tax law, in either case to the effect that Holders of such New Debt
Securities will not recognize gain or loss for federal income tax purposes as a
result of such deposit, defeasance, and discharge and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such deposit, defeasance and discharge were not to
occur. (Sections 1302 and 1304).
DEFEASANCE OF CERTAIN COVENANTS. The Indenture provides that, upon the
Company's exercise of its option (if any) to have Section 1303 applied to any
New Debt Securities, the Company may omit to comply with certain restrictive
covenants that may be described in the applicable Prospectus Supplement, and the
occurrence of certain Events of Default, which are described above in clause (d)
(with respect to such restrictive covenants) in the first paragraph under
"Events of Default" and any that may be described in the applicable Prospectus
Supplement, will be deemed not to be or result in an Event of Default and the
provisions of the Indenture relating to subordination (if otherwise applicable)
will cease to be effective, in each case with respect to such New Debt
Securities. The Company, in order to exercise such option, will be required to
deposit, in trust for the benefit of the Holders of such New Debt Securities,
money or U.S. Government Obligations, or both, which, through the payment
13
of principal and interest in respect thereof in accordance with their terms,
will provide money in an amount sufficient to pay the principal of and any
premium and interest on such New Debt Securities on the respective Stated
Maturities in accordance with the terms of the Indenture and such New Debt
Securities. The Company will also be required, among other things, to deliver to
the Trustee an Opinion of Counsel to the effect that Holders of such New Debt
Securities will not recognize gain or loss for federal income tax purposes as a
result of such deposit and defeasance of certain obligations and will be subject
to federal income tax on the same amount, in the same manner and at the same
times as would have been the case if such deposit and defeasance were not to
occur. In the event the Company were to exercise this option with respect to any
New Debt Securities and such New Debt Securities were declared due and payable
because of the occurrence of an Event of Default, other than one relating to the
applicable restrictive covenant, the amount of money and U.S. Government
Obligations so deposited in trust would be sufficient to pay amounts due on such
New Debt Securities at the time of their respective Stated Maturities but may
not (and generally will not) be sufficient to pay amounts due on such New Debt
Securities upon any acceleration resulting from such Event of Default. In such
case, the Company would remain liable for such payments. (Sections 1303 and
1304).
NOTICES
Notices to Holders of New Debt Securities will be given by mail to the
addresses of such Holders as they may appear in the Security Register. (Sections
101 and 106).
TITLE
The Company, the Trustee, and any agent of the Company or the Trustee
may treat the Person in whose name a Debt Security is registered as the absolute
owner thereof (whether or not such Debt Security may be overdue) for the purpose
of making payment and for all other purposes. (Section 308).
GOVERNING LAW
The Indenture and the New Debt Securities will be governed by, and
construed in accordance with, the law of the State of New York. (Section 112).
REGARDING THE TRUSTEE
The Trustee under the Indenture is The Bank of New York. The Company
maintains normal banking arrangements with The Bank of New York. The Trustee is
also trustee for Junior Subordinated Deferrable Interest Debentures, Series A,
of the Company under the Indenture. Upon the occurrence of an Event of Default
or an event which, after notice or lapse of time or both, would become an Event
of Default, the Trustee may be deemed to have a conflicting interest, for the
purposes of the Trust Indenture Act of 1939 with respect to the New Debt
Securities of any series that rank senior to such Series A Debentures. In such
case, the Trustee may be required to resign as Trustee under the Indenture. In
that event, the Company would be required to appoint a successor Trustee.
PLAN OF DISTRIBUTION
The Company will sell the Securities from time to time through
underwriters, dealers or agents and/or directly to other purchasers in either
negotiated or competitively bid transactions. Any Securities acquired by any
underwriters will be acquired by such 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, at market prices prevailing at
the time of sale or at varying prices determined at the time of sale. The
underwriter or underwriters with respect to a
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particular underwritten offering of Securities will be named in the Prospectus
Supplement relating to such offering and, if an underwriting syndicate is used,
the managing underwriter or underwriters will be set forth on the cover page of
such Prospectus Supplement. The applicable Prospectus Supplement will also set
forth the purchase price of the Securities offered 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 and other specific terms
of the particular Securities.
Unless otherwise set forth in a Prospectus Supplement, the obligations
of the underwriters to purchase any Securities will be subject to certain
conditions precedent, and the underwriters will be obligated to purchase all of
the particular Securities offered thereby if any are purchased.
The Securities may be offered and sold by the Company directly or
through agents designated by the Company from time to time. Any agent involved
in the offer or sale of the Securities in respect of which this Prospectus is
delivered will be named in, and any commissions payable by the Company to such
agent will be set forth in, the applicable Prospectus Supplement. Unless
otherwise indicted in the applicable Prospectus Supplement, each such agent will
be acting on a reasonable-efforts basis for the period of its appointment.
Underwriters, dealers and agents that participate in the distribution
of Securities may be deemed to be underwriters and any discounts or commissions
received by them from the Company and any profit on the resale of Securities by
them may be deemed to be underwriting discounts and commissions under the
Securities Act.
Underwriters, dealers and agents may be entitled, under agreements to
be entered into with the Company, to indemnification against certain civil
liabilities, including liabilities under the Securities Act.
VALIDITY OF THE SECURITIES
The validity of the Securities offered hereby will be passed upon for
the Company by Sullivan & Cromwell, New York, New York, and for the
underwriters, agents or dealers by Brown & Wood LLP, New York, New York. On
matters of local law, those firms will rely on Robert R. Winter, Esq., Vice
President, Legal Services of the Company.
EXPERTS
The financial statements incorporated in this Prospectus by reference
to the Annual Report have been so incorporated in reliance on the reports of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
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No dealer, salesperson or other individual has been authorized to give
any information or to make any representations other than contained or
incorporated by reference in this Prospectus Supplement, the applicable Pricing
Supplement or the Prospectus in connection with the offer made by this
Prospectus Supplement, the applicable Pricing Supplement and the Prospectus and,
if given or made, such information or representations must not be relied upon as
having been authorized by the Company or the Agents. Neither the delivery of
this Prospectus Supplement, the applicable Pricing Supplement or the Prospectus
nor any sale made hereunder and thereunder shall under any circumstance create
an implication that there has not been any change in the affairs of the Company
since the date hereof or thereof. This Prospectus Supplement, the applicable
Pricing Supplement and the Prospectus do not constitute an offer or solicitation
by anyone in any jurisdiction in which such offer or solicitation is not
authorized or in which the person making such offer is not qualified to do so or
to anyone to whom it is unlawful to make such offer or solicitation.
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TABLE OF CONTENTS
PAGE
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PROSPECTUS SUPPLEMENT
Risk Factors ........................... S-2
Description of Notes ................... S-4
Special Provisions Relating to
Foreign Currency Notes ............... S-19
United States Taxation ................. S-22
Plan of Distribution ................... S-30
PROSPECTUS
Available Information................... 2
Incorporation of Certain Documents
By Reference.......................... 2
The Company............................. 3
Use of Proceeds......................... 3
Construction and Financing.............. 3
Description of the New Bonds............ 4
Description of New Debt Securities...... 6
Plan of Distribution.................... 14
Validity of the Securities.............. 15
Experts................................. 15
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$200,000,000
THE POTOMAC EDISON COMPANY
SECURED MEDIUM-TERM NOTES, SERIES A
(A SERIES OF FIRST MORTGAGE BONDS)
AND
UNSECURED MEDIUM-TERM NOTES, SERIES A
EACH DUE NINE MONTHS OR MORE
FROM DATE OF ISSUE
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PROSPECTUS SUPPLEMENT
-----------------
MERRILL LYNCH & CO.
FIRST CHICAGO CAPITAL MARKETS, INC.
GOLDMAN, SACHS & CO.
NOVEMBER 14, 1997
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