<Page>
Prospectus Supplement filed pursuant to Rule 424(b)(2)
Registration No. 333-82230
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED FEBRUARY 14, 2002)
8,000,000 MEDS'sm' EQUITY UNITS
(INITIALLY CONSISTING OF 8,000,000 CORPORATE MEDS'sm')
[KEYSPAN LOGO]
KEYSPAN CORPORATION
Each MEDS Equity Unit will have a stated amount of $50 and will initially
consist of a purchase contract issued by us and $50 principal amount of our
notes due 2008, which we collectively refer to as Corporate MEDS.
The purchase contract will obligate you to purchase from us on May 16, 2005,
for a price of $50, the following number of shares of our common stock:
if the average closing price of our common stock over the 20-trading day
period ending on the third trading day prior to May 16, 2005 equals or
exceeds $42.36, 1.1804 shares;
if the average closing price of our common stock over the same period is
less than $42.36 but greater than $35.30, a number of shares having a value,
based on the 20-trading day average closing price, equal to $50; and
if the average closing price of our common stock over the same period is
less than or equal to $35.30, 1.4164 shares.
Under each purchase contract, we will make quarterly contract adjustment
payments at the rate of 3.85% of the $50 stated amount per year. The notes
will initially bear interest at a rate of 4.90% per year. The interest rate
will be reset on or after February 16, 2005, but no later than May 16, 2005.
These payments will be made quarterly, on February 16, May 16, August 16 and
November 16 of each year, beginning August 16, 2002.
The note will be pledged to secure your obligation to purchase our common
stock under the related purchase contract. The notes will not trade separately
from the Corporate MEDS unless and until Treasury securities are substituted
for the notes to create Treasury MEDS, the purchase contracts are settled
early or the notes are remarketed, all as described in this prospectus
supplement.
The Corporate MEDS have been approved for listing on the New York Stock
Exchange, or NYSE, under the symbol 'KSE PrA'. On April 30, 2002, the last
reported sale price of our common stock on the NYSE was $35.30 per share.
The Corporate MEDS are subject to special tax rules. For a discussion of the
special rules governing contingent payment debt obligations, see 'Certain United
States Federal Income Tax Consequences.'
INVESTING IN THE MEDS EQUITY UNITS INVOLVES RISKS. SEE 'RISK FACTORS' BEGINNING
ON PAGE S-15 OF THIS PROSPECTUS SUPPLEMENT.
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<Caption>
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS KEYSPAN
- ----------------------------------------------------------------------------------------------------
Per Corporate MEDS $50.00 $1.50 $48.50
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Total $400,000,000 $12,000,000 $388,000,000
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</Table>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT
APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS
SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
We have granted the underwriters an option to purchase up to 1,200,000
additional Corporate MEDS on the same terms and conditions set forth above
within 13 days from the date of the original issuance of the Corporate MEDS,
solely to cover over-allotments, if any. J.P. Morgan Securities Inc. expects to
deliver the Corporate MEDS to purchasers on or about May 6, 2002.
<Table>
JPMORGAN
LEHMAN BROTHERS MERRILL LYNCH & CO. GOLDMAN, SACHS & CO.
CREDIT LYONNAIS SECURITIES (USA) INC. SOCTIA CAPITAL THE WILLIAMS CAPITAL GROUP, L.P.
</Table>
April 30, 2002
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TABLE OF CONTENTS
<Table>
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PAGE
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PROSPECTUS SUPPLEMENT
Where You Can Find More Information......................... S-2
Prospectus Supplement Summary............................... S-3
Risk Factors................................................ S-15
Capitalization.............................................. S-23
Common Stock Dividends and Price Range...................... S-24
Ratio of Earnings to Fixed Charges.......................... S-25
Use of Proceeds............................................. S-26
Accounting Treatment........................................ S-26
Description of the MEDS Equity Units........................ S-27
Description of the Purchase Contracts....................... S-31
Other Provisions of the Purchase Contract Agreement and the
Pledge Agreement.......................................... S-43
Certain Terms of the Notes.................................. S-47
United States Federal Income Tax Consequences............... S-53
ERISA Considerations........................................ S-63
Underwriting................................................ S-65
Legal Matters............................................... S-68
Experts..................................................... S-68
PROSPECTUS
About this Prospectus....................................... i
Risk Factors................................................ 1
Forward-Looking Statements.................................. 3
KeySpan Corporation......................................... 4
The Trusts.................................................. 5
Use of Proceeds............................................. 5
Ratio of Earnings to Fixed Charges and of Earnings to
Combined Fixed Charges and Preferred Stock Dividends...... 5
Description of Debt Securities.............................. 7
Description of Preferred Stock.............................. 21
Description of Depositary Shares............................ 24
Description of the Trust Preferred Securities............... 27
Description of Common Stock................................. 39
Description of Stock Purchase Contracts and Stock Purchase
Units..................................................... 43
Description of Warrants and Warrant Units................... 44
United States Federal Income Tax Consequences............... 46
ERISA Considerations........................................ 63
Plan of Distribution........................................ 67
Legal Opinions.............................................. 68
Experts..................................................... 68
Where You Can Find More Information......................... 69
</Table>
THE ACCOMPANYING PROSPECTUS IS PART OF A REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. YOU SHOULD RELY ONLY ON THE INFORMATION
INCORPORATED BY REFERENCE OR PROVIDED IN THIS PROSPECTUS SUPPLEMENT AND IN THE
ACCOMPANYING PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE ELSE TO PROVIDE YOU WITH
ADDITIONAL OR DIFFERENT INFORMATION. WE ARE NOT MAKING AN OFFER OF THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT
ASSUME THAT THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT OR IN THE ACCOMPANYING
PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THOSE
DOCUMENTS, OR THAT THE INFORMATION INCORPORATED BY REFERENCE IS ACCURATE AS OF
ANY DATE OTHER THAN THE DATE OF THE DOCUMENT INCORPORATED BY REFERENCE.
'MEDS' is a service mark of J.P. Morgan Securities Inc.
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission, or the SEC. You may
read and copy any of these documents at the SEC's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC
filings are also available to the public on the SEC's web site at
http://www.sec.gov.
We filed a registration statement on Form S-3 with the SEC covering the MEDS
Equity Units. For further information on us and the MEDS Equity Units, you
should refer to the registration statement and its exhibits. This prospectus
supplement summarizes material provisions of the MEDS Equity Units. Because the
prospectus supplement may not contain all the information that you may find
important, you should review the full text of these documents. We have included
or will file copies of these documents as exhibits to our registration statement
or a Current Report on Form 8-K.
The SEC allows us to 'incorporate by reference' the information that we file
with the SEC, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus supplement, and later information that
we file with the SEC will automatically update and supersede this information.
We incorporate by reference the documents listed below and any future filings
made with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934 until all of the MEDS Equity Units are sold.
Annual Report on Form 10-K for the fiscal year ended December 31, 2001, as
amended by Form 10-K/A filed on April 17, 2002.
Current Report on Form 8-K filed January 24, 2002.
Current Report on Form 8-K filed February 26, 2002.
Current Report on Form 8-K filed March 11, 2002.
Current Report on Form 8-K filed April 5, 2002.
Current Report on Form 8-K filed April 25, 2002.
Quarterly Report on Form 10-Q filed April 26, 2002.
Form 8-A filed March 30, 1999.
You may request a copy of any of our SEC filings, at no cost, over the Internet
at our web site at http://www.keyspanenergy.com or by writing or telephoning us
at the following address:
Investor Relations
KeySpan Corporation
One MetroTech Center
Brooklyn, New York, 11201
(718) 403-3196
The information in our website is not part of this prospectus supplement or the
accompanying prospectus.
S-2
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PROSPECTUS SUPPLEMENT SUMMARY
You should read the following summary in conjunction with the more detailed
information incorporated by reference or provided in this prospectus supplement
or in the accompanying prospectus. This prospectus supplement and the
accompanying prospectus contain forward-looking statements (as that term is
defined in the Private Securities Litigation Reform Act of 1995). Forward-
looking statements should be read in conjunction with the cautionary statements
and important factors included in this prospectus supplement under the heading
'Risk Factors' and in the accompanying prospectus under the heading
'Forward-Looking Statements.'
KEYSPAN
OVERVIEW
KeySpan Corporation, a New York corporation, was formed in May 1998 as a result
of the business combination of KeySpan Energy Corporation, the parent of The
Brooklyn Union Gas Company, and certain businesses of the Long Island Lighting
Company. We have assets of more than $11.7 billion and approximately 2.5 million
gas customers throughout the Northeast.
Our core business is gas distribution, conducted by our six regulated gas
utility subsidiaries: The Brooklyn Union Gas Company d/b/a KeySpan Energy
Delivery New York and KeySpan Gas East Corporation d/b/a KeySpan Energy Delivery
Long Island distribute gas to customers in the Boroughs of Brooklyn, Queens and
Staten Island in New York City and the Counties of Nassau and Suffolk on Long
Island, respectively; Boston Gas Company, Colonial Gas Company and Essex Gas
Company, each doing business as KeySpan Energy Delivery New England, distribute
gas to customers in eastern and central Massachusetts; and EnergyNorth Natural
Gas, Inc. d/b/a KeySpan Energy Delivery New England distributes gas to customers
in central New Hampshire.
We are also a major, and growing, generator of electricity. We own and operate
five large generating plants and 42 smaller facilities in Nassau and Suffolk
Counties on Long Island and lease and operate a major facility in Queens County
in New York City. Under contractual arrangements, we provide power, electric
transmission and distribution services operations, billing and other customer
services for approximately one million electric customers of the Long Island
Power Authority on Long Island.
Our other subsidiaries are involved in oil and gas exploration and production;
gas storage; wholesale and retail gas and electric marketing; appliance service;
heating, ventilation and air conditioning installation and services; large
energy-system ownership, installation and management; telecommunications; and
energy-related internet activities. We also invest in, and participate in the
development of, pipelines and other energy-related projects, domestically and
internationally. In 2001, we signed an agreement to sell Midland Enterprises,
Inc., our water barging subsidiary, for approximately $230 million in cash and
the assumption by the purchaser of $135 million in debt. We expect the closing
of this transaction to occur in the second quarter of 2002 after the receipt of
regulatory approvals.
We are a registered holding company under the Public Utility Holding Company Act
of 1935, as amended, or PUHCA. Therefore, our corporate and financial activities
and those of our subsidiaries, including their ability to pay dividends to us,
are subject to regulation by the SEC. Under our holding company structure, we
have no independent operations or sources of income of our own and conduct
substantially all of our operations through our subsidiaries and, as a result,
we depend on the earnings and cash flow of, and dividends or distributions from,
our subsidiaries to provide the funds necessary to meet our debt and contractual
obligations. Furthermore, a substantial portion of our consolidated assets,
earnings and cash flow is derived from the operations of our regulated utility
subsidiaries, whose legal authority to pay dividends or make other distributions
to us is subject to regulation by state regulatory authorities.
Our principal place of business is One MetroTech Center, Brooklyn, New York
11201, and our telephone number is (718) 403-1000.
S-3
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THE OFFERING -- Q&A
WHAT ARE MEDS EQUITY UNITS?
The MEDS Equity Units consist of units referred to as Corporate MEDS and
Treasury MEDS. The MEDS Equity Units offered will initially consist of 8,000,000
Corporate MEDS (9,200,000 Corporate MEDS if the underwriters exercise their
overallotment option in full), each with a stated amount of $50. From each
Corporate MEDS, the holder may create a Treasury MEDS, as described below.
WHAT ARE THE COMPONENTS OF CORPORATE MEDS?
Each Corporate MEDS will consist of a purchase contract issued by us and $50
principal amount of our notes due 2008. The note that is a component of each
Corporate MEDS will be owned by the holder of the Corporate MEDS, but it will be
pledged to the collateral agent to secure the holder's obligation to purchase
our common stock under the related purchase contract. If the notes which are
components of the Corporate MEDS are successfully remarketed on or prior to the
ninth business day preceding May 16, 2005 (the 'purchase contract settlement
date') or a tax event redemption occurs prior to the purchase contract
settlement date, in each case as described in this prospectus supplement, the
applicable ownership interest in a Treasury portfolio of zero-coupon U.S.
Treasury securities as further described herein will replace the notes as a
component of each Corporate MEDS and will be pledged to the collateral agent to
secure the holder's obligations under the related purchase contracts. The notes
will not trade separately from the Corporate MEDS unless and until Treasury MEDS
are created by substituting Treasury securities for notes, the Corporate MEDS'
purchase contracts are settled early or the notes are remarketed.
WHAT IS A PURCHASE CONTRACT?
Each purchase contract underlying a MEDS Equity Unit obligates the holder of the
purchase contract to purchase, and obligates us to sell, on May 16, 2005, for
$50 in cash, a number of newly issued shares of our common stock equal to the
'settlement rate.' The settlement rate will be calculated, subject to adjustment
as described under 'Description of the Purchase Contracts -- Anti-Dilution
Adjustments,' as follows:
if the applicable market value of our common stock is equal to or greater
than the threshold appreciation price, the settlement rate will be 1.1804
shares;
if the applicable market value of our common stock is less than the
threshold appreciation price but greater than the reference price, the
settlement rate will be equal to $50 divided by the applicable market value
of our common stock; and
if the applicable market value of our common stock is less than or equal to
the reference price, the settlement rate will be 1.4164 shares.
'Applicable market value of our common stock' means the average of the closing
price per share of our common stock on the 20 consecutive trading days ending on
the third trading day immediately preceding May 16, 2005. The 'reference price'
is $35.30, which is the last reported sale price of our common stock on the NYSE
on April 30, 2002. The 'threshold appreciation price' is $42.36.
CAN I SETTLE A PURCHASE CONTRACT EARLY?
At the option of each holder, a purchase contract may be settled early for cash
at any time prior to 11:00 a.m. (New York City time) on the fourth business day
immediately preceding February 16, 2005, which we also refer to as the election
date. If a purchase contract is settled early, 1.1804 shares of our common stock
will be issued per purchase contract. In addition, if we are involved
S-4
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in a merger in which at least 30% of the consideration for our common stock
consists of cash or cash equivalents, then each holder of a purchase contract
will have the right to accelerate and settle the purchase contract for cash at
the settlement rate in effect immediately before the merger.
Your early settlement right is subject to the condition that, if required under
the U.S. federal securities laws, there is a registration statement under the
Securities Act of 1933 in effect covering any securities deliverable upon
settlement of a purchase contract.
WHAT ARE THE COMPONENTS OF TREASURY MEDS?
Treasury MEDS are MEDS Equity Units consisting of a purchase contract and a
1/20, or 5%, undivided beneficial ownership interest in a Treasury security. The
Treasury security is a zero-coupon U.S. Treasury security with a principal
amount at maturity of $1,000 that matures on May 15, 2005. The interests in the
Treasury securities that are components of each Treasury MEDS will be pledged to
the collateral agent to secure the holder's obligations under the purchase
contract.
HOW CAN I CREATE TREASURY MEDS FROM CORPORATE MEDS?
Unless a Treasury portfolio has replaced the notes as a component of the
Corporate MEDS as the result of a tax event redemption, each holder of Corporate
MEDS will have the right, at any time prior to 11:00 a.m. (New York City time)
on the election date, to substitute for the notes held by the collateral agent
zero-coupon Treasury securities (CUSIP No. 912803AD5) that mature on May 15,
2005, in a total principal amount at maturity equal to the aggregate principal
amount of the notes for which substitution is being made. These substitutions
will create Treasury MEDS, and the related notes will be released to the holder.
Because Treasury securities are issued in integral multiples of $1,000, holders
of Corporate MEDS may make these substitutions only in integral multiples of 20
Corporate MEDS.
HOW CAN I RECREATE CORPORATE MEDS FROM TREASURY MEDS?
Unless a tax event Treasury portfolio has replaced the notes as a component of
the Corporate MEDS as a result of a tax event redemption, each holder of
Treasury MEDS will have the right, at any time prior to 11:00 a.m. (New York
City time) on the election date, to substitute for any Treasury securities held
by the collateral agent, notes in an aggregate principal amount equal to the
aggregate principal amount at maturity of the Treasury securities for which
substitution is being made. These substitutions will recreate Corporate MEDS,
and the related Treasury securities will be released to the holder. Because
Treasury securities are issued in integral multiples of $1,000, holders of
Treasury MEDS may make these substitutions only in integral multiples of 20
Treasury MEDS.
WHAT PAYMENTS AM I ENTITLED TO AS A HOLDER OF CORPORATE MEDS?
A holder of a Corporate MEDS will be entitled to receive cash payments, payable
quarterly in arrears, consisting of:
interest on the related note or cash distributions on the applicable
ownership interest of the Treasury portfolio, as applicable, at the rate of
4.90% of $50 per year, and
contract adjustment payments at the rate of 3.85% of the stated amount per
year.
Each Corporate MEDS has a stated amount of $50. Our obligations with respect to
contract adjustment payments will be subordinate and junior in right of payment
to our obligations under any of our senior indebtedness. We are not entitled to
defer interest payments on the notes.
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Because the notes will be treated as contingent debt obligations, original issue
discount, or OID, will accrue on each note for United States federal income tax
purposes. See 'United States Federal Income Tax Consequences'.
WHAT PAYMENTS AM I ENTITLED TO IF I CREATE TREASURY MEDS?
Holders of Treasury MEDS will be entitled to receive quarterly cash
distributions of contract adjustment payments at the rate of 3.85% of the stated
amount per year. In addition, OID will accrue on each related Treasury security.
Each holder of Treasury MEDS will receive the notes that formed a part of the
Corporate MEDS used to create Treasury MEDS and as a holder of the notes will be
entitled to receive the interest payments on such notes specified below.
WHAT ARE THE PAYMENT DATES FOR THE MEDS EQUITY UNITS?
The payments described above in respect of the MEDS Equity Units will be payable
quarterly in arrears on February 16, May 16, August 16, and November 16 of each
year, commencing August 16, 2002. In the case of contract adjustment payments,
the payments will be payable to but excluding the earlier of May 16, 2005 or the
most recent quarterly payment date on or before any early settlement or
termination of the related purchase contracts. Interest payments on the notes
are described below under the questions and answers beginning with 'What
interest payments will I receive on the notes?'
WHAT IS REMARKETING?
The notes of Corporate MEDS holders will be remarketed on the third business day
immediately preceding February 16, 2005, which we refer to as the initial
remarketing date. The remarketing agent will use its commercially reasonable
best efforts to remarket the notes (bearing the reset rate described below) and
to obtain a price for the notes of at least 100.25% of the purchase price for
the Treasury portfolio, as defined below. A portion of the proceeds from the
remarketing equal to the Treasury portfolio purchase price will be applied to
purchase the Treasury portfolio. The Treasury portfolio will be substituted for
the notes and will be pledged to the collateral agent to secure the Corporate
MEDS holders' obligations to purchase our common stock under the purchase
contracts. When paid at maturity, proceeds from the Treasury portfolio in an
amount equal to the principal amount of the notes will automatically be applied
to satisfy in full the Corporate MEDS holders' obligations to purchase our
common stock under the related purchase contracts on the purchase contract
settlement date and proceeds from the Treasury portfolio in an amount equal to
the interest payment that would have been due on the notes on the purchase
contract settlement date, assuming the interest rate was not reset, will be paid
to the holders.
The remarketing agent will deduct, as a remarketing fee, an amount not exceeding
25 basis points (0.25%) of the Treasury portfolio purchase price from any amount
of the proceeds from the remarketing of the notes in excess of the Treasury
portfolio purchase price. The remarketing agent will then remit the remaining
portion of the proceeds from the remarketing of the notes, if any, for the
benefit of the holders.
You may elect not to participate in the remarketing and to retain the notes
underlying your Corporate MEDS by creating Treasury MEDS at any time prior to
11:00 a.m. (New York City time) on the election date.
If the remarketing agent cannot successfully remarket the notes on the initial
remarketing date at a price of at least 100.25% of the purchase price for the
Treasury portfolio or a condition precedent to the remarketing has not been
satisfied, then the remarketing agent will use its commercially reasonable best
efforts thereafter to remarket the notes on one or more subsequent occasions
after the initial remarketing date until the ninth business day preceding
May 16, 2005. Any such remarketing will be at a price equal to at least 100.25%
of the purchase price for the Treasury portfolio.
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The remarketing agent will deduct, as a remarketing fee, an amount not exceeding
25 basis points (0.25%) of the Treasury portfolio purchase price from any amount
of the proceeds from the remarketing of the notes in excess of the Treasury
portfolio purchase price. The remarketing agent will then remit the remaining
portion of the proceeds from the remarketing of the notes, if any, for the
benefit of the holders.
If a successful remarketing of notes has not occurred on or prior to the ninth
business day preceding May 16, 2005, the notes will continue to be a component
of the Corporate MEDS and another remarketing will be attempted on the third
business day immediately preceding May 16, 2005. Notes that are components of
Corporate MEDS whose holders have failed to notify the purchase contract agent
on or prior to 5:00 p.m. (New York City time) on the fifth business day before
May 16, 2005, of their intention to pay cash in order to satisfy their
obligations under the related purchase contracts, or failed to deliver such cash
prior to 11:00 a.m. (New York City time) on the fourth business day before
May 16, 2005, will be remarketed. In this remarketing, the remarketing agent
will use its commercially reasonable best efforts to remarket the notes at a
price of approximately 100.25%, but not less than 100%, of the aggregate
principal amount of the notes remarketed. A portion of the proceeds from the
remarketing equal to the aggregate principal amount of the notes included in the
Corporate MEDS will automatically be applied to satisfy in full the Corporate
MEDS holders' obligations to purchase our common stock under the related
purchase contracts on the purchase contract settlement date.
The remarketing agent will deduct, as a remarketing fee, an amount not exceeding
25 basis points (0.25%) of the aggregate principal amount of the remarketed
notes from any amount of the proceeds from the remarketing of the notes in
excess of the aggregate principal amount of those remarketed notes. The
remarketing agent will then remit the remaining portion of the proceeds from the
remarketing of the notes, if any, for the benefit of the holders.
If the remarketing agent cannot successfully remarket the notes on the third
business day immediately preceding May 16, 2005, at a price of at least 100% of
the total principal amount of the notes remarketed or a condition precedent to
such remarketing has not been satisfied, we will exercise our rights as a
secured party and retain the notes pledged as collateral or dispose of them in
accordance with applicable law. Following such action, the holders' obligations
to purchase our common stock under the related purchase contracts on the
purchase contract settlement date will be satisfied in full.
WHAT IS THE TREASURY PORTFOLIO THAT REPLACES YOUR NOTES UPON A SUCCESSFUL
REMARKETING PRIOR TO THE THIRD BUSINESS DAY IMMEDIATELY PRECEDING MAY 16, 2005?
The Treasury portfolio that replaces your notes upon a successful remarketing is
a portfolio of zero-coupon U.S. Treasury securities consisting of:
interest or principal strips of U.S. Treasury securities that mature on
May 15, 2005 in an aggregate amount equal to the principal amount of the
notes included in the Corporate MEDS; and
interest or principal strips of U.S. Treasury securities that mature on
May 15, 2005 in an aggregate amount equal to the aggregate interest payment
that would be due on May 16, 2005 on the principal amount of the notes that
would have remained a component of the Corporate MEDS assuming no
remarketing and no reset of the interest rate on the notes.
For a description of the Treasury portfolio to be purchased in the context of a
tax event redemption, see 'Certain Terms of the Notes -- Tax Event Redemption.'
IF I DO NOT HOLD THE NOTES AS PART OF CORPORATE MEDS, MAY I STILL PARTICIPATE IN
A REMARKETING OF MY NOTES?
Holders of notes that are not components of Corporate MEDS may elect, in the
manner described in this prospectus supplement, to have their notes remarketed
by the remarketing agent.
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HOW MAY I SATISFY MY OBLIGATIONS UNDER THE PURCHASE CONTRACTS?
Holders of MEDS Equity Units may satisfy their obligations, or their obligations
will be terminated, under the purchase contracts as follows:
if you are a Corporate MEDS holder, through the application of the proceeds
of a successful remarketing that occurs on the third business day
immediately preceding May 16, 2005, or if a Treasury portfolio has replaced
the notes as a result of a successful remarketing or a tax event
redemption, through the application of the proceeds of the disposition of
such Treasury portfolio;
if you are a Treasury MEDS holder, through the application of the proceeds
of the Treasury securities;
if you are a Treasury MEDS holder or if you are a Corporate MEDS holder and
a successful remarketing of the notes has not occurred prior to such time,
by settling the purchase contracts with cash prior to 11:00 a.m. (New York
City time) on the fourth business day prior to May 16, 2005, with prior
notification to the purchase contract agent;
through early settlement, by the delivery of cash to the purchase contract
agent in the manner described in this prospectus supplement; provided that
at such time, if so required under the U.S. federal securities laws, there
is in effect a registration statement covering any securities to be
delivered in respect of the purchase contracts being settled; or
without any further action, upon the termination of the purchase contracts
as a result of our bankruptcy, insolvency or reorganization.
If the holder of a MEDS Equity Unit settles a purchase contract early or if the
holder's purchase contract is terminated as a result of our bankruptcy,
insolvency or reorganization, such holder will have no right to receive any
accrued contract adjustment payments.
WHAT INTEREST PAYMENTS WILL I RECEIVE ON THE NOTES?
Interest payments on the notes will be payable initially at the annual rate of
4.90% of the principal amount of $50 to, but excluding, the date the interest
rate on the notes is reset. Following a reset of the interest rate, the notes
will bear interest from the date three business days after the date of a
successful remarketing, or May 16, 2005 if no successful remarketing occurs, at
the reset rate to, but excluding, May 16, 2008.
WHAT ARE THE PAYMENT DATES ON THE NOTES?
Interest payments will be payable quarterly in arrears on each February 16,
May 16, August 16 and November 16, commencing August 16, 2002.
WHEN WILL THE INTEREST RATE ON THE NOTES BE RESET?
Unless a tax event redemption has occurred, the interest rate on the notes will
be reset on the date of a successful remarketing, and such reset rate will
become effective three business days following such date, or if no successful
remarketing occurs, on May 16, 2005.
WHAT IS THE RESET RATE?
In the case of a successful remarketing on or prior to the ninth business day
immediately preceding May 16, 2005, the reset rate will be the rate (subject to
the last sentence of this paragraph) the notes should bear in order for the
notes included in Corporate MEDS to have an approximate aggregate market value
of approximately 100.25% of the applicable Treasury portfolio purchase price. In
the case of a successful remarketing on the third business day immediately
preceding May 16, 2005, the reset rate will be the rate (subject to the last
sentence of this paragraph) the notes should bear in order for each note to have
an approximate market value of approximately 100.25%, but not less than 100%, of
the principal amount of that note. If a successful remarketing does not occur on
or prior to the third business day immediately preceding
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May 16, 2005, the reset rate will be set on such date, as described in this
prospectus supplement, based on a spread over the applicable two-year Treasury
benchmark rate, such spread to be determined based on the rating of the notes.
See 'Certain Terms of the Notes -- Failed Remarketing.' Any reset rate may not
be less than the original interest rate on the notes and may not exceed the
maximum rate, if any, permitted by applicable law.
WHEN ARE THE NOTES REDEEMABLE?
The notes are redeemable at our option, in whole but not in part, upon the
occurrence and continuation of a tax event under the circumstances described in
this prospectus supplement. Following any such redemption of the notes, which is
referred to as a tax event redemption, prior to the earlier of the date of a
successful remarketing or May 16, 2005, holders that own Corporate MEDS will own
the applicable ownership interest in the tax event Treasury portfolio as a
component of their Corporate MEDS. Holders of notes that are not part of a
Corporate MEDS will receive the redemption amount, plus accrued and unpaid
interest, if any, paid in such tax event redemption.
For a description of the tax event Treasury portfolio to be purchased in the
context of a tax event redemption, see 'Certain Terms of the Notes -- Tax Event
Redemption.'
WHAT IS THE RANKING OF THE NOTES?
The notes will rank equally and ratably with all of our other senior unsecured
and unsubordinated obligations. The indenture under which the notes will be
issued does not limit our ability to issue or incur other unsecured debt.
Because we are a holding company that derives all of our income from our
operating subsidiaries, the notes will be effectively subordinated to
liabilities of, including debt and preferred stock incurred or issued by, those
subsidiaries. The indenture does not limit the amount of debt or preferred stock
which may be incurred or issued by our subsidiaries. See 'Description of Debt
Securities' in the accompanying prospectus.
WILL THE NOTES CONTAIN A LIMITATION ON LIENS?
We and certain of our subsidiaries may not grant a lien on certain of our assets
without similarly securing the notes, subject to certain exceptions. For
additional information, see 'Description of Debt Securities' in the accompanying
prospectus.
WHAT ARE THE PRINCIPAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES RELATED TO
THE CORPORATE MEDS, TREASURY MEDS AND NOTES?
If you purchase Corporate MEDS in this offering, under the agreements governing
the Corporate MEDS, you will be deemed to agree to treat, for U.S. federal,
state and local income and franchise tax purposes, the purchase of a Corporate
MEDS as the purchase of a unit consisting of the note and purchase contract
constituting the Corporate MEDS. In addition, you agree to treat the notes as
our indebtedness for U.S. federal, state and local income and franchise tax
purposes. You must allocate the purchase price of the Corporate MEDS between
those notes and purchase contracts in proportion to their respective initial
fair market values, which will establish your initial tax basis. We expect to
report the initial fair market value of each note as $50 and the initial fair
market value of each purchase contract as $0.
Under the indenture governing the notes, we and each holder of the notes agree,
for U.S. federal income tax purposes, to treat the notes as indebtedness that is
subject to the regulations governing contingent payment debt obligations in the
manner described below under 'United States Federal Income Tax Consequences.' As
discussed more fully below, the effect of these Treasury regulations will be
(1) to require you, regardless of your usual method of tax accounting, to use
the accrual method with respect to the notes, (2) to possibly result in the
accrual of original issue discount by you in excess of stated interest payments
actually received by you and (3) generally to result in ordinary rather than
capital treatment of any gain, and to some extent loss, on the sale, exchange
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or other disposition of the note at any time up to six months after the date on
which the interest rate on the notes is reset.
If you own Treasury MEDS, you will be required to include in gross income your
allocable share of any original issue discount or acquisition discount on the
Treasury securities that accrues in such year.
We intend to report the purchase contract adjustment payments as income to you,
but you may want to consult your tax advisor concerning alternative
characterizations.
Because there is no statutory, judicial or administrative authority directly
addressing the tax treatment of Corporate MEDS or instruments similar to
Corporate MEDS, we urge you to consult your own tax advisor concerning the tax
consequences of an investment in Corporate MEDS. For additional information, see
'United States Federal Income Tax Consequences' in this prospectus supplement.
WHAT ARE THE RIGHTS AND PRIVILEGES OF OUR COMMON STOCK?
The shares of our common stock that you will be obligated to purchase under the
purchase contracts have one vote per share. For more information, please see the
discussion of our common stock and our rights plan in this prospectus supplement
under the heading 'Risk Factors -- Risks Relating to KeySpan -- Provisions of
our certificate of incorporation and bylaws and New York corporate law and state
regulatory requirements may discourage a takeover attempt' and in the
accompanying prospectus under the heading 'Description of Common Stock.'
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THE OFFERING -- EXPLANATORY DIAGRAMS
The following diagrams demonstrate some of the key features of the purchase
contracts, the notes, the Corporate MEDS and the Treasury MEDS, and the
transformation of Corporate MEDS into Treasury MEDS and separate notes.
The following diagrams also assume that the notes are successfully remarketed on
the third business day immediately preceding May 16, 2005, and there is no early
settlement. For clarity, the following diagrams also use approximate maturity
and other dates.
PURCHASE CONTRACT
Corporate MEDS and Treasury MEDS both include a purchase contract under which
the holder agrees to purchase shares of our common stock at the end of three
years. In addition, these purchase contracts include unsecured contract
adjustment payments as shown in the diagrams on the following pages.
[GRAPHIC OMITTED]
[GRAPHIC: (1) Chart showing the relationship between the value of shares
delivered upon settlement of a purchase contract and the applicable market value
of our common stock, illustrating that (i) the holder of a purchase contract
will only realize equity appreciation on his purchase contract if the applicable
market value of our common stock exceeds the threshold appreciation price, (ii)
the holder of a purchase contract will realize no equity appreciation if the
applicable market value of our common stock is between the reference price and
the threshold appreciation price, and (iii) the holder of a purchase contract
will bear the entire risk of a decline if the applicable market value of our
common stock is less than or equal to the reference price; and (2) Chart showing
relationship between the number of shares delivered upon settlement of a
purchase contract and the applicable market value of our common stock.]
[Footnotes to graphic]
- ---------
(1) The 'reference price' is $35.30, which is the last reported sale price of
our common stock on the NYSE on April 30, 2002.
(2) The 'threshold appreciation price' is $42.36.
(3) If the applicable market value of our common stock is less than or equal to
the reference price, 1.4164 shares will be delivered, which is equal to $50
divided by the reference price.
(4) If the applicable market value of our common stock is between the reference
price and the threshold appreciation price, the number of shares to be
delivered will be calculated by dividing $50 by the applicable market value
of our common stock.
(5) If the applicable market value of our common stock is equal to or greater
than the threshold appreciation price, 1.1804 shares will be delivered,
which is equal to $50 divided by the threshold appreciation price.
(6) The 'applicable market value of our common stock' means the average of the
closing price per share of our common stock on the 20 consecutive trading
days ending on the third trading day immediately preceding May 16, 2005.
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CORPORATE MEDS
Each Corporate MEDS consists of two components as described below:
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
[GRAPHIC: (1) Chart showing the two components of Corporate MEDS: a purchase
contract and a note. The chart also indicates the terms of the purchase
contract, including the contract adjustment payment rate and purchase contract
settlement date, and the terms of the notes, including the interest rate,
interest reset date and maturity date.]
The holder owns the notes but will pledge them to the collateral agent to
secure the holder's obligations under the purchase contract.
The foregoing analysis assumes the notes are successfully remarketed on the
third business day immediately preceding May 16, 2005. If the remarketing
were to be successful prior to such date, following the remarketing of the
notes, the applicable ownership interest in the Treasury portfolio would
replace the notes as a component of the Corporate MEDS, and the reset rate
of the notes would be effective three business days following the
successful remarketing.
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TREASURY MEDS
Each Treasury MEDS consists of two components as described below:
[GRAPHIC OMITTED]
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
[GRAPHIC: Showing the two components of Treasury MEDS: a purchase contract and
zero-coupon Treasury securities. The chart also indicates the terms of the
purchase contract, including the contract adjustment payment rate and purchase
contract settlement date, and the maturity date of the zero-coupon Treasury
securities.]
The holder owns the Treasury securities but will pledge them to the
collateral agent to secure the holder's obligations under the purchase
contract. Unless the purchase contract is settled early for cash or is
terminated as a result of our bankruptcy, insolvency or reorganization or
the holder recreates a Corporate MEDS, the Treasury securities will be used
to satisfy the holder's obligation under the purchase contract.
NOTES
Upon creation of a Treasury MEDS, the holder would also hold a note. The notes
have the terms described below:
[GRAPHIC OMITTED]
[GRAPHIC OMITTED]
[GRAPHIC: Chart showing the terms of the notes, including the interest rate,
interest rate reset date and maturity date.]
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TRANSFORMING CORPORATE MEDS INTO TREASURY MEDS AND NOTES
To create a Treasury MEDS, the holder separates a Corporate MEDS into its
components -- the purchase contract and the note -- and then combines the
purchase contract with zero-coupon Treasury securities that mature on
May 15, 2005.
The holder owns the Treasury securities but will pledge them to us to
secure the holder's obligations under the purchase contract.
The Treasury securities together with the purchase contract constitute a
Treasury MEDS. The note, which is no longer a component of the Corporate
MEDS, is tradeable as a separate security.
[GRAPHIC OMITTED]
[GRAPHIC: Chart showing how to transform Corporate MEDS into Treasury MEDS and
notes by substituting Treasury securities for notes.]
The holder can also transform Treasury MEDS and notes into Corporate MEDS.
Following that transformation, the Treasury securities, which will no
longer be components of the Treasury MEDS, will be released to the
applicable holder.
The transformation of Corporate MEDS into Treasury MEDS and notes, and the
transformation of Treasury MEDS and notes into Corporate MEDS, requires
certain minimum amounts of securities, as more fully described in this
prospectus supplement, and can be done by the holder at any time prior to
11:00 a.m. (New York City time) on the election date.
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RISK FACTORS
Before purchasing the MEDS Equity Units, investors should carefully consider the
following risk factors together with the other information incorporated by
reference or provided in this prospectus supplement or in the accompanying
prospectus in order to evaluate an investment in the MEDS Equity Units.
RISKS RELATED TO KEYSPAN
WE ARE A HOLDING COMPANY, AND WE AND OUR SUBSIDIARIES ARE SUBJECT TO FEDERAL
AND/OR STATE REGULATION WHICH LIMITS OUR FINANCIAL ACTIVITIES, INCLUDING THE
ABILITY OF OUR SUBSIDIARIES TO PAY DIVIDENDS AND MAKE DISTRIBUTIONS TO US.
We are a holding company registered under the Public Utility Holding Company Act
of 1935 with no business operations or sources of income of our own. We conduct
all of our operations through our subsidiaries and depend on the earnings and
cash flow of, and dividends or distributions from, our subsidiaries to provide
the funds necessary to meet our debt and contractual obligations. Because we are
a registered holding company, our corporate and financial activities and those
of our subsidiaries, including their ability to pay dividends to us from
unearned surplus, are subject to PUHCA and regulation by the SEC. We have
committed to the SEC that through December 31, 2003, our common equity will be
at least 30% of our consolidated capitalization, and each of our utility
subsidiaries' common equity will be at least 30% of that subsidiary's
capitalization. At March 31, 2002, our consolidated common equity was 35.3% of
our consolidated capitalization, including commercial paper, and for each of our
utility subsidiaries was approximately 32% of each subsidiary's capitalization.
In addition, a substantial portion of our consolidated assets, earnings and cash
flow is derived from the operation of our regulated utility subsidiaries, whose
legal authority to pay dividends or make other distributions to us is subject to
regulation by the utility regulatory commissions of New York, Massachusetts and
New Hampshire. Pursuant to New York Public Service Commission orders, the
ability of KeySpan Energy Delivery New York and KeySpan Energy Delivery Long
Island to pay dividends to us is conditioned upon their maintenance of a utility
capital structure with debt not exceeding 55% and 58%, respectively, of total
utility capitalization. In addition, the level of dividends paid by both
utilities may not be increased from current levels if a 40 basis point penalty
is incurred under a customer service performance program. At the end of KEDNY's
and KEDLI's rate years (September 30, 2001 and November 30, 2001, respectively),
their ratios of debt to total utility capitalization were 44% and 54%,
respectively. Furthermore, the rights of our creditors (including the holders of
the notes) to participate in the distribution of the stock owned by us in our
regulated subsidiaries would also be subject to approval by the New York,
Massachusetts and New Hampshire utility regulatory commissions and the Federal
Energy Regulatory Commission.
PUHCA ALSO LIMITS OUR BUSINESS OPERATIONS AND OUR ABILITY TO AFFILIATE WITH
OTHER UTILITIES.
PUHCA, in addition to limiting our financial activities, also limits our
operations to a single integrated utility system, plus additional energy related
businesses, regulates transactions between us and our subsidiaries and requires
SEC approval for specified utility mergers and acquisitions. In its order
approving our acquisition of Eastern and Energy North, the SEC reserved
jurisdiction on its determination of whether the companies that comprise our
energy services business can be classified as 'energy-related companies' and
therefore retainable under existing SEC precedent. We are unable to predict
whether the SEC will authorize the retention of all or some of these companies
or the impact its determination will have on our financial condition or results
of operations.
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OUR GAS DISTRIBUTION AND ELECTRIC SERVICES BUSINESSES MAY BE ADVERSELY AFFECTED
BY CHANGES IN FEDERAL AND STATE REGULATION.
The regulatory environment applicable to our gas distribution and our electric
services businesses has undergone substantial changes in recent years, on both
the federal and state levels. These changes have significantly affected the
nature of the gas and electric utility and power industries and the manner in
which their participants conduct their businesses. Moreover, existing statutes
and regulations may be revised or reinterpreted, new laws and regulations may be
adopted or become applicable to us or our facilities, and future changes in laws
and regulations may affect our gas distribution and our electric services
businesses in ways that we cannot predict.
Proposals to re-regulate the wholesale power market have been made at the
federal level. These proposals, and legislative and other attention to the
electric power industry could have a material adverse effect on our strategies
and results of operations for our electric services business and our financial
condition. In particular, we sell power and energy from our Ravenswood
generating facility into the New York Independent System Operator energy market
at market based rates, subject to mitigation measures approved by the Federal
Energy Regulatory Commission. The pricing for both energy sales and services to
the NYISO energy market is still evolving and some of the FERC's price
mitigation measures are subject to rehearing and possible judicial review.
WE COULD BE REQUIRED TO CLASSIFY THE LEASE RELATING TO OUR RAVENSWOOD FACILITY
AS INDEBTEDNESS IN 2003, WHICH WOULD REDUCE OUR BORROWING CAPACITY UNDER OUR
EXISTING CREDIT FACILITY.
We currently anticipate that we could be required to classify the lease under
which we operate our Ravenswood facility as $425 million of indebtedness as a
result of guidance we expect the Financial Accounting Standards Board to issue
later in 2002. We do not believe that guidance would be effective earlier than
January 1, 2003. This classification would increase the amount of our
indebtedness for purposes of calculating our financial covenants under our
credit agreement expiring September 19, 2002. Accordingly, if these covenants
were then applicable, this would reduce our available borrowing capacity. We
anticipate negotiating a new credit agreement prior to the expiration of the
existing credit agreement but are unable to predict the outcome of those
negotiations.
OUR HEDGING PROCEDURES MAY NOT PROTECT OUR SALES AND NET INCOME FROM VOLATILITY.
To lower our financial exposure related to commodity price fluctuations, our
marketing, trading and risk management operations routinely enter into contracts
to hedge a portion of our purchase and sale commitments, weather fluctuations,
electricity sales, natural gas supply and other commodities. However, we do not
always cover the entire exposure of our assets or our positions to market price
volatility and the coverage will vary over time. To the extent we have unhedged
positions or our hedging procedures do not work as planned, fluctuating
commodity prices could cause our sales and net income to be volatile.
SEC RULES FOR EXPLORATION AND PRODUCTION COMPANIES MAY REQUIRE US TO RECOGNIZE A
NON-CASH IMPAIRMENT CHARGE AT THE END OF OUR REPORTING PERIODS.
We use the full cost method of accounting for our investments in natural gas and
oil properties. These investments consist of our 67% equity interest in The
Houston Exploration Company, an independent natural gas and oil exploration
company, as well as KeySpan Exploration and Production, LLC, our wholly owned
subsidiary engaged in a joint venture with Houston Exploration. Under the full
cost method, all costs of acquisition, exploration and development of natural
gas and oil reserves are capitalized into a 'full cost pool' as incurred, and
properties in the pool are depleted and charged to operations using the
unit-of-production method based on production and proved reserve quantities. To
the extent that these capitalized costs, net of accumulated depletion, less
deferred taxes exceed the present value (using a 10% discount rate) of estimated
future net cash flows from proved natural gas and oil reserves and the lower of
cost or fair value of unproved properties, those excess costs are charged to
operations. If a write-down is
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required, it would result in a charge to earnings but would not have an impact
on cash flows. Once incurred, an impairment of gas properties is not reversible
at a later date even if gas prices increase.
THERE IS UNCERTAINTY CONCERNING THE SURVIVAL OF ARTHUR ANDERSEN LLP AS AN
INDEPENDENT AUDITING FIRM, WHICH MAY MAKE IT DIFFICULT FOR YOU TO SEEK REMEDIES
AGAINST ARTHUR ANDERSEN IN CONNECTION WITH THIS OFFERING.
On April 5, 2002, we appointed Deloitte & Touche LLP to be our independent
certified public accountant. Our former independent certified public accountant,
Arthur Andersen LLP, has informed us that on March 14, 2002 it was indicted on
federal obstruction of justice charges arising from the government's
investigation of Enron. Arthur Andersen has pled not guilty to these charges. As
a result of such indictment and other lawsuits, there is a possibility that
Arthur Andersen may fail or be forced to merge with or have its assets sold, as
a whole or in parts, to one or more third parties. In the event that Arthur
Andersen fails or does not otherwise continue in business, Arthur Andersen may
have insufficient assets to satisfy future claims by investors that might arise
under federal securities laws or otherwise.
OUR OPERATING RESULTS MAY FLUCTUATE ON A SEASONAL AND QUARTERLY BASIS.
Our gas distribution business is a seasonal business and is subject to weather
conditions. We receive most of our gas distribution revenues in the first and
fourth quarters when demand for natural gas usually increases due to colder
weather conditions. As a result, we are subject to seasonal variations in
working capital because we purchase most of our natural gas supplies in the
second and third quarters and must increase our borrowings in these periods to
finance these purchases. Accordingly, our results of operations in the future
will fluctuate substantially on a seasonal basis. In addition, our New
England-based gas distribution subsidiaries do not benefit from weather
normalization tariffs, and results from our Ravenswood generating facility are
directly correlated to the weather as the demand and price for the electricity
it generates increases during the summer. As a result, fluctuations in weather
between years may have a significant effect on our results of operations for
these subsidiaries.
WE CANNOT PREDICT WHETHER LIPA WILL EXERCISE ITS OPTION TO PURCHASE OUR LONG
ISLAND GENERATING ASSETS AND THE EFFECT OF THAT PURCHASE ON US.
Under a Generation Purchase Right Agreement entered into with the Long Island
Power Authority in 1998, LIPA had the right to purchase, at fair market value,
during the twelve month period beginning May 28, 2001, all of our Long Island
based generating assets that had been previously owned by the Long Island
Lighting Company. For the fiscal year ended December 31, 2001, those assets
generated $51 million of earnings before interest and taxes. On April 16, 2002,
we and LIPA agreed to establish a new option window commencing November 29, 2004
and ending May 28, 2005 under the Generation Purchase Right Agreement. At this
point in time, we cannot predict whether LIPA will exercise its right to
purchase the assets, nor can we estimate the effect on our financial condition
or results of operations if LIPA were to exercise its option.
WE OWN 67% OF THE HOUSTON EXPLORATION COMPANY, AND OUR RESULTS OF OPERATION ARE
THEREFORE SUBJECT TO THE RISKS AFFECTING ITS BUSINESS.
We own 67% of The Houston Exploration Company, an independent natural gas and
oil producer. Therefore, our results of operations in our energy investments
segment are subject to the same risks and uncertainties that affect the
operations of Houston Exploration. In addition to the risks set forth under the
caption ' -- SEC rules for exploration and production companies may require us
to recognize a non-cash impairment charge at the end of our reporting periods,'
these risks and uncertainties include:
The volatility of natural gas and oil prices. If natural gas and oil prices
decline, the amount of natural gas and oil Houston Exploration can
economically produce may be reduced, which may result in a material decline
in its revenue.
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The potential inability of Houston Exploration to meet its capital
requirements. If Houston Exploration is unable to meet its capital
requirements to fund, develop, acquire and produce natural gas and oil
reserves, its oil and gas reserves will decline.
Substantial Indebtedness. Houston Exploration's outstanding indebtedness
under its bank credit facility and the indenture governing its senior
subordinated notes contain covenants that require a substantial portion of
its cash flow from operations to be dedicated to its debt service
obligations and impose other restrictions that limit its ability to borrow
additional funds or dispose of assets. These restrictions may affect its
flexibility in planning for, and reacting to, changes in business
conditions.
Estimates of proved reserves and future net revenue may change. Any
significant variance from the assumptions used to estimate proved reserves
or natural gas could result in the actual quantity of Houston Exploration's
reserves and future net cash flow being materially different from the
estimates in its reserve report.
OUR COSTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS ARE SIGNIFICANT, AND THE COST OF
COMPLIANCE WITH FUTURE ENVIRONMENTAL LAWS COULD ADVERSELY AFFECT US.
Our operations are subject to extensive federal, state and local environmental
laws and regulations relating to air quality, water quality, waste management,
natural resources and the health and safety of our employees. These
environmental laws and regulations expose us to costs and liabilities relating
to our operations and our current and formerly owned properties. Compliance with
these legal requirements requires us to commit significant capital toward
environmental monitoring, installation of pollution control equipment and
permits at our facilities. Costs of compliance with environmental regulations,
and in particular emission regulations, could have a material impact on our
electric services business and our results of operations and financial position,
especially if emission limits are tightened, more extensive permitting
requirements are imposed, additional substances become regulated or the number
and type of electric generating plants we operate increase.
In addition, we are responsible for the clean-up of contamination at certain
manufactured gas plant ('MGP') sites and at other sites and are aware of
additional MGP sites where we may have responsibility for clean up costs. While
our gas rate plans generally allow for the full recovery of the costs of
investigation and remediation of MGP sites, these rate recovery mechanisms may
change in the future. To the extent rate recovery mechanisms change in the
future, or if additional environmental matters arise in the future at our
currently or historically owned facilities, at sites we may acquire in the
future or at third party waste disposal sites, costs associated with
investigating and remediating these sites could have a material adverse effect
on our results of operations and financial condition.
PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND NEW YORK CORPORATE
LAW AND STATE REGULATORY REQUIREMENTS MAY DISCOURAGE A TAKEOVER ATTEMPT.
Provisions contained in our certificate of incorporation and bylaws and the laws
of New York, the state in which we are organized, could make it more difficult
for a third party to acquire us in a transaction not approved by our board of
directors. Provisions of our certificate of incorporation and bylaws impose
various procedural and other requirements that could make it more difficult for
shareholders to effect certain corporate actions. These requirements may have
the effect of delaying or deterring a change of control of our company. In
addition, a change of control of our company may be delayed or deterred as a
result of the shareholders' rights plan adopted by our board of directors.
Furthermore, the SEC and utility regulatory commissions of New York,
Massachusetts and New Hampshire would need to approve any transaction that
involves a change of control of us. These provisions could limit the price that
certain investors might be willing to pay in the future for shares of our common
stock. See 'Description of Common Stock -- Antitakeover effects of New York law
and KeySpan's certificate of incorporation' in the accompanying prospectus.
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RISKS RELATED TO THIS OFFERING
BECAUSE THE NUMBER OF SHARES OF COMMON STOCK THAT YOU WILL RECEIVE UPON
SETTLEMENT OF A PURCHASE CONTRACT WILL DEPEND ON THE FUTURE PRICE OF OUR COMMON
STOCK, YOU WILL BEAR THE RISK OF DECLINE IN THE VALUE OF OUR COMMON STOCK.
The terms of the Corporate MEDS will differ from those of ordinary convertible
securities. The number of shares of our common stock that you will receive upon
the settlement of a purchase contract is not fixed but instead will generally
depend on the average of the closing price per share of our common stock on the
20 consecutive trading days ending on the third trading day immediately
preceding May 16, 2005. The aggregate market value of the common stock you may
receive upon settlement of the purchase contract may be more or less than the
stated amount of $50 per Corporate MEDS. If the average closing price per share
of common stock over the 20 consecutive trading days ending on the third trading
day immediately preceding May 16, 2005 is less than $35.30, the aggregate market
value of the common stock issuable upon settlement generally will be less than
$50, and the investment in the Corporate MEDS will result in a loss. Therefore,
you will bear the risk of a decline in the market value of the common stock
prior to settlement of the purchase contracts. Any such loss could be
substantial.
YOUR OPPORTUNITY FOR EQUITY APPRECIATION WILL BE LESS THAN DIRECT OWNERSHIP OF
OUR COMMON STOCK.
The aggregate market value of the common stock you may receive upon settlement
of a purchase contract generally will exceed the stated amount of $50 only if
the average closing price per share of our common stock over the 20 consecutive
trading days ending on the third trading day immediately preceding May 16, 2005
equals or exceeds $42.36, which we refer to as the 'threshold appreciation
price.' The threshold appreciation price represents an appreciation of 20% over
the closing price of our common stock on the NYSE on April 30, 2002. Therefore,
during the period prior to settlement, an investment in Corporate MEDS affords
less opportunity for equity appreciation than a direct investment in the common
stock. If the applicable market value of our common stock exceeds $35.30, which
we refer to as the 'reference price,' but falls below the threshold appreciation
price, you will realize no equity appreciation of the common stock for the
period during which you own the purchase contract. Furthermore, if the
applicable market value of our common stock equals or exceeds the threshold
appreciation price for that period, you will realize only 83.33% of the value of
the shares of our common stock you could have purchased with $50 at the time of
the offering.
THE TRADING PRICES FOR THE MEDS EQUITY UNITS WILL BE DIRECTLY AFFECTED BY THE
TRADING PRICES OF OUR COMMON STOCK.
The trading prices of the MEDS Equity Units in the secondary market will be
directly affected by the trading prices of our common stock, the general level
of interest rates and our credit quality. It is impossible to predict whether
the price of our common stock or interest rates will rise or fall. Trading
prices of our common stock will be influenced by our operating results and
prospects and by economic, financial and other factors. In addition, general
market conditions, including the level of, and fluctuations in, the trading
prices of stocks generally, and sales of substantial amounts of our common stock
in the market after the offering of the MEDS Equity Units, or the perception
that such sales could occur, could affect the price of our common stock.
Fluctuations in interest rates may give rise to arbitrage opportunities based
upon changes in the relative value of our common stock underlying the purchase
contracts and of the other components of the MEDS Equity Units. Any such
arbitrage could, in turn, affect the trading prices of the Corporate MEDS,
Treasury MEDS, notes and our common stock.
HOLDERS OF MEDS EQUITY UNITS WILL NOT BE ENTITLED TO ANY RIGHTS WITH RESPECT TO
OUR COMMON STOCK, BUT WILL BE SUBJECT TO ALL CHANGES AFFECTING OUR COMMON STOCK.
Holders of MEDS Equity Units will not be entitled to any rights with respect to
our common stock (including, without limitation, voting rights, rights to
receive any dividends or other
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distributions on the common stock and any rights under our rights agreement),
but will be subject to all changes affecting the common stock. Holders of MEDS
Equity Units will only be entitled to rights on our common stock if and when we
deliver shares of our common stock upon settlement of the purchase contracts on
May 16, 2005, or as a result of early settlement of a purchase contract, as the
case may be (and then, only with respect to the shares actually delivered on or
before such date), and the applicable record date, if any, for the exercise of
rights or the receipt of dividends or other distributions occurs after that
date. For example, in the event that an amendment is proposed to our certificate
of incorporation or bylaws requiring shareholder approval and the record date
for determining the shareholders of record entitled to vote on the amendment
occurs prior to delivery of our common stock to holders of MEDS Equity Units,
those holders will not be entitled to vote on the amendment, although they will
nevertheless be subject to any changes in the powers, preferences or special
rights of our common stock upon receipt of our common stock.
WE MAY ISSUE ADDITIONAL SHARES OF COMMON STOCK AND THEREBY MATERIALLY AND
ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK.
The number of shares of our common stock that holders of MEDS Equity Units are
obligated to purchase on May 16, 2005 or as a result of early settlement of a
purchase contract, is subject to adjustment for certain events arising from
stock splits and combinations, stock dividends and certain other actions by us
that significantly modify our capital structure. We will not adjust the number
of shares of our common stock that the holders are to receive on May 16, 2005 or
as a result of early settlement of a purchase contract, for other events,
including offerings by us of our common stock for cash or in connection with
acquisitions. We are not restricted from issuing additional shares of common
stock during the term of the purchase contracts and have no obligation to
consider the interests of holders of MEDS Equity Units for any reason. If we
issue additional shares of common stock, that issuance may materially and
adversely affect the price of our common stock and, because of the relationship
of the number of shares holders are to receive under the purchase contracts to
the price of our common stock, may adversely affect the trading price of
Corporate MEDS or Treasury MEDS.
THE SECONDARY MARKET FOR THE MEDS EQUITY UNITS MAY BE ILLIQUID.
It is not possible to predict how the Corporate MEDS, Treasury MEDS or notes
will trade in the secondary market or whether the secondary market will be
liquid or illiquid. There is currently no secondary market for the Corporate
MEDS, Treasury MEDS or notes. The Corporate MEDS have been approved for listing
on the NYSE under the symbol 'KSE PrA.' We do not have any obligation or current
intention to apply for any separate listing of the Treasury MEDS or notes. There
can be no assurance as to the liquidity of any secondary market that may develop
for the Corporate MEDS, the Treasury MEDS or the notes, a holder's ability to
sell these securities or whether a trading market, if it develops, will
continue. In addition, in the event a holder were to substitute Treasury
securities for notes or notes for Treasury securities, thereby converting
Corporate MEDS to Treasury MEDS or Treasury MEDS to Corporate MEDS, as the case
may be, the liquidity of Corporate MEDS or Treasury MEDS could be adversely
affected. There can be no assurance that the Corporate MEDS will not be delisted
from the NYSE or that trading in the Corporate MEDS will not be suspended as a
result of the election by one or more holders to create Treasury MEDS, which
could cause the number of Corporate MEDS to fall below the requirement for
listing securities on the NYSE that at least 1,000,000 Corporate MEDS be
outstanding at any time with a minimum of 400 holders. The underwriters have
advised us that they currently intend to make a market for the Corporate MEDS,
the Treasury MEDS and the notes; however, they are not obligated to do so and
they may discontinue any market making at any time.
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<Page>
A MEDS EQUITY UNIT HOLDER'S RIGHTS TO THE PLEDGED SECURITIES WILL BE SUBJECT TO
OUR SECURITY INTEREST.
Although holders of MEDS Equity Units will be the beneficial owners of the
related notes, Treasury securities or applicable ownership interest in the
applicable Treasury portfolio, as the case may be, those securities will be
pledged to The Bank of New York, as the collateral agent, to secure the holders'
obligations under the related purchase contracts. Thus, the holders' rights to
the pledged securities will be subject to our security interest. Additionally,
notwithstanding the automatic termination of the purchase contracts in the event
that we become the subject of a case under the U.S. Bankruptcy Code, the
delivery of the pledged securities to holders of MEDS Equity Units may be
delayed by the imposition of the automatic stay of Section 362 of the Bankruptcy
Code.
WE MAY REDEEM THE NOTES UPON THE OCCURRENCE OF A TAX EVENT.
We have the option to redeem the notes, upon at least 30 but not more than 60
days' prior written notice, in whole but not in part, if a tax event occurs and
continues under the circumstances described in this prospectus supplement under
'Certain Terms of the Notes -- Tax Event Redemption.' If we exercise this
option, we will redeem the notes at the redemption amount plus accrued and
unpaid interest, if any, which we refer to as the redemption price. Unless the
notes have been successfully remarketed, if the tax event redemption occurs
prior to May 16, 2005, the redemption price payable to holders of the Corporate
MEDS in respect of notes that are included in Corporate MEDS will be distributed
to the collateral agent, who in turn will purchase the tax event Treasury
portfolio on behalf of the holders, and will remit the remainder of the
redemption price, if any, to the holders. The tax event Treasury portfolio will
be substituted for notes that are components of Corporate MEDS as collateral to
secure the holders' obligations under the related purchase contracts. Holders of
notes that are not components of Corporate MEDS will receive redemption payments
directly. There can be no assurance as to the impact on the market prices for
the Corporate MEDS if the tax event Treasury portfolio is substituted as
collateral in place of the notes so redeemed. A tax event redemption will be a
taxable event to the holders of the notes.
WE ARE A HOLDING COMPANY. THE INDENTURE DOES NOT LIMIT THE AMOUNT OF DEBT OR
PREFERRED STOCK THAT WE OR OUR SUBSIDIARIES MAY ISSUE OR INCUR. THE CLAIMS OF
CREDITORS AND HOLDERS OF DEBT AND PREFERRED STOCK OF OUR SUBSIDIARIES ARE
EFFECTIVELY SENIOR TO CLAIMS OF HOLDERS OF NOTES AND TO CLAIMS OF THE HOLDERS OF
THE MEDS EQUITY UNITS. IN ADDITION, CONTRACT ADJUSTMENT PAYMENTS WILL BE OUR
SUBORDINATED OBLIGATIONS.
The notes will be issued as a new series of senior unsecured debt securities
under an indenture between us and JPMorgan Chase Bank, as trustee, and will rank
equally and ratably in right of payment with all of our other senior unsecured
and unsubordinated obligations. The indenture does not limit our ability to
issue or incur other unsecured debt.
We are a holding company that derives all of our income from our subsidiaries.
Accordingly, our ability to service our debt, including our obligations under
the notes, and other obligations are primarily dependent on the earnings of our
subsidiaries and the payment of those earnings to us, in the form of dividends,
loans or advances and through repayment of loans or advances from us. In
addition, any payment of dividends, loans or advances by those subsidiaries
could be subject to statutory or contractual restrictions. Our subsidiaries have
no obligation to pay any amounts due on the notes. Upon liquidation or
reorganization of any of our subsidiaries, the claims of that subsidiary's
creditors and preferred shareholders generally will be paid before payments can
be made to us that could be applied to make payments on the notes or the MEDS
Equity Units or to our other creditors. As a result, the notes and contract
adjustment payments under the purchase contracts will be structurally
subordinated to the obligations and liabilities of our subsidiaries. As of
March 31, 2002, the aggregate accrued liabilities and other obligations of our
subsidiaries were approximately $4.4 billion. In addition, our obligations with
respect to contract adjustment payments will be subordinate and junior in right
of payment to our obligations under any of our senior indebtedness.
S-21
<Page>
THE PURCHASE CONTRACT AGREEMENT WILL NOT BE QUALIFIED UNDER THE TRUST INDENTURE
ACT AND THE OBLIGATIONS OF THE PURCHASE CONTRACT AGENT ARE LIMITED.
The purchase contract agreement between the purchase contract agent and us will
not be qualified as an indenture under the Trust Indenture Act of 1939, and the
purchase contract agent will not be required to qualify as a trustee under the
Trust Indenture Act. The notes constituting a part of the Corporate MEDS will be
issued pursuant to an indenture, which has been qualified under the Trust
Indenture Act. Accordingly, if you hold MEDS Equity Units, you will not have the
benefit of the protections of the Trust Indenture Act other than to the extent
applicable to a note included in a Corporate MEDS. The protections generally
afforded the holder of a security issued under an indenture that has been
qualified under the Trust Indenture Act include:
disqualification of the indenture trustee for 'conflicting interests,' as
defined under the Trust Indenture Act;
provisions preventing a trustee that is also a creditor of the issuer from
improving its own credit position at the expense of the security holders
immediately prior to or after a default under such indenture; and
the requirement that the indenture trustee deliver reports at least
annually with respect to certain matters concerning the indenture trustee
and the securities.
THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE MEDS EQUITY UNITS ARE UNCLEAR.
No statutory, judicial or administrative authority directly addresses the
treatment of the MEDS Equity Units or instruments similar to the units for U.S.
federal income tax purposes. As a result, the U.S. federal income tax
consequences of the purchase, ownership and disposition of the MEDS Equity Units
are unclear.
WE WILL TREAT THE NOTES AS CONTINGENT PAYMENT DEBT INSTRUMENTS AND YOU WILL BE
REQUIRED TO ACCRUE ORIGINAL ISSUE DISCOUNT.
Under the indenture, we and each holder agree, for U.S. federal income tax
purposes, to treat the notes as indebtedness that is subject to the regulations
governing contingent payment debt instruments. As a result, you will be required
to include any original issue discount in income during your ownership of the
notes, subject to some adjustments. Additionally, you will generally be required
to recognize ordinary income on the gain, if any, realized on a sale, exchange
or other disposition of the notes at any time up to six months after the date on
which the interest rate on the notes is reset; thus, the ability to offset such
ordinary income with a loss, if any, on a purchase contract may be limited. See
'United States Federal Income Tax Consequences.'
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CAPITALIZATION
The following table sets forth as of March 31, 2002:
our actual short-term debt and capitalization; and
our short-term debt and capitalization as adjusted to reflect the issuance
of the MEDS Equity Units (assuming the underwriters do not exercise their
overallotment option) and the use of the proceeds thereof to pay down
short-term debt as described under the caption 'Use of Proceeds.'
You should read this table in conjunction with our consolidated financial
statements and the notes to these consolidated financial statements incorporated
by reference in this prospectus supplement.
<Table>
<Caption>
AT MARCH 31, 2002
--------------------------
AS
ACTUAL ADJUSTED
------ --------
(IN THOUSANDS)
Short-term debt, including current maturities of long-term
debt...................................................... $1,039,981 $ 652,731
---------- ----------
---------- ----------
Long-term debt.............................................. 4,693,403 4,693,403
Notes due 2008.............................................. -- 400,000
---------- ----------
Total long-term debt.................................... 4,693,403 5,093,403
---------- ----------
Preferred stock............................................. 84,077 84,077
---------- ----------
Common stock, $.01 par value; authorized 450,000,000 shares;
outstanding 140,570,579 shares (1)........................ 2,991,307 2,991,307
Retained earnings........................................... 602,990 560,268(2)
Accumulated comprehensive income............................ (30,475) (30,475)
Treasury stock purchased.................................... (527,826) (527,826)
---------- ----------
Total common shareholders' equity....................... 3,035,996 2,993,274
---------- ----------
Total capitalization (3)................................ $7,813,476 $8,170,754
---------- ----------
---------- ----------
</Table>
- ---------
(1) The number of outstanding shares does not include the common stock issuable
upon settlement of the purchase contracts underlying the MEDS Equity Units
and common stock issuable upon exercise of outstanding options, warrants and
other convertible securities.
(2) Reflects an adjustment of $42,722,328 representing the present value of the
contract adjustment payments payable in connection with the purchase
contracts underlying the MEDS Equity Units.
(3) Consists of Long-term debt, Preferred stock and Total common shareholders'
equity.
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COMMON STOCK DIVIDENDS AND PRICE RANGE
We have paid dividends on our common stock each year since 1998. Our 15th
consecutive quarterly dividend on our common stock was paid on February 1, 2002
to holders of record on January 15, 2002 in the amount of $0.445 per share.
Purchasers of the MEDS Equity Units offered hereby will not be entitled to
receive any quarterly dividend with a record date prior to the purchase contract
settlement date or any early settlement date. It is generally our practice to
pay dividends quarterly on the 1st day of February, May, August and November.
The payment of dividends is within the sole discretion of our Board of
Directors. See 'Description of Common Stock' in the accompanying prospectus.
The high and low sales prices of our common stock, as reported on the New York
Stock Exchange consolidated tape (NYSE ticker symbol: 'KSE'), and dividends paid
per share, for the periods indicated, are presented below:
<Table>
<Caption>
PRICE RANGE
--------------- DIVIDENDS PAID
HIGH LOW PER SHARE
---- --- ---------
2000
First Quarter..................................... $27.88 $20.19 $0.445
Second Quarter.................................... $32.69 $26.00 $0.445
Third Quarter..................................... $40.13 $30.94 $0.445
Fourth Quarter.................................... $43.63 $33.50 $0.445
2001
First Quarter..................................... $41.94 $34.20 $0.445
Second Quarter.................................... $41.10 $35.75 $0.445
Third Quarter..................................... $37.20 $29.10 $0.445
Fourth Quarter.................................... $35.35 $31.53 $0.445
2002
First Quarter..................................... $36.72 $30.01 $0.445
Second Quarter (through April 30, 2002)........... $37.45 $34.35 --
</Table>
S-24
<Page>
RATIO OF EARNINGS TO FIXED CHARGES
The following table shows our consolidated ratio of earnings to fixed charges
for the periods indicated:
<Table>
<Caption>
TWELVE MONTHS ENDED NINE MONTHS TWELVE MONTHS ENDED THREE MONTHS
MARCH 31, ENDED DECEMBER 31, ENDED
- --------------------------------------- DECEMBER 31, --------------------- MARCH 31,
1997(a) 1998(a) 1998 1999 2000 2001 2002
------- ------- ---- ---- ---- ---- ----
2.21 2.44 (b) 3.23 3.04 2.10 4.82
</Table>
- ---------
(a) Represents ratio of earnings to fixed charges for our predecessor, Long
Island Lighting Company.
(b) For the nine months ended December 31, 1998, earnings were insufficient to
cover fixed charges by $365.0 million. During the nine months ended
December 31, 1998, we incurred the following special charges (after tax):
charges associated with the transaction with the Long Island Power
Authority of $107.9 million; charges associated with the combination of
Long Island Lighting Company's gas and electric services businesses with us
of $83.5 million; an impairment charge of $54.1 million to write-down the
value of proved gas reserves; and a charge of $13.0 million to establish a
not-for-profit philanthropic foundation.
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USE OF PROCEEDS
The net proceeds from this offering will be used to repay approximately
$387,250,000 of commercial paper that was issued for general corporate purposes.
The commercial paper currently bears interest at a weighted average annualized
interest rate of 2.03% and has a maturity of up to 270 days. Certain
underwriters of this offering are dealers under our commercial paper program and
may receive proceeds from this offering.
ACCOUNTING TREATMENT
The net proceeds from the sale of the MEDS Equity Units will be allocated
between the purchase contracts and the notes on our financial statements. The
present value of the MEDS Equity Units contract adjustment payments will be
initially charged to common shareholders' equity, with an offsetting credit to
liabilities. Subsequent contract adjustment payments are allocated between this
liability account and interest expense based on a constant rate calculation over
the life of the transaction.
The purchase contracts are forward transactions in our common stock. Upon
settlement of the purchase contract, we will receive $50 on that purchase
contract and will issue the requisite number of shares of our common stock. The
$50 that we receive will be credited to common shareholders' equity.
Before the issuance of our common stock upon settlement of the purchase
contracts, the purchase contracts will be reflected in our diluted earnings per
share calculations using the treasury stock method. Under this method, the
number of shares of our common stock used in calculating diluted earnings per
share (based on the settlement formula applied at the end of the reporting
period) is deemed to be increased by the excess, if any, of the number of shares
that would be issued upon settlement of the purchase contracts over the number
of shares that could be purchased by us in the market (at the average market
price during the period) using the proceeds receivable upon settlement.
Consequently, we anticipate that there will be no dilutive effect on our
earnings per share except during periods when the average market price of our
common stock is above $42.36.
The Emerging Issues Task Force of the FASB is considering proposals related to
accounting for certain securities and financial instruments, including
securities such as the MEDS Equity Units. The current proposals being considered
include rulemaking that, if adopted, would endorse the treasury stock method of
accounting discussed above. Alternatively, other proposals being considered
could result in the common shares issuable pursuant to the purchase contracts to
be deemed outstanding and included in the calculation of diluted earnings per
share, and could result in periodic 'marking to market' of the purchase
contracts, causing periodic charges or credits to income. If this latter
approach were adopted, our diluted earnings per share could increase and
decrease from quarter to quarter to reflect the lesser and greater number of
shares issuable upon satisfaction of the purchase contracts. The outcome of the
EITF rulemaking is uncertain.
The FASB has issued an exposure draft entitled 'Accounting for Financial
Instruments with Characteristics of Liabilities, Equity or Both.' Under the
proposed Statement, any financial instrument that is issued in the form of
shares that are subject to mandatory redemption provisions are classified as
liabilities. This proposed Statement would require that, in the initial year of
adoption, an entity restate all financial statements for earlier years presented
for the effects of financial instruments within the scope of this Statement that
were outstanding at any time during the initial year of adoption. This proposed
Statement would be effective for fiscal years beginning after June 15, 2002. As
the exposure draft is currently written, the notes component of the MEDS Equity
Units would continue to be required to be classified as a liability.
Because the exposure draft is subject to future deliberations, the ultimate
outcome and timing of the exposure draft and its effect on the financial
statement presentation of this offering is uncertain.
S-26
<Page>
DESCRIPTION OF THE MEDS EQUITY UNITS
This section summarizes some of the terms of the MEDS Equity Units, and together
with the summary of some of the provisions of the purchase contract agreement,
the pledge agreement, the indenture and the notes described below, contains a
description of all of the material terms of the MEDS Equity Units. This summary,
however, does not contain a complete description of the MEDS Equity Units. You
should read this summary together with the purchase contract agreement, the
pledge agreement, the indenture and the notes for a complete understanding of
the provisions that may be important to you and for the definitions of some of
the terms used in this summary. The indenture has been filed with the SEC and
the form of purchase contract agreement, pledge agreement, the first and second
supplemental indentures to the indenture and the notes will be filed with the
SEC. This summary supplements the information in 'Description of Stock Purchase
Contracts and Stock Purchase Units' and 'Description of Debt Securities'
contained in the accompanying prospectus and, to the extent it is inconsistent
with the accompanying prospectus, replaces the descriptions in that prospectus.
We will issue the MEDS Equity Units under the purchase contract agreement
between the purchase contract agent and us. The MEDS Equity Units will initially
consist of 8,000,000 Corporate MEDS (9,200,000 Corporate MEDS if the
underwriters exercise their overallotment option in full), each with a stated
amount of $50.
CORPORATE MEDS
Each Corporate MEDS will consist of a unit comprised of:
(1) a purchase contract pursuant to which
(A) the holder will agree to purchase from us no later than May 16, 2005, for
$50, a number of newly issued shares of our common stock equal to the
settlement rate described below under 'Description of the Purchase
Contracts -- Purchase of our Common Stock,' ' -- Early Settlement by
Delivering Cash' and ' -- Early Settlement upon Cash Merger' and
(B) we will make quarterly unsecured contract adjustment payments to the
holder at the rate of 3.85% of the stated amount per year, and
(2) either
(A) so long as no tax event redemption has occurred
a note with a $50 principal amount, or
following a successful remarketing of the notes on or prior to the ninth
business day immediately preceding May 16, 2005, the applicable
ownership interest in a portfolio of zero-coupon U.S. Treasury
securities maturing on May 15, 2005, which is referred to as the
Treasury portfolio, or
(B) after a tax event redemption has occurred
the applicable ownership interest in a portfolio of zero-coupon U.S.
Treasury securities as more fully described under 'Certain Terms of the
Notes -- Tax Event Redemption,' which is referred to as the tax event
Treasury portfolio.
'Applicable ownership interest' means, with respect to a portfolio of zero-
coupon U.S. Treasury securities contained in a Corporate MEDS:
(1) for a Treasury portfolio,
a 1/20, or 5%, undivided beneficial ownership interest in a $1,000 face
amount principal or interest strip in a U.S. Treasury security included in
the Treasury portfolio that matures on May 15, 2005, and
a 0.06125% undivided beneficial ownership interest in a $1,000 face amount
principal or interest strip in a U.S. Treasury security included in the
Treasury portfolio that matures on May 15, 2005; and
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(2) for a tax event Treasury portfolio,
a 1/20, or 5%, undivided beneficial ownership interest in a $1,000 face
amount principal or interest strip in a U.S. Treasury security included in
the tax event Treasury portfolio that matures on May 15, 2005, and
for each scheduled interest payment date on the notes that occurs after the
tax event redemption date through the purchase contract settlement date, a
0.06125% undivided beneficial ownership interest in a $1,000 face amount
principal or interest strip in a U.S. Treasury security included in the tax
event Treasury portfolio maturing on or prior to the day immediately
preceding the relevant interest payment date.
For United States federal income tax purposes, the purchase price of each
Corporate MEDS will be allocated between the related purchase contract and the
note in proportion to their respective fair market values at the time of
issuance. We expect that, at the time of issuance, the fair market value of each
note will be $50 and the fair market value of each purchase contract will be $0.
This position generally will be binding on each beneficial owner of each
Corporate MEDS, but not on the Internal Revenue Service, or IRS. See 'United
States Federal Income Tax Consequences -- Corporate MEDS -- Allocation of
Purchase Price.'
As long as a MEDS Equity Unit is in the form of a Corporate MEDS, the note or
the appropriate applicable ownership interest in any Treasury portfolio, as
applicable, forming a part of the Corporate MEDS will be pledged to the
collateral agent to secure the holder's obligation to purchase our common stock
under the related purchase contract.
CREATING TREASURY MEDS
Unless the tax event Treasury portfolio has replaced the notes as a component of
the Corporate MEDS as the result of a tax event redemption, each holder of
Corporate MEDS will have the right, at any time prior to 11:00 a.m. (New York
City time) on the fourth business day immediately preceding February 16, 2005,
which we refer to as the election date, to substitute for the related notes held
by the collateral agent, zero-coupon U.S. Treasury securities (CUSIP
No. 912803AD5) maturing on May 15, 2005, which are referred to as Treasury
securities, having a principal amount at maturity equal to the aggregate
principal amount of the notes for which substitution is being made. These
substitutions will create Treasury MEDS, and the notes will be released to the
holder. Because Treasury securities are issued in integral multiples of $1,000,
holders of Corporate MEDS may make these substitutions only in integral
multiples of 20 Corporate MEDS. The final time you may create Treasury MEDS is
11:00 a.m. (New York City time) on the election date.
Each Treasury MEDS will consist of a unit, comprised of:
(1) a purchase contract pursuant to which
the holder will agree to purchase from us no later than May 16, 2005, for
$50, a number of newly issued shares of our common stock equal to the
settlement rate described below under 'Description of the Purchase
Contracts -- Purchase of our Common Stock,' ' -- Early Settlement by
Delivering Cash' and ' -- Early Settlement upon Cash Merger' and
we will make quarterly unsecured contract adjustment payments to the holder
at the rate of 3.85% of the stated amount per year, and
(2) a 1/20, or 5%, undivided beneficial ownership interest in a Treasury
security having a principal amount at maturity of $1,000.
For example, to create 20 Treasury MEDS, the Corporate MEDS holder will:
deposit with the collateral agent a Treasury security having a principal
amount of $1,000 that matures on May 15, 2005; and
transfer 20 Corporate MEDS to the purchase contract agent accompanied by a
notice stating that the holder has deposited the required Treasury
securities with the collateral agent and
S-28
<Page>
requesting that the purchase contract agent instruct the collateral agent
to release to the holder the $1,000 principal amount of notes relating
to the 20 Corporate MEDS.
Upon that deposit and the receipt of an instruction from the purchase contract
agent, the collateral agent will release the related $1,000 principal amount of
notes from the pledge under the pledge agreement, free and clear of our security
interest, to the purchase contract agent. The purchase contract agent then will:
cancel the 20 Corporate MEDS;
transfer the related $1,000 principal amount of notes to the holder; and
deliver 20 Treasury MEDS to the holder.
The Treasury securities will be substituted for the notes and will be pledged to
the collateral agent to secure the holder's obligation to purchase our common
stock under the related purchase contracts. The related notes released to the
holder thereafter will trade separately from the Treasury MEDS. Contract
adjustment payments will be payable by us on these Treasury MEDS on each payment
date from the later of August 16, 2002 and the last payment date on which
contract adjustment payments were made on the related purchase contract (whether
as a component of the Treasury MEDS or a Corporate MEDS). In addition, OID will
accrue on the related Treasury securities. See 'United States Federal Income Tax
Consequences -- Treasury MEDS -- Interest Income and Original Issue Discount.'
RECREATING CORPORATE MEDS
Unless the tax event Treasury portfolio has replaced the notes as a component of
the Corporate MEDS as a result of a tax event redemption, each holder of
Treasury MEDS will have the right, at any time prior to 11:00 a.m. (New York
City time) on the election date, to substitute for the related Treasury
securities held by the collateral agent, notes in an aggregate principal amount
equal to the aggregate principal amount at maturity of the Treasury securities
for which substitution is being made. These substitutions will recreate
Corporate MEDS, and the related Treasury securities will be released to the
holder. Because Treasury securities are issued in integral multiples of $1,000,
holders of Treasury MEDS may make these substitutions only in integral multiples
of 20 Treasury MEDS.
For example, to recreate 20 Corporate MEDS, the Treasury MEDS holder will:
deposit with the collateral agent notes with an aggregate principal amount
of $1,000, which notes will have been purchased in the open market at the
holder's expense or are held by the holder as a result of creating Treasury
MEDS; and
transfer 20 Treasury MEDS to the purchase contract agent accompanied by a
notice stating that the holder has deposited notes with an aggregate
principal amount of $1,000 with the collateral agent and requesting that
the purchase contract agent instruct the collateral agent to release to the
holder the Treasury securities relating to the 20 Treasury MEDS.
Upon that deposit and the receipt of an instruction from the purchase contract
agent, the collateral agent will release the related Treasury securities from
the pledge under the pledge agreement, free and clear of our security interest,
to the purchase contract agent. The purchase contract agent will then:
cancel the 20 Treasury MEDS;
transfer the related Treasury securities to the holder; and
deliver 20 Corporate MEDS to the holder.
The notes will be substituted for the Treasury securities and will be pledged to
the collateral agent to secure the holder's obligation to purchase our common
stock under the related purchase contracts.
Holders that elect to substitute pledged securities, thereby creating Treasury
MEDS or recreating Corporate MEDS, will be responsible for any fees or expenses
payable in connection with the substitution.
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<Page>
CURRENT PAYMENTS
Holders of Corporate MEDS will be entitled to receive cash payments on the
Corporate MEDS, payable quarterly in arrears, consisting of:
interest on the related notes payable by us or cash distributions on the
applicable ownership interest of any Treasury portfolio, as applicable, at
the rate of 4.90% of the stated amount per year, and
distributions of quarterly contract adjustment payments payable by us at
the rate of 3.85% of the stated amount per year.
Holders who create Treasury MEDS will be entitled to receive quarterly cash
distributions of contract adjustment payments payable by us at the rate of 3.85%
of the stated amount per year. Each MEDS Equity Unit will have a stated amount
of $50. Although holders of Treasury MEDS will not receive any interest payments
on the Treasury securities pledged in connection with the creation of the
Treasury MEDS, they will be required to accrue OID on these Treasury securities.
Our obligations with respect to the contract adjustment payments will be
subordinate and junior in right of payment to our obligations under any of our
senior indebtedness. 'Senior indebtedness' with respect to the contract
adjustment payments means our indebtedness of any kind provided the instrument
under which such indebtedness is incurred does not expressly provide otherwise.
The notes will be our senior unsecured obligations and will rank equally in
right of payment with all of our other unsecured and unsubordinated debt
obligations. See 'Description of Debt Securities' in the accompanying
prospectus.
VOTING AND CERTAIN OTHER RIGHTS
Holders of purchase contracts forming part of the Corporate MEDS or Treasury
MEDS, in their capacities as such holders, will have no rights with respect to
our common stock (including, without limitation, voting rights, rights to
receive any dividends or other distributions on our common stock and any rights
under our shareholder rights plan).
LISTING OF THE SECURITIES
The Corporate MEDS have been approved for listing on the NYSE under the symbol
'KSE PrA.' Unless and until substitution has been made as described in
' -- Creating Treasury MEDS' or ' -- Recreating Corporate MEDS,' neither the
notes nor the Treasury securities component of a Treasury MEDS will trade
separately from Corporate MEDS or Treasury MEDS. The notes or any Treasury
portfolio component will trade as a unit with the purchase contract component of
the Corporate MEDS, and the Treasury securities component will trade as a unit
with the purchase contract component of the Treasury MEDS. We have no obligation
or current intention to apply for listing of the Treasury MEDS or notes.
Our common stock is listed on the NYSE and trades under the symbol 'KSE.' The
shares of our common stock issuable upon settlement of each purchase contract
have been approved for listing on the NYSE, subject to notice of issuance.
MISCELLANEOUS
We, our subsidiaries or our affiliates may from time to time, to the extent
permitted by law, purchase any of the Corporate MEDS, Treasury MEDS or notes
which are then outstanding by tender, in the open market or by private
agreement.
S-30
<Page>
DESCRIPTION OF THE PURCHASE CONTRACTS
This section summarizes some of the terms of the purchase contract agreement,
purchase contracts, pledge agreement, remarketing agreement and second
supplemental indenture establishing the terms of the notes and uses some terms
that are not defined in this prospectus supplement or the accompanying
prospectus but that are defined in the purchase contract agreement. This summary
does not contain a complete description of the purchase contracts. You should
read this summary together with the purchase contract agreement, pledge
agreement, remarketing agreement and second supplemental indenture for a
complete understanding of the provisions that may be important to you. The forms
of such documents will be filed with the SEC.
PURCHASE OF OUR COMMON STOCK
Unless settled early or terminated as described under ' -- Early Settlement by
Delivering Cash,' ' -- Early Settlement upon Cash Merger' or ' -- Termination of
Purchase Contracts,' each purchase contract underlying a MEDS Equity Unit will
obligate the holder of the purchase contract to purchase, and us to sell, on
May 16, 2005, for $50 in cash, a number of newly issued shares of our common
stock equal to the 'settlement rate.' The settlement rate will be calculated,
subject to adjustment under the circumstances described in ' -- Anti-Dilution
Adjustments,' as follows:
if the applicable market value of our common stock is equal to or greater
than the threshold appreciation price of $42.36, which is approximately 20%
above the reference price of $35.30, the settlement rate will be 1.1804
shares, which is equal to $50 divided by the threshold appreciation price.
Accordingly, if the market price for our common stock increases, between
the date of this prospectus supplement and the period during which the
applicable market value of our common stock is measured, to an amount that
is higher than the threshold appreciation price, the aggregate market value
of the shares of our common stock issued upon settlement of the purchase
contract will be higher than $50, assuming that the market price of our
common stock on the date of settlement is the same as the applicable market
value of our common stock. If the market price is the same as the threshold
appreciation price, the aggregate market value of those shares of our
common stock will be equal to $50, assuming that the market price of our
common stock on the date of settlement is the same as the applicable market
value of our common stock;
if the applicable market value of our common stock is less than the
threshold appreciation price but greater than the reference price, the
settlement rate will be equal to $50 divided by the applicable market value
of our common stock. Accordingly, if the market price for our common stock
increases between the date of this prospectus supplement and the period
during which the applicable market value of our common stock is measured,
but the market price is less than the threshold appreciation price, the
aggregate market value of the shares of our common stock issued upon
settlement of the purchase contract will be equal to $50, assuming that the
market price of our common stock on the date of settlement is the same as
the applicable market value of our common stock; and
if the applicable market value of our common stock is less than or equal to
the reference price, the settlement rate will be 1.4164 shares, which is
equal to $50 divided by the reference price. Accordingly, if the market
price for our common stock decreases between the date of this prospectus
supplement and the period during which the applicable market value of our
common stock is measured, the aggregate market value of the shares of our
common stock issued upon settlement of the purchase contract will be less
than $50, assuming that the market price of our common stock on the date of
settlement is the same as the applicable market value of our common stock.
If the applicable market value of our common stock equals the reference
price, the aggregate market value of those shares of our common stock will
be equal to $50, assuming that the market price of our common stock on the
date of settlement is the same as the applicable market value of our common
stock.
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'Applicable market value of our common stock' means the average of the closing
price per share of our common stock on the 20 consecutive trading days ending on
the third trading day immediately preceding May 16, 2005.
'Closing price' of our common stock on any date of determination means the
closing sale price as of the close of the principal trading session (or, if no
closing price is reported, the last reported sale price) of our common stock on
the NYSE on that date or, if our common stock is not listed for trading on the
NYSE on any such date, as reported in the composite transactions for the
principal United States national or regional securities exchange on which our
common stock is so listed. If our common stock is not so listed on a United
States national or regional securities exchange, the closing price means the
last sale price of our common stock as reported by the Nasdaq Stock Market or,
if our common stock is not so reported, the last quoted bid price for our common
stock in the over-the-counter market as reported by the National Quotation
Bureau or similar organization. If the bid price is not available, the closing
price means the market value of our common stock on the date of determination as
determined by a nationally recognized independent investment banking firm
retained by us for this purpose.
A 'trading day' means a day on which our common stock is not suspended from
trading on any national or regional securities exchange or association or
over-the-counter market at the close of business and has traded at least once on
the national or regional securities exchange or association or over-the-counter
market that is the primary market for the trading of our common stock.
We will not issue any fractional shares of our common stock pursuant to the
purchase contracts. In lieu of fractional shares otherwise issuable (calculated
on an aggregate basis) in respect of the purchase contracts being settled on the
purchase contract settlement date by a holder of MEDS Equity Units, the holder
will be entitled to receive an amount of cash equal to the fraction of a share
multiplied by the applicable market value of our common stock.
On the business day immediately preceding May 16, 2005, unless:
a holder of MEDS Equity Units has settled the related purchase contracts
through the early delivery of cash to the purchase contract agent in the
manner described under ' -- Early Settlement by Delivering Cash' or under
' -- Early Settlement upon Cash Merger;'
a holder of MEDS Equity Units has settled the related purchase contracts
with cash on the fourth business day immediately preceding May 16, 2005,
pursuant to prior notice given in the manner described under ' -- Notice to
Settle with Cash;' or
an event described under ' -- Termination of Purchase Contracts' below has
occurred,
then
in the case of Corporate MEDS, we will exercise our rights as a secured
party and retain the notes pledged as collateral or dispose of the notes in
accordance with applicable law. Following such action, the holder's
obligation to purchase our common stock under the related purchase
contracts on the purchase contract settlement date will be satisfied in
full; or
in the case of Treasury MEDS, or in the event that a Treasury portfolio has
replaced the notes as a component of the Corporate MEDS as the result of a
successful remarketing of the notes or a tax event redemption, in the case
of Corporate MEDS, the principal amount of the related Treasury securities
or a portion of the appropriate applicable ownership interest in a Treasury
portfolio, as applicable, when paid at maturity, will automatically be
applied to satisfy in full the holder's obligation to purchase our common
stock under the related purchase contracts.
Our common stock will then be issued and delivered to the holder or the holder's
designee, upon presentation and surrender of the certificate evidencing the MEDS
Equity Units and payment by the holder of any transfer or similar taxes payable
in connection with the issuance of our common stock to any person other than the
holder.
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Each holder of MEDS Equity Units, by acceptance of these securities, will be
deemed to have:
irrevocably agreed to be bound by the terms and provisions of the related
purchase contracts and the pledge agreement and to have agreed to perform
such holder's obligations thereunder for so long as the holder remains a
holder of the MEDS Equity Units; and
duly appointed the purchase contract agent as the holder's attorney-in-fact
to enter into and perform under the related purchase contracts and pledge
agreement on behalf of and in the name of the holder.
In addition, each holder and beneficial owner of MEDS Equity Units, by
acceptance of these securities, will be deemed to have agreed to treat itself as
the owner of the related notes, the appropriate applicable ownership interest of
any Treasury portfolio or the Treasury securities, as the case may be.
So long as the MEDS Equity Units are held through the depositary, the beneficial
owners will have rights and obligations with respect to the MEDS Equity Units
equivalent to those of a holder except that such rights and obligations are
exercisable only through the depositary or its participants. See ' -- Book-Entry
Only System.'
REMARKETING
Pursuant to the remarketing agreement and subject to the terms of the
supplemental remarketing agreement among the remarketing agent, the purchase
contract agent and us, unless a tax event redemption has occurred, the notes of
Corporate MEDS holders will be remarketed on the third business day immediately
preceding February 16, 2005, which we refer to as the initial remarketing date,
unless the remarketing agent, with the consent of KeySpan, delays the
remarketing to a later date.
The remarketing agent will use its commercially reasonable best efforts to
remarket the notes on the initial remarketing date at a price of at least
100.25% of the aggregate applicable Treasury portfolio purchase price described
below. A portion of the proceeds from a successful remarketing equal to the
Treasury portfolio purchase price will be applied to purchase the Treasury
portfolio consisting of:
interest or principal strips of U.S. Treasury securities that mature on
May 15, 2005, in an aggregate amount equal to the principal amount of the
notes included in Corporate MEDS; and
interest or principal strips of U.S. Treasury securities that mature on
May 15, 2005, in an aggregate amount equal to the aggregate interest
payment that would be due on May 16, 2005 on the principal amount of the
notes that would have been included in Corporate MEDS assuming no
remarketing and that the interest rate on the notes was not reset as
described in 'Certain Terms of the Notes -- Market Rate Reset.'
In addition, the remarketing agent will deduct, as a remarketing fee, an amount
not exceeding 25 basis points (0.25%) of the applicable Treasury portfolio
purchase price from any amount of the proceeds from the remarketing of the notes
in excess of the applicable Treasury portfolio purchase price. The remarketing
agent will then remit the remaining portion of the proceeds from the remarketing
of the notes, if any, for the benefit of the holders. Corporate MEDS holders
whose notes are remarketed will not otherwise be responsible for the payment of
any remarketing fee in connection with the remarketing.
As used in this context, 'Treasury portfolio purchase price' means the lowest
aggregate price quoted by a primary U.S. government securities dealer in The
City of New York to the quotation agent on the date of the successful
remarketing, for the purchase of the applicable Treasury portfolio described
above for settlement on the third business day immediately following such date.
'Quotation agent' means J.P. Morgan Securities Inc. or its successor or any
other primary U.S. government securities dealer in The City of New York selected
by us.
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If (1) despite using its commercially reasonable best efforts, the remarketing
agent cannot remarket the notes on the initial remarketing date, other than to
us, at a price of at least 100.25% of the Treasury portfolio purchase price, or
(2) the remarketing has not occurred because a condition precedent to the
remarketing has not been satisfied, in each case resulting in a failed
remarketing, the notes will continue to be a component of Corporate MEDS and one
or more remarketings will be attempted as described below.
If the remarketing of the notes on the initial remarketing date has resulted in
a failed remarketing, unless a tax event redemption has occurred, the
remarketing agent will use its commercially reasonable best efforts to remarket
the notes on one or more subsequent occasions after the initial remarketing date
until the ninth business day immediately preceding May 16, 2005. Any such
remarketing will be at a price equal to at least 100.25% of the Treasury
portfolio purchase price.
A portion of the proceeds from a successful remarketing equal to the Treasury
portfolio purchase price will be applied to purchase the Treasury portfolio. In
addition, the remarketing agent will deduct, as a remarketing fee, an amount not
exceeding 25 basis points (0.25%) of the applicable Treasury portfolio purchase
price from any amount of the proceeds from the remarketing of the notes in
excess of the applicable Treasury portfolio purchase price. The remarketing
agent will then remit the remaining portion of the proceeds from the remarketing
of the notes, if any, for the benefit of the holders. Corporate MEDS holders
whose notes are remarketed will not otherwise be responsible for the payment of
any remarketing fee in connection with the remarketing.
Following a successful remarketing on or prior to the ninth business day
immediately preceding May 16, 2005, the Treasury portfolio will be substituted
for the notes and will be pledged to the collateral agent to secure the
Corporate MEDS holders' obligation to purchase our common stock under the
purchase contracts.
If a successful remarketing of notes has not occurred on or prior to the ninth
business day immediately preceding May 16, 2005, unless a tax event redemption
has occurred, the notes of Corporate MEDS holders who have failed to notify the
purchase contract agent on or prior to 5:00 p.m. (New York City time) on the
fifth business day immediately preceding May 16, 2005 of their intention to
settle the related purchase contracts with cash, or who have given such notice
but failed to make the required payment on or prior to 11:00 a.m. (New York City
time) on the fourth business day immediately preceding May 16, 2005, will be
remarketed on the third business day immediately preceding May 16, 2005.
In such case, the remarketing agent will then use its commercially reasonable
best efforts to remarket the notes at a price of approximately 100.25%, but not
less than 100%, of the aggregate principal amount of the notes. A portion of the
proceeds from such remarketing equal to the aggregate principal amount of the
notes will automatically be applied to satisfy in full the Corporate MEDS
holders' obligation to purchase our common stock under the related purchase
contracts on the purchase contract settlement date.
In addition, the remarketing agent will deduct, as a remarketing fee, an amount
not exceeding 25 basis points (0.25%) of the aggregate principal amount of the
remarketed notes from any amount of the proceeds from the remarketing of the
notes in excess of the aggregate principal amount of those remarketed notes. The
remarketing agent will then remit the remaining portion of the proceeds from the
remarketing of those notes, if any, for the benefit of the holders. Corporate
MEDS holders whose notes are remarketed will not otherwise be responsible for
the payment of any remarketing fee in connection with the remarketing.
If (1) despite using its commercially reasonable best efforts, the remarketing
agent cannot remarket the notes on the third business day immediately preceding
May 16, 2005, other than to us, at a price of at least 100% of the aggregate
principal amount of the notes, or (2) the remarketing has not occurred because a
condition precedent to the remarketing has not been satisfied, in each case
resulting in a failed remarketing, we will exercise our rights as a secured
party and retain the notes pledged as collateral or dispose of the notes in
accordance with applicable law. Following
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such action, each holder's obligation to purchase our common stock under the
related purchase contracts on the purchase settlement date will be satisfied in
full.
We will cause a notice of a failed final remarketing of notes to be published on
the second business day immediately preceding May 16, 2005, in a daily newspaper
in the English language of general circulation in The City of New York, which is
expected to be The Wall Street Journal. In addition, we will request, not later
than 7 nor more than 15 calendar days prior to the initial remarketing date,
that the depositary notify its participants holding notes and Corporate MEDS of
the initial remarketing. It is currently anticipated that J.P. Morgan Securities
Inc. will be the remarketing agent.
EARLY SETTLEMENT BY DELIVERING CASH
At any time prior to 11:00 a.m. (New York City time) on the election date, a
holder of MEDS Equity Units may settle the related purchase contracts in their
entirety provided that at such time, if so required under the U.S. federal
securities laws, there is in effect a registration statement covering the shares
of our common stock or other securities to be delivered in respect of the
purchase contracts being settled, by presenting and surrendering the related
MEDS Equity Units certificate at the office of the purchase contract agent with
the form of 'Election to Settle Early' on the reverse side of such certificate
completed and executed as indicated (if such MEDS Equity Units are held in
certificated form), accompanied by payment to us in immediately available funds
of an amount equal to:
$50 multiplied by the number of purchase contracts being settled, plus
if the delivery is made with respect to any purchase contract during the
period from the close of business on any record date next preceding any
payment date to the opening of business on such payment date, an amount
equal to the contract adjustment payments payable on the payment date with
respect to the purchase contract.
Holders of Corporate MEDS may settle early only in integral multiples of 20
Corporate MEDS. If a Treasury portfolio has replaced the notes as a component of
Corporate MEDS as a result of a successful remarketing of the notes or a tax
event redemption, holders of the Corporate MEDS may settle early only in
integral multiples of 80,000 Corporate MEDS. Holders of Treasury MEDS may settle
early only in integral multiples of 20 Treasury MEDS.
We have agreed that, if required under the U.S. federal securities laws, we will
use commercially reasonable efforts to (1) have in effect a registration
statement covering any securities to be delivered in respect of the purchase
contracts being settled and (2) provide a prospectus in connection therewith, in
each case in a form that may be used in connection with early settlement of the
purchase contracts.
So long as the MEDS Equity Units are evidenced by one or more global security
certificates deposited with the depositary, procedures for early settlement will
also be governed by standing arrangements between the depositary and the
purchase contract agent.
Upon early settlement of purchase contracts, presentation and surrender of the
MEDS Equity Unit certificate evidencing the related Corporate MEDS or Treasury
MEDS (if the MEDS Equity Units are held in certificated form), and payment of
any transfer or similar taxes payable by the holder in connection with the
issuance of our related common stock to any person other than the holder of the
MEDS Equity Units:
the holder will receive 1.1804 newly issued shares of our common stock per
MEDS Equity Unit, regardless of the market price of our common stock on the
date of early settlement, subject to adjustment under the circumstances
described in ' -- Anti-Dilution Adjustments' below, accompanied by this
prospectus supplement, as amended or supplemented, if required by U.S.
securities laws;
the notes, the appropriate applicable ownership interest in a Treasury
portfolio or the Treasury securities, as the case may be, related to the
MEDS Equity Units will be transferred to the holder free and clear of our
security interest and transferred within three
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business days following the applicable early settlement date to the holder
or the holder's designee;
the holder's right to receive future contract adjustment payments will
terminate; and
no adjustment will be made to or for the holder on account of any amounts
accrued in respect of contract adjustment payments.
We will not issue any fractional shares of our common stock in connection with
early settlement of any purchase contracts. In lieu of fractional shares
otherwise issuable (calculated on an aggregate basis) in respect of the purchase
contracts being early settled on any date by a holder of MEDS Equity Units, the
holder will be entitled to receive an amount of cash equal to the fraction of a
share multiplied by the closing price of our common stock on the early
settlement date.
If the purchase contract agent receives a MEDS Equity Unit certificate, if the
MEDS Equity Units are held in certificated form, accompanied by the completed
and executed 'Election to Settle Early' and the required immediately available
funds, from a holder of MEDS Equity Units by 5:00 p.m., New York City time, on a
business day, that day will be considered the purchase contract settlement date
for those MEDS Equity Units and the stock will be delivered to the settling
holder as soon thereafter as reasonably practicable. If the purchase contract
agent receives the necessary documentation after 5:00 p.m., New York City time,
on a business day or at any time on a day that is not a business day, the next
business day will be considered the purchase contract settlement date for that
MEDS Equity Unit and the stock will be delivered to the settling holder as soon
thereafter as reasonably practicable.
EARLY SETTLEMENT UPON CASH MERGER
Prior to May 16, 2005, if we are involved in a merger in which at least 30% of
the consideration for our common stock consists of cash or cash equivalents,
which is referred to as a 'cash merger,' then on or after the effective date of
the cash merger each holder of MEDS Equity Units will have the right to
accelerate and settle the related purchase contract with cash at the settlement
rate in effect immediately prior to the effective date of the cash merger,
provided that the settlement date is no later than the fourth business day
immediately preceding May 16, 2005 and at such time, if so required under the
U.S. federal securities laws, there is in effect a registration statement
covering any securities to be delivered in respect of the purchase contracts
being settled. This right is referred to as the 'merger early settlement right.'
We will provide each holder with a notice of the completion of a cash merger
within five business days of the cash merger. The notice will specify the early
settlement date, which shall be a date specified by us that is between 20 and 30
business days after the date of the notice but which may not be later than the
fourth business day immediately preceding May 16, 2005. The notice will also set
forth, among other things, the formula for determining the applicable settlement
rate and the amount of the securities and other property receivable by the
holder upon settlement. To exercise the merger early settlement right, a holder
must present and surrender at the office of the purchase contract agent, not
later than 5:00 p.m., New York City time, on the third business day before the
early settlement date, the related certificate evidencing MEDS Equity Units (if
the MEDS Equity Units are held in certificated form), accompanied by payment to
us in immediately available funds of the amount set forth above under ' -- Early
Settlement by Delivering Cash.'
Holders of Corporate MEDS may settle early only in integral multiples of 20
Corporate MEDS. If a Treasury portfolio has replaced the notes as a component of
Corporate MEDS as a result of a successful remarketing of the notes or a tax
event redemption, holders of the Corporate MEDS may settle early only in
integral multiples of 80,000 Corporate MEDS. Holders of Treasury MEDS may settle
early only in integral multiples of 20 Treasury MEDS.
We have agreed that, if required under the U.S. federal securities laws, we will
use commercially reasonable efforts to (1) have in effect a registration
statement covering any securities to be delivered in respect of the purchase
contracts being settled and (2) provide a prospectus in connection therewith, in
each case in a form that may be used in connection with early settlement of the
purchase contracts following a cash merger.
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So long as the MEDS Equity Units are evidenced by one or more global security
certificates deposited with the depositary, procedures for early settlement upon
a cash merger will also be governed by standing arrangements between the
depositary and the purchase contract agent.
If a holder exercises the merger early settlement right, we will deliver to the
holder on the early settlement date the kind and amount of securities or other
property that the holder would have been entitled to receive in the cash merger
if the holder had settled the purchase contract immediately before the cash
merger at the settlement rate in effect at such time, determined using the
average of the closing price per share of our common stock on the 20 consecutive
trading days ending on the third trading date immediately preceding the
effective date of the cash merger. A holder will also receive the notes,
applicable ownership interest in the Treasury portfolio or Treasury securities,
as the case may be, related to the MEDS Equity Units, free and clear of our
security interest.
If a holder does not elect to exercise the merger early settlement right, the
holder's MEDS Equity Units will remain outstanding and subject to normal
settlement on May 16, 2005, subject to any earlier termination or exercise of
early settlement rights.
NOTICE TO SETTLE WITH CASH
If a successful remarketing has not occurred prior to the ninth business day
immediately preceding May 16, 2005, a holder of Corporate MEDS or Treasury MEDS
may settle the related purchase contract with cash prior to 11:00 a.m., New York
City time, on the fourth business day immediately preceding May 16, 2005. A
holder of a Corporate MEDS or Treasury MEDS must notify the purchase contract
agent of its intention to settle by separate cash not later than 5:00 p.m., New
York City time, on the fifth business day immediately preceding May 16, 2005. If
a holder of Corporate MEDS (unless a tax event Treasury portfolio has replaced
the notes as a result of a tax event redemption) fails to deliver the cash to
the collateral agent prior to 11:00 a.m., New York City time, on the fourth
business day immediately preceding May 16, 2005, the notes which are a component
of such holder's Corporate MEDS will be remarketed on the third business day
immediately preceding May 16, 2005, and the proceeds of such remarketing shall
be used to satisfy in full the holder's obligation to purchase our common stock
under the related purchase contracts. If a holder of Treasury MEDS or Corporate
MEDS (after a successful remarketing or tax event redemption) fails to deliver
the cash to the collateral agent prior to 11:00 a.m., New York City time, on the
fourth business day immediately preceding May 16, 2005, the proceeds of the
related Treasury securities or applicable ownership interest in a Treasury
portfolio, as the case may be, will be used to satisfy in full the holder's
obligation to purchase our common stock under the related purchase contracts.
CONTRACT ADJUSTMENT PAYMENTS
Contract adjustment payments in respect of MEDS Equity Units will be fixed at
the rate of 3.85% of the stated amount of $50 per purchase contract per year.
Contract adjustment payments payable for any period will be computed on the
basis of a 360-day year of twelve 30-day months. Contract adjustment payments
will accrue from May 6, 2002 and will be payable quarterly in arrears on
February 16, May 16, August 16 and November 16 of each year, commencing
August 16, 2002.
Contract adjustment payments will be payable to the holders of purchase
contracts as they appear on the books and records of the purchase contract agent
on the relevant record dates, which, as long as the MEDS Equity Units remain in
book-entry only form, will be one business day prior to the relevant payment
date. These distributions will be paid through the purchase contract agent, who
will hold amounts received in respect of the contract adjustment payments for
the benefit of the holders of the purchase contracts relating to the MEDS Equity
Units. Subject to any applicable laws and regulations, each such payment will be
made as described under ' -- Book-Entry Only System.' In the event that the MEDS
Equity Units do not continue to remain in book-entry only form, we shall have
the right to select relevant record dates, which shall be at least one business
day but not more than 60 business days prior to the relevant payment dates,
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and to make payments by check mailed to the address of the holder as of the
relevant record date or by wire transfer to an account appropriately designated
by the holder entitled to payment.
If any date on which contract adjustment payments are to be made on the purchase
contracts related to the MEDS Equity Units is not a business day, then payment
of the contract adjustment payments payable on that date will be made on the
next succeeding day which is a business day, and no interest or payment will be
paid in respect of the delay. A 'business day' means any day other than a
Saturday, Sunday or any other day on which banking institutions and trust
companies in The City of New York are permitted or required by any applicable
law to close.
Our obligations with respect to contract adjustment payments will be subordinate
and junior in right of payment to our obligations under any of our senior
indebtedness. Upon any payment or distribution of our assets to our creditors
upon any dissolution, winding up, liquidation or reorganization, whether
voluntary or involuntary, or in bankruptcy, insolvency, receivership or other
similar proceedings, the holders of all senior indebtedness shall first be
entitled to receive payment in full of all amounts due or to become due thereon,
or payment of such amounts shall have been provided for, before the holders of
the MEDS Equity Units shall be entitled to receive any contract adjustment
payments with respect to any MEDS Equity Unit. In addition, because we are a
holding company, contract adjustment payments on the MEDS Equity Units are
effectively subordinated to all indebtedness and other liabilities, including
trade payables and preferred stock, of our subsidiaries.
In addition, no payment of contract adjustment payments with respect to any MEDS
Equity Units may be made if:
any payment default on any senior indebtedness has occurred and is
continuing beyond any applicable grace period; or
any default other than a payment default with respect to senior
indebtedness occurs and is continuing that permits the acceleration of the
maturity thereof and the purchase contract agent receives a written notice
of such default from us or the holders of such senior indebtedness.
ANTI-DILUTION ADJUSTMENTS
In order to maintain a holder's relative investment in our common stock upon the
occurrence of certain events, the formula for determining the settlement rate
will be subject to adjustment, without duplication, upon the occurrence of those
events, including:
(a) the payment of dividends and other distributions of our common stock on
such common stock;
(b) the issuance to all holders of our common stock of rights, warrants or
options (other than pursuant to any dividend reinvestment or share
purchase plans) entitling them, for a period of up to 45 days, to
subscribe for or purchase such common stock at less than the current
market price thereof;
(c) subdivisions, splits and combinations of our common stock;
(d) distributions to all holders of our common stock of evidences of our
indebtedness, securities, cash or property (excluding any dividend or
distribution covered by clause (a) or (b) above and any dividend or
distribution paid exclusively in cash);
(e) distributions (other than regular quarterly cash dividends) consisting
exclusively of cash to all holders of our common stock in an aggregate
amount that, together with (1) other all-cash distributions (other than
regular quarterly cash dividends) made within the preceding 12 months
and (2) any cash and the fair market value, as of the expiration of the
tender or exchange offer referred to below, of consideration payable in
respect of any tender or exchange offer (other than consideration
payable in respect of any odd-lot tender offer) by us or any of our
subsidiaries for such common stock concluded within the preceding 12
months, exceeds 15% of our aggregate market capitalization (aggregate
market capitalization being the product of the current market price of
our common stock
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multiplied by the number of shares of such common stock then
outstanding) on the date of the distribution; and
(f) the successful completion of a tender or exchange offer made by us or
any of our subsidiaries for our common stock which involves an aggregate
consideration that, together with (1) any cash and the fair market value
of other consideration payable in respect of any tender or exchange
offer (other than consideration payable in respect of any odd-lot tender
offer) by us or any of our subsidiaries for such common stock concluded
within the preceding 12 months and (2) the aggregate amount of any
all-cash distributions (other than regular quarterly cash dividends) to
all holders of our common stock made within the preceding 12 months,
exceeds 15% of our aggregate market capitalization on the expiration of
the tender or exchange offer.
The 'current market price' on any day means the average of the closing price per
share of our common stock for the five consecutive trading days selected by us
commencing not more than 30 trading days before, and ending not later than, the
earlier of the day in question and the day before the 'ex date' with respect to
the issuance or distribution requiring the computation. For purposes of this
paragraph, the term 'ex date,' when used with respect to any issuance or
distribution, shall mean the first date on which our common stock trades regular
way on the applicable exchange or in the applicable market without the right to
receive the issuance or distribution.
In the case of certain reclassifications, consolidations, mergers, sales or
transfers of assets or other transactions pursuant to which our common stock is
converted into the right to receive other securities, cash or property, each
purchase contract then outstanding would, without the consent of the holders of
the related Corporate MEDS or Treasury MEDS, as the case may be, become a
contract to purchase only the kind and amount of securities, cash and other
property receivable upon such reorganization event (except as otherwise
specifically provided, without any interest thereon and without any right to
dividends or distributions thereon which have a record date that is prior to the
purchase contract settlement date) which would have been received by the holder
of the related Corporate MEDS or Treasury MEDS immediately prior to the date of
consummation of such transaction if such holder had then settled such purchase
contract.
If at any time we make a distribution of property to our shareholders which
would be taxable to those shareholders as a dividend for United States federal
income tax purposes (e.g., distributions out of our current or accumulated
earnings and profits or evidences of indebtedness or assets, but generally not
stock dividends or rights to subscribe for capital stock) and, pursuant to the
settlement rate adjustment provisions of the purchase contract agreement, the
settlement rate is increased, this increase may give rise to a taxable dividend
to holders of MEDS Equity Units. See 'United States Federal Income Tax
Consequences -- Purchase Contracts -- Adjustment to Settlement Rate.'
In addition, we may make increases in the settlement rate, as our board of
directors deems advisable, to avoid or diminish any income tax to holders of our
capital stock resulting from any dividend or distribution of capital stock (or
rights to acquire capital stock) or from any event treated as such for income
tax purposes or for any other reasons.
Adjustments to the settlement rate will be calculated to the nearest 1/10,000th
of a share. No adjustment in the settlement rate shall be required unless the
adjustment would require an increase or decrease of at least one percent in the
settlement rate. However, any adjustments which are not required to be made
because they would have required an increase or decrease of less than one
percent shall be carried forward and taken into account in any subsequent
adjustment.
We will be required, within ten business days following an adjustment of the
settlement rate, to provide written notice to the purchase contract agent of the
occurrence of the adjustment and a statement setting forth in reasonable detail
both the method by which the adjustment to the settlement rate was determined
and the revised settlement rate.
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Each adjustment to the settlement rate will result in a corresponding adjustment
to the number of shares of our common stock issuable upon early settlement of a
purchase contract.
If an adjustment is made to the settlement rate as a result of an event
described in paragraphs (a) through (f) above, an adjustment will also be made
to the applicable market value solely to determine which of the three clauses in
the definition of settlement rate will be applicable on any purchase contract
settlement date.
TERMINATION OF PURCHASE CONTRACTS
The purchase contracts, and our rights and obligations and the rights and
obligations of the holders of the MEDS Equity Units under the purchase
contracts, including the right and obligation to purchase our common stock and
the right to receive contract adjustment payments, will immediately and
automatically terminate upon the occurrence of certain events of bankruptcy,
insolvency or reorganization with respect to us. Upon any termination, the
collateral agent will release the related notes, the appropriate applicable
ownership interest in any Treasury portfolio or the Treasury securities, as the
case may be, held by it to the purchase contract agent for distribution to the
holders, subject, in the case of a Treasury portfolio or the Treasury
securities, to the purchase contract agent's disposition of the subject
securities for cash, and the payment of this cash to the holders, to the extent
that the holders would otherwise have been entitled to receive less than $1,000
principal amount at maturity of any such security. Upon any termination,
however, the release and distribution may be subject to a delay. In the event
that we become the subject of a case under the U.S. Bankruptcy Code, the delay
may occur as a result of the imposition of the automatic stay under the
Bankruptcy Code and continue until the automatic stay has been lifted.
PLEDGED SECURITIES AND PLEDGE AGREEMENT
Pledged securities will be pledged to the collateral agent, for our benefit,
pursuant to the pledge agreement to secure the obligations of holders of MEDS
Equity Units to purchase our common stock under the related purchase contracts.
The rights of holders of MEDS Equity Units to the related pledged securities
will be subject to our security interest created by the pledge agreement.
No holder of Corporate MEDS or Treasury MEDS will be permitted to withdraw the
pledged securities related to the Corporate MEDS or Treasury MEDS from the
pledge arrangement except:
to substitute Treasury securities for the related notes as provided for
under 'Description of the MEDS Equity Units -- Creating Treasury MEDS;'
to substitute notes for the related Treasury securities, as provided for
under 'Description of the MEDS Equity Units -- Recreating Corporate MEDS;'
or
upon the termination, early settlement or cash settlement immediately prior
to the purchase contract settlement date of the related purchase contracts.
Subject to the security interest and the terms of the purchase contract
agreement and the pledge agreement, each holder of Corporate MEDS will be
entitled through the purchase contract agent and the collateral agent to all of
the proportional rights and preferences of the related notes that are components
of Corporate MEDS, including distribution, voting, redemption, repayment and
liquidation rights. Each holder of Treasury MEDS and each holder of Corporate
MEDS, if a Treasury portfolio has replaced any notes as a component of Corporate
MEDS as a result of a successful remarketing of notes or a tax event redemption,
will retain beneficial ownership of the related Treasury securities or the
appropriate applicable ownership interest of a Treasury portfolio, as
applicable, pledged in respect of the related purchase contracts. We will have
no interest in the pledged securities other than our security interest.
Except as described in 'Other Provisions of the Purchase Contract Agreement and
the Pledge Agreement -- General,' the collateral agent will, upon receipt of
payments on the pledged securities, if any, distribute the payments to the
purchase contract agent, which will in turn distribute those payments to the
persons in whose names the related Corporate MEDS or Treasury
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MEDS are registered at the close of business on the record date immediately
preceding the date of payment.
BOOK-ENTRY ONLY SYSTEM
The Depository Trust Company, which we refer to along with its successors in
this capacity as the depositary, will act as securities depositary for the MEDS
Equity Units. The MEDS Equity Units will be issued only as fully-registered
securities registered in the name of Cede & Co., the depositary's nominee. One
or more fully-registered global security certificates, representing the total
aggregate number of MEDS Equity Units, will be issued and will be deposited with
the depositary and will bear a legend regarding the restrictions on exchanges
and registration of transfer referred to below.
The laws of some jurisdictions may require that some purchasers of securities
take physical delivery of securities in certificated form. These laws may impair
the ability to transfer beneficial interests in the MEDS Equity Units so long as
the MEDS Equity Units are represented by global security certificates.
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 Securities Exchange
Act of 1934. The depositary holds securities that its participants deposit with
the depositary. The depositary also facilitates the settlement among
participants of securities transactions, including 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 include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. The depositary is owned by a number of its direct participants
and by the NYSE, the American Stock Exchange, Inc., and the National Association
of Securities Dealers, Inc. Access to the depositary's system is also available
to others, including securities brokers and dealers, banks and trust companies
that clear transactions through or maintain a direct or indirect custodial
relationship with a direct participant either directly or indirectly. The rules
applicable to the depositary and its participants are on file with the SEC.
Although the depositary has agreed to the foregoing procedures in order to
facilitate transfers of interests in the global security certificates among
participants, the depositary is under no obligation to perform or continue to
perform these procedures and these procedures may be discontinued at any time.
We will not have any responsibility for the performance by the depositary or its
direct participants or indirect participants under the rules and procedures
governing the depositary.
In the event that the depositary notifies us that the depositary is unwilling or
unable to continue as a depositary for the global security certificates and no
successor depositary has been appointed within 90 days after this notice, or a
default under the purchase contract agreement or the indenture has occurred and
is continuing, certificates for the MEDS Equity Units will be printed and
delivered in exchange for beneficial interests in the global security
certificates. We may also decide to discontinue use of the system of book-entry
transfers through the depositary (or successor depositary). In that event, MEDS
Equity Units certificates will be printed and delivered.
As long as the depositary or its nominee is the registered owner of the global
security certificates, the depositary or the nominee, as the case may be, will
be considered the sole owner and holder of the global security certificates and
all MEDS Equity Units represented by these certificates for all purposes under
the MEDS Equity Units and the purchase contract agreement. Except in the limited
circumstances referred to above, owners of beneficial interests in global
security certificates will not be entitled to have such global security
certificates or the MEDS Equity Units represented by the global security
certificates registered in their names, will not receive or be entitled to
receive physical delivery of MEDS Equity Unit certificates in exchange for
beneficial interests in global security certificates and will not be considered
to be owners or holders of the global
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security certificates or any MEDS Equity Units represented by these certificates
for any purpose under the MEDS Equity Units or the purchase contract agreement.
All payments on the MEDS Equity Units represented by the global security
certificates and all transfers and deliveries of related notes, Treasury
portfolios, Treasury securities and our common stock will be made to the
depositary or its nominee, as the case may be, as the holder of the securities.
Ownership of beneficial interests in the global security certificates will be
limited to participants or persons that may hold beneficial interests through
institutions that have accounts with the depositary or its nominee. Ownership of
beneficial interests in global security certificates will be shown only on, and
the transfer of those ownership interests will be effected only through, records
maintained by the depositary or its nominee, with respect to participants'
interests, or any participant, with respect to interests of persons held by the
participant on their behalf. Procedures for settlement of purchase contracts on
the purchase contract settlement date or upon early settlement will be governed
by arrangements among the depositary, participants and persons that may hold
beneficial interests through participants designed to permit settlement without
the physical movement of certificates. Payments, transfers, deliveries,
exchanges and other matters relating to beneficial interests in global security
certificates may be subject to various policies and procedures adopted by the
depositary from time to time. Neither we nor any of our agents, nor the purchase
contract agent nor any of its agents 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 global security
certificates, or for maintaining, supervising or reviewing any of the
depositary's records or any participant's records relating to these beneficial
ownership interests.
The information in this section concerning the depositary and its book-entry
only system has been obtained from sources that we believe to be reliable, but
we do not take responsibility for the accuracy of this information.
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OTHER PROVISIONS OF THE PURCHASE CONTRACT
AGREEMENT AND THE PLEDGE AGREEMENT
This section summarizes some of the other provisions of the purchase contract
agreement and the pledge agreement. This summary does not contain a complete
description of the purchase contract agreement or the pledge agreement. These
documents will be filed with the SEC, and you should read these documents for
provisions that may be important to you and for the definitions of some terms
used in this summary.
GENERAL
Except as described in 'Description of the Purchase Contracts -- Book-Entry Only
System,' distributions on the MEDS Equity Units will be payable, purchase
contracts will be settled (and documents related to the MEDS Equity Units and
purchase contracts will be delivered), and transfers of the MEDS Equity Units
will be registrable, at the office of the purchase contract agent in The City of
New York. In addition, if the MEDS Equity Units do not remain in book-entry only
form, payment of distributions on the MEDS Equity Units may be made, at our
option, by check mailed to the address of the holder entitled to payment or by
wire transfer to an account appropriately designated by the holder entitled to
payment.
Shares of our common stock will be delivered on May 16, 2005 (or earlier upon
early settlement), or, if a purchase contract has terminated, the related
pledged securities will be delivered potentially after a delay as a result of
the imposition of the automatic stay under the Bankruptcy Code (see 'Description
of the Purchase Contracts -- Termination of Purchase Contracts'), at the office
of the purchase contract agent upon presentation and surrender of the related
MEDS Equity Unit certificate.
If a holder of outstanding Corporate MEDS or Treasury MEDS fails to present and
surrender the MEDS Equity Unit certificate evidencing the Corporate MEDS or
Treasury MEDS to the purchase contract agent on or before May 16, 2005, or
earlier upon early settlement, the shares of our common stock issuable in
settlement of the related purchase contract will be registered in the name of
the purchase contract agent. The shares, together with any distributions
thereon, will be held by the purchase contract agent as agent for the benefit of
the holder until the MEDS Equity Unit certificate is presented and surrendered
or the holder provides satisfactory evidence that the certificate has been
destroyed, lost or stolen, together with any indemnity that may be required by
the purchase contract agent and us.
If the purchase contracts have terminated prior to May 16, 2005, the related
pledged securities have been transferred to the purchase contract agent for
distribution to the holders, and a holder fails to present and surrender the
MEDS Equity Unit certificate evidencing the holder's Corporate MEDS or Treasury
MEDS to the purchase contract agent, the related pledged securities delivered to
the purchase contract agent and payments on the pledged securities will be held
by the purchase contract agent as agent for the benefit of the holder until the
MEDS Equity Unit certificate is presented or the holder provides the evidence
and indemnity described above.
The purchase contract agent will have no obligation to invest or to pay interest
on any amounts held by the purchase contract agent pending distribution, as
described above.
No service charge will be made for any registration of transfer or exchange of
the MEDS Equity Units, except for any tax or other governmental charge that may
be imposed in connection with a transfer or exchange.
MODIFICATION
The purchase contract agreement and the pledge agreement will contain provisions
permitting us and the purchase contract agent, and in the case of the pledge
agreement, the collateral agent, to modify the purchase contract agreement or
the pledge agreement without the consent of the holders for any of the following
purposes:
to evidence the succession of another person to our obligations;
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to add to the covenants for the benefit of holders or to surrender any of
our rights or powers under those agreements;
to evidence and provide for the acceptance of appointment of a successor
purchase contract agent or a successor collateral agent or securities
intermediary;
to make provision with respect to the rights of holders pursuant to
adjustments in the settlement rate due to consolidations, mergers or other
reorganization events; and
to cure any ambiguity, to correct or supplement any provisions that may be
inconsistent, or to make any other provisions with respect to such matters
or questions, provided that such action shall not materially adversely
affect the interest of the holders.
The purchase contract agreement and the pledge agreement will contain provisions
permitting us and the purchase contract agent, and in the case of the pledge
agreement, the collateral agent, with the consent of the holders of not less
than a majority of the purchase contracts at the time outstanding, to modify the
terms of the purchase contracts, the purchase contract agreement and the pledge
agreement. However, no such modification may, without the consent of the holder
of each outstanding purchase contract affected by the modification:
change any payment date;
change the amount or type of pledged securities related to the purchase
contract unless such change is not adverse to holders;
impair the right of the holder of any pledged securities to receive
distributions on the pledged securities or otherwise adversely affect the
holder's rights in or to the pledged securities;
change the place or currency of payment or reduce any contract adjustment
payments;
impair the right to institute suit for the enforcement of the purchase
contract or any contract adjustment payments;
reduce the number of shares of our common stock or the amount of any other
property purchasable under the purchase contract, increase the price to
purchase our common stock or any other property upon settlement of the
purchase contract, change the purchase contract settlement date or the
right to early settlement or otherwise adversely affect the holder's rights
under the purchase contract; or
reduce the above-stated percentage of outstanding purchase contracts the
consent of the holders of which is required for the modification or
amendment of the provisions of the purchase contracts, the purchase
contract agreement or the pledge agreement.
If any amendment or proposal referred to above would adversely affect only the
Corporate MEDS or the Treasury MEDS, then only the affected class of holders
will be entitled to vote on the amendment or proposal and the amendment or
proposal will not be effective except with the consent of the holders of not
less than a majority of the affected class or all of the holders of the affected
class, as applicable.
NO CONSENT TO ASSUMPTION
Each holder of MEDS Equity Units, by acceptance of these securities, will under
the terms of the purchase contract agreement and the MEDS Equity Units, be
deemed expressly to have withheld any consent to the assumption (i.e.,
affirmance) of the related purchase contracts by us or our trustee if we become
the subject of a case under the Bankruptcy Code or other similar state or
federal law provision for reorganization or liquidation.
CONSOLIDATION, MERGER, SALE OR CONVEYANCE
We will covenant in the purchase contract agreement that we will not merge or
consolidate with or into any other entity or sell, assign, transfer, lease or
convey all or substantially all of our properties and assets to any person or
entity, unless:
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we are the continuing entity or the successor entity is a corporation
organized and existing under the laws of any domestic jurisdiction and
expressly assumes our obligations under the purchase contracts, the
purchase contract agreement, the pledge agreement and the remarketing
agreement; and
we are not or the successor entity is not, immediately after the merger,
consolidation, sale, assignment, transfer, lease or conveyance, in default
of payment obligations under the purchase contracts, the purchase contract
agreement, the pledge agreement or the remarketing agreement or in material
default in the performance of any other obligations under these agreements.
TITLE
We, any of our agents, the purchase contract agent or the collateral agent may
treat the registered owner of a MEDS Equity Unit as the absolute owner of that
MEDS Equity Unit for the purpose of making payment and settling the related
purchase contracts and for all other purposes regardless of any notice to the
contrary.
REPLACEMENT OF MEDS EQUITY UNIT CERTIFICATES
In the event that physical certificates have been issued, any mutilated MEDS
Equity Unit certificate will be replaced by us at the expense of the holder upon
surrender of the certificate to the purchase contract agent. MEDS Equity Units
certificates that have been destroyed, lost or stolen will be replaced by us at
the expense of the holder upon delivery to us and the purchase contract agent of
evidence of the destruction, loss or theft satisfactory to us and the purchase
contract agent. In the case of a destroyed, lost or stolen MEDS Equity Unit
certificate, an indemnity satisfactory to us and the purchase contract agent may
be required at the expense of the holder of the MEDS Equity Units evidenced by
the certificate before a replacement will be issued.
Notwithstanding the foregoing, we will not be obligated to issue any
certificates for Corporate MEDS or Treasury MEDS on or after the business day
immediately preceding May 16, 2005 or the date of any early settlement or after
the purchase contracts have terminated. The purchase contract agreement will
provide that, in lieu of the delivery of a replacement MEDS Equity Unit
certificate following May 16, 2005, or earlier settlement of a particular MEDS
Equity Unit, the purchase contract agent, upon delivery of the evidence and
indemnity described above, will deliver our common stock issuable pursuant to
the purchase contracts included in the Corporate MEDS or Treasury MEDS evidenced
by the certificate, or, if the purchase contracts have terminated prior to
May 16, 2005, deliver the pledged securities included in the Corporate MEDS or
Treasury MEDS evidenced by the certificate.
GOVERNING LAW
The purchase contract agreement, the pledge agreement and the purchase contracts
will be governed by, and interpreted in accordance with, the laws of the State
of New York.
INFORMATION CONCERNING THE PURCHASE CONTRACT AGENT
JPMorgan Chase Bank will be the purchase contract agent. The purchase contract
agent will act as the agent for the holders of Corporate MEDS and Treasury MEDS
from time to time. The purchase contract agreement will not obligate the
purchase contract agent to exercise any discretionary actions in connection with
a default under the terms of the Corporate MEDS and Treasury MEDS or the
purchase contract agreement.
The purchase contract agreement will contain provisions limiting the liability
of the purchase contract agent. The purchase contract agreement will contain
provisions under which the purchase contract agent may resign or be replaced.
This resignation or replacement would be effective upon the appointment of a
successor.
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JPMorgan Chase Bank also acts, and may act, as trustee under various indentures
and trusts, including as indenture trustee, security registrar and paying agent
under the indenture. We and our affiliates maintain various banking and trust
relationships with JPMorgan Chase Bank. In addition, an affiliate of JPMorgan
Chase Bank, J.P. Morgan Securities Inc., is an underwriter in this offering and
is expected to be the remarketing agent.
INFORMATION CONCERNING THE COLLATERAL AGENT
The Bank of New York will be the collateral agent. The collateral agent will act
solely as our agent and will not assume any obligation or relationship of agency
or trust for or with any of the holders of the Corporate MEDS and Treasury MEDS
except for the obligations owed by a pledgee of property to the owner of the
property under the pledge agreement and applicable law.
The pledge agreement will contain provisions limiting the liability of the
collateral agent. The pledge agreement will contain provisions under which the
collateral agent may resign or be replaced. This resignation or replacement
would be effective upon the appointment of a successor.
We and our affiliates maintain various banking relationships with The Bank of
New York.
MISCELLANEOUS
The purchase contract agreement will provide that we will pay all fees and
expenses related to the offering of the MEDS Equity Units, the retention of the
collateral agent and the enforcement by the purchase contract agent of the
rights of the holders of the MEDS Equity Units.
However, holders who elect to substitute the related pledged securities, thereby
creating Treasury MEDS or recreating Corporate MEDS, will be responsible for any
fees or expenses payable in connection with the substitution, as well as any
commissions, fees or other expenses incurred in acquiring the pledged securities
to be substituted, and we will not be responsible for any of those fees or
expenses.
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CERTAIN TERMS OF THE NOTES
The following description is a summary of certain terms of the notes. It
supplements the description of debt securities in the accompanying prospectus
and, to the extent it is inconsistent with the prospectus, replaces the
description in the prospectus. The notes will be issued under an indenture dated
as of November 1, 2000 between us and JPMorgan Chase Bank (successor to The
Chase Manhattan Bank), as trustee, as supplemented by the first supplemental
indenture to be entered into between us and JPMorgan Chase Bank and the second
supplemental indenture to be entered into between us and JPMorgan Chase Bank.
The descriptions in this prospectus supplement and the accompanying prospectus
contain a description of the material terms of the notes and the indenture, but
do not purport to be complete. You should read these descriptions together with
the indenture, the first supplemental indenture, the second supplemental
indenture and the note, as well as the Trust Indenture Act, for a complete
understanding of the provisions that may be important to you and for definitions
of some terms used in this summary. The indenture, the first supplemental
indenture, the second supplemental indenture and the form of note are or will be
filed with the SEC.
GENERAL
The notes will be our direct, senior and unsecured obligations and will rank
without preference or priority among themselves and equally with all of our
existing and future senior unsecured and unsubordinated indebtedness. The notes
initially will be issued in an aggregate principal amount of $400,000,000. If
the overallotment option is exercised in full by the underwriters, an additional
$60,000,000 aggregate principal amount of notes will be issued.
We are a holding company that derives all of our income from our subsidiaries.
Accordingly, our ability to service our debt, including our obligations under
the notes, and other obligations are primarily dependent on the earnings of our
subsidiaries and the payment of those earnings to us, in the form of dividends,
loans or advances and through repayment of loans or advances from us. In
addition, any payment of dividends, loans or advances by those subsidiaries
could be subject to statutory or contractual restrictions. Our subsidiaries have
no obligation to pay any amounts due on the notes.
The notes will not be subject to a sinking fund provision and will not be
subject to defeasance. Unless a tax event redemption has occurred prior to
May 16, 2008, the entire principal amount of the notes will mature and become
due and payable, together with any accrued and unpaid interest, on May 16, 2008.
Except for a tax event redemption, the notes will not be redeemable by us. See
' -- Tax Event Redemption.'
The trustee will initially be the security registrar and the paying agent for
the notes. Notes forming a part of the Corporate MEDS will be issued in
certificated form, will be in denominations of $50 and integral multiples of
$50, without coupons, and may be transferred or exchanged, without service
charge but upon payment of any taxes or other governmental charges payable in
connection with the transfer or exchange, at the office described below.
Payments on notes issued as a global security will be made to the depositary or
a successor depositary. Principal and interest with respect to certificated
notes will be payable, the transfer of the notes will be registrable and notes
will be exchangeable for notes of a like aggregate principal amount in
denominations of $50 and integral multiples of $50, at the office or agency
maintained by us for this purpose in The City of New York. We have initially
designated the corporate trust office of the indenture trustee as that office.
However, at our option, payment of interest may be made by check mailed to the
address of the holder entitled to payment or by wire transfer to an account
appropriately designated by the holder entitled to payment.
The indenture does not contain provisions that afford holders of the notes
protection in the event of a highly leveraged transaction or other similar
transaction involving us that may adversely affect the holders.
Under the indenture, we agree, and by purchasing a Corporate MEDS each holder
agrees, for United States federal, state and local income and franchise tax
purposes, (i) to treat the
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acquisition of a Corporate MEDS as an acquisition of the note and the purchase
contract constituting the Corporate MEDS and (ii) to treat the notes as
contingent payment debt instruments. As such, you will be subject to U.S.
federal income tax on the accrual of original issue discount in respect of the
notes. See 'Certain United States Federal Income Tax Considerations -- Corporate
MEDS.'
INTEREST AND PAYMENT
Each note shall bear interest initially at the rate of 4.90% per year, from the
original issue date. Interest will be payable quarterly in arrears on
February 16, May 16, August 16 and November 16 of each year, each an 'interest
payment date,' commencing August 16, 2002, to the person in whose name the note
is registered at the close of business on the business day prior to the date on
which the interest payment falls.
The applicable interest rate on the notes will be reset on the reset date to the
reset rate described below under ' -- Market Rate Reset.' The reset date will be
the date of a successful remarketing of the notes, or, if there is no successful
remarketing of the notes on or prior to the date three business days immediately
preceding May 16, 2005, on such date. The reset rate will take effect on the
date three business days following the reset date.
The amount of interest payable for any period will be computed on the basis of a
360-day year consisting of twelve 30-day months. The amount of interest payable
for any period shorter than a full quarterly period for which interest is
computed will be computed on the basis of the actual number of days elapsed in a
90-day period. In the event that any date on which interest is payable on the
notes is not a business day, then payment of the interest payable on that date
will be made on the next succeeding day which is a business day, and no interest
or payment will be paid in respect of the delay.
MARKET RATE RESET
The reset rate on the notes will be equal to the rate which is sufficient to
allow a successful remarketing of the notes and will be determined by the
remarketing agent. In the case of a reset in connection with a remarketing on or
prior to the ninth business day immediately preceding May 16, 2005, which would
be effective on the third business day following the date of such successful
remarketing, the reset rate will be the rate (subject to the last sentence of
this paragraph) necessary in order for the notes included in Corporate MEDS to
have an approximate aggregate market value on the reset date of approximately
100.25% of the Treasury portfolio purchase price described under 'Description of
the Purchase Contracts -- Remarketing.' In the case of a reset in connection
with a remarketing on the third business day immediately preceding May 16, 2005,
which would be effective on the purchase contract settlement date, the reset
rate will be the rate (subject to the last sentence of this paragraph) necessary
in order for the notes included in the Corporate MEDS to have an approximate
market value on the reset date of approximately 100.25%, but not less than 100%,
of the principal amount of the notes. The reset rate will in no event be less
than the original interest rate on the notes and will not exceed the maximum
rate permitted by applicable law.
If the notes are not successfully remarketed on or prior to the third business
day immediately preceding May 16, 2005, the reset rate will be determined by the
remarketing agent as the rate equal to (1) the three-year benchmark Treasury
rate, as defined below, plus (2) the applicable spread, as defined below.
The term 'three-year benchmark Treasury rate' means the bid side rate displayed
at 10:00 a.m., New York City time, on the third business day prior to May 16,
2005 for direct obligations of the United States having a maturity comparable to
the remaining term to maturity of the notes, as agreed upon by us and the
remarketing agent. This rate will be as displayed in the Telerate system or, if
the Telerate system is no longer available or, in the opinion of the remarketing
agent, after consultation with us, no longer an appropriate system from which to
obtain such rate, such other nationally recognized quotation system as, in the
opinion of the remarketing agent, after
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consultation with us, is appropriate. If the three-year benchmark Treasury rate
cannot be determined as set forth above, it will be calculated by the
remarketing agent as the yield to maturity of the applicable benchmark Treasury,
expressed as a bond equivalent on the basis of a year of 365 or 366 days, as
applicable, and applied on a daily basis, and computed by taking the arithmetic
mean of the secondary market bid rates, as of 10:30 a.m., New York City time, on
the third business day prior to May 16, 2005 of three leading United States
government securities dealers selected by the remarketing agent, after
consultation with us, which may include the remarketing agent or an affiliate
thereof.
The term 'applicable spread' means the spread determined as set forth below,
based on the prevailing rating, as defined below, of the notes in effect at the
close of business on the final remarketing date:
<Table>
<Caption>
PREVAILING RATING ON THE NOTES SPREAD
- ------------------------------ ------
AA/'Aa'..................................................... 1.00%
A/'a'....................................................... 1.25%
BBB/'Baa'................................................... 2.00%
Below BBB/'Baa'............................................. 2.75%
</Table>
For purposes of this definition, the 'prevailing rating' of the notes shall be:
(1) AA/'Aa' if the notes have a credit rating of AA or better by Standard &
Poor's Ratings Services ('S&P') and 'Aa3' or better by Moody's Investors
Service, Inc. ('Moody's') or the equivalent of such ratings by such agencies
or a substitute rating agency or agencies selected by the remarketing agent,
after consultation with us;
(2) if not under clause (1) above, then A/'a' if the notes have a credit
rating of A or better by S&P and 'A3' or better by Moody's or the equivalent
of such ratings by such agencies or a substitute rating agency or agencies
selected by the remarketing agent, after consultation with us;
(3) if not under clause (1) or (2) above, then BBB/'Baa' if the notes have a
credit rating of BBB or better by S&P and 'Baa3' or better by Moody's or the
equivalent of such ratings by such agencies or a substitute rating agency or
agencies selected by the remarketing agent, after consultation with us; or
(4) if not under clause (1), (2) or (3) above, then Below BBB/'Baa.'
Notwithstanding the foregoing, (A) if (i) the credit rating of the notes by S&P
shall be on the 'Credit Watch' of S&P with a designation of 'negative
implications' or 'developing,' or (ii) the credit rating of the notes by Moody's
shall be on the 'Corporate Credit Watch List' of Moody's with a designation of
'downgrade' or 'uncertain,' or, in each case, on any successor list of S&P or
Moody's with a comparable designation, the prevailing ratings of the notes shall
be deemed to be within a range one full level lower in the above table than
those actually assigned to the notes by Moody's and S&P and (B) if the notes are
rated by only one rating agency on or before the third business day immediately
preceding May 16, 2005, the prevailing rating will at all times be determined
without reference to the rating of any other rating agency; provided that if no
such rating agency shall have in effect a rating of the notes and the
remarketing agent is unable to identify a substitute rating agency or agencies,
the prevailing rating shall be Below BBB/'Baa.'
By approximately 4:30 p.m., New York City time, on the reset date, the
remarketing agent will advise the depositary, the indenture trustee and us of
the reset rate and on the following business day we will cause a notice of the
reset rate to be published in a daily newspaper in the English language of
general circulation in The City of New York, which is expected to be The Wall
Street Journal.
OPTIONAL REMARKETING
Prior to 11:00 a.m. (New York City time) on the election date but no earlier
than the interest payment date immediately preceding such date, holders of notes
that are not components of
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Corporate MEDS may elect to have their notes remarketed in the same manner as
notes that are components of Corporate MEDS by delivering their notes, along
with a notice of this election, to the custodial agent. The custodial agent will
hold the notes in an account separate from the collateral account in which the
pledged securities will be held. Holders of notes electing to have those notes
remarketed will also have the right to withdraw the election prior to
11:00 a.m. (New York City time) on the election date.
TAX EVENT REDEMPTION
If a tax event occurs and is continuing, we may, at our option, redeem the notes
in whole but not in part at any time at a price, which is referred to as the
redemption price, equal to, for each note, the redemption amount described below
plus accrued and unpaid interest, if any, to the date of redemption.
Installments of interest on notes which are due and payable on or prior to a
redemption date will be payable to the holders of the notes registered as such
at the close of business on the relevant record date.
Unless the notes have been successfully remarketed, if the tax event redemption
occurs prior to May 16, 2005, the redemption price for the notes forming a part
of the Corporate MEDS at the time of the tax event redemption will be
distributed to the collateral agent, who in turn will purchase the tax event
Treasury portfolio described below on behalf of the holders of Corporate MEDS
and remit the remainder of the redemption price, if any, to the purchase
contract agent for payment to the holders. The tax event Treasury portfolio will
be substituted for the notes and will be pledged to the collateral agent to
secure the Corporate MEDS holders' obligations to purchase our common stock
under the purchase contracts.
If any notes are not part of Corporate MEDS, the redemption price for those
notes will be distributed to the holders of those notes.
'Tax event' means the receipt by us of an opinion of nationally recognized
independent tax counsel experienced in such matters to the effect that there is
more than an insubstantial risk that interest payable by us on the notes would
not be deductible, in whole or in part, by us for United States federal income
tax purposes as a result of (1) any amendment to, change in, or announced
proposed change in, the laws, or any regulations thereunder, of the United
States or any political subdivision or taxing authority thereof or therein
affecting taxation, (2) any amendment to or change in an interpretation or
application of any such laws or regulations by any legislative body, court,
governmental agency or regulatory authority or (3) any interpretation or
pronouncement that provides for a position with respect to any such laws or
regulations that differs from the generally accepted position on the date of
this prospectus supplement, which amendment, change or proposed change is
effective or which interpretation or pronouncement is announced on or after the
date the MEDS Equity Units are issued.
'Redemption amount' means, for each note:
in the case of a tax event redemption occurring prior to the earlier of
(1) the date of a successful remarketing, or (2) May 16, 2005, the product
of the principal amount of that note and a fraction whose numerator is the
applicable Treasury portfolio purchase price and whose denominator is the
aggregate principal amount of the notes included in Corporate MEDS, and
in the case of a tax event redemption occurring on or after the earlier of
(1) the date of a successful remarketing or (2) May 16, 2005, for each
note, the product of the principal amount of the note and a fraction whose
numerator is the applicable Treasury portfolio purchase price and whose
denominator is the aggregate principal amount of the notes outstanding on
the tax event redemption date.
Depending on the amount of the Treasury portfolio purchase price, the redemption
amount could be less than or greater than the principal amount of the notes.
As used in this context, 'Treasury portfolio purchase price' means the lowest
aggregate price quoted by a primary U.S. government securities dealer in The
City of New York to the quotation
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agent on the third business day immediately preceding the tax event redemption
date for the purchase of the tax event Treasury portfolio for settlement on the
tax event redemption date.
The portfolio of zero-coupon U.S. Treasury securities, or tax event Treasury
portfolio, to be purchased on behalf of the holders of Corporate MEDS in
connection with a tax event redemption, will consist of:
interest or principal strips of U.S. Treasury securities that mature on
May 15, 2005 in an aggregate amount equal to the principal amount of the
notes included in the Corporate MEDS, and
with respect to each scheduled interest payment date on the notes that
occurs after the tax event redemption and on or before May 16, 2005,
interest or principal strips of U.S. Treasury securities that mature on or
prior to the business day immediately preceding that interest payment date
in an aggregate amount equal to the aggregate interest payment that would
be due on the aggregate principal amount of the notes included in the
Corporate MEDS on that date if the interest rate of the notes was not reset
on the reset date.
Solely for purposes of determining the Treasury portfolio purchase price in the
case of a tax event redemption occurring on or after the earlier of the date of
a successful remarketing or May 16, 2005, tax event Treasury portfolio shall
mean:
interest or principal strips of U.S. Treasury securities that mature on
May 15, 2008 in an aggregate amount equal to the principal amount of the
notes outstanding, and
with respect to each scheduled interest payment date on the notes that
occurs after the tax event redemption and on or before May 16, 2008,
interest or principal strips of U.S. Treasury securities that mature on or
prior to the business day immediately preceding that interest payment date
in an aggregate amount equal to the aggregate interest payment that would
be due on the aggregate principal amount of the notes outstanding on that
date if the interest rate of the notes was not reset on the reset date.
Notice of any redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each registered holder of notes to be
redeemed at its registered address. Unless we default in payment of the
redemption price, on and after the redemption date interest shall cease to
accrue on the notes. In the event any notes are called for redemption, neither
we nor the trustee will be required to register the transfer of or exchange the
notes to be redeemed.
BOOK-ENTRY AND SETTLEMENT
Notes which are released from the pledge following substitution or settlement of
the purchase contracts will be issued in the form of one or more global
certificates, which are referred to as global securities, registered in the name
of the depositary or its nominee. Except under the limited circumstances
described below or except upon recreation of Corporate MEDS, notes represented
by the global securities will not be exchangeable for, and will not otherwise be
issuable as, notes in certificated form. The global securities described above
may not be transferred except by the depositary to a nominee of the depositary
or by a nominee of the depositary to the depositary or another nominee of the
depositary or to a successor depositary or its nominee.
The laws of some jurisdictions may require that some purchasers of securities
take physical delivery of the securities in certificated form. These laws may
impair the ability to transfer beneficial interests in such a global security.
Except as provided below, owners of beneficial interests in such a global
security will not be entitled to receive physical delivery of notes in
certificated form and will not be considered the holders (as defined in the
indenture) thereof for any purpose under the indenture, and no global security
representing notes shall be exchangeable, except for another global security of
like denomination and tenor to be registered in the name of the depositary or
its nominee or a successor depositary or its nominee. Accordingly, each
beneficial owner must rely on the procedures of the depositary or if such person
is not a participant, on the procedures of the
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participant through which such person owns its interest to exercise any rights
of a holder under the indenture.
In the event that
the depositary notifies us that it is unwilling or unable to continue as a
depositary for the global security certificates and no successor depositary
has been appointed within 90 days after this notice,
an event of default occurs and is continuing with respect to the notes; or
we determine in our sole discretion that we will no longer have notes
represented by global securities,
certificates for the notes will be printed and delivered in exchange for
beneficial interests in the global security certificates. Any global note that
is exchangeable pursuant to the preceding sentence shall be exchangeable for
note certificates registered in the names directed by the depositary. We expect
that these instructions will be based upon directions received by the depositary
from its participants with respect to ownership of beneficial interests in the
global security certificates.
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UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following summary describes the material United States federal income tax
consequences, as of the date of this prospectus supplement, of the purchase,
ownership and disposition of Corporate MEDS, Treasury MEDS, notes, and our
common stock acquired under the purchase contracts.
Except where otherwise stated, this summary deals only with Corporate MEDS,
Treasury MEDS, notes, and our common stock held as a capital asset by a holder
who:
is a United States person (as defined below); and
purchases the Corporate MEDS upon original issuance at their original issue
price.
A 'United States person' is a holder who is, for U.S. federal income tax
purposes, one of the following:
a citizen or resident of the United States;
a corporation, partnership or other entity created or organized in or under
the laws of the United States or any political subdivision of the United
States;
an estate the income of which is subject to United States federal income
taxation regardless of its source; or
a trust if (1) it is subject to the primary supervision of a court within
the United States and one or more United States persons have the authority
to control all substantial decisions of the trust, or (2) it has a valid
election in effect under applicable United States Treasury regulations to
be treated as a United States person.
Your tax treatment may vary depending on your particular situation. This summary
does not address all of the tax consequences that may be relevant to holders
that are subject to special tax treatment, such as:
dealers in securities or currencies;
financial institutions;
tax-exempt investors;
traders in securities that elect to use a mark-to-market method of
accounting for their securities holdings;
persons liable for alternative minimum tax;
insurance companies;
real estate investment trusts;
regulated investment companies;
persons holding Corporate MEDS, Treasury MEDS, notes, or our common stock
as part of a hedging, conversion, integrated or constructive sale
transaction or a straddle; or
U.S. persons whose functional currency is not the United States dollar.
In addition, if a partnership holds Corporate MEDS, Treasury MEDS, notes or our
common stock, the tax treatment of a partner will generally depend upon the
status of the partner and the activities of the partnership. If you are a
partner of a partnership holding the above instruments, you should consult your
tax advisors.
This summary is based on the Internal Revenue Code of 1986, as amended (which we
refer to as the 'Code'), the Treasury regulations promulgated under the Code and
administrative and judicial interpretations as of the date of this prospectus
supplement. These income tax laws, regulations and interpretations, however, may
change at any time. Any change could be retroactive to the issuance date of the
Corporate MEDS.
No statutory, administrative or judicial authority directly addresses the
treatment of Corporate MEDS or instruments similar to Corporate MEDS for United
States federal income tax purposes. As a result, we cannot assure you that the
Internal Revenue Service or the courts will agree with the tax consequences
described herein. A different treatment from that assumed below could
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adversely affect the amount, timing and character of income, gain or loss in
respect of an investment in the Corporate MEDS. You should consult your own tax
advisor regarding the tax consequences to you of the purchase, ownership and
disposition of Corporate MEDS, Treasury MEDS, notes and our common stock,
including the tax consequences under state, local, foreign and other tax laws.
CORPORATE MEDS
Allocation of Purchase Price
Your acquisition will be treated as an acquisition of the note and the purchase
contract constituting the Corporate MEDS and, by purchasing a Corporate MEDS,
you will be deemed to have agreed to such treatment. The remainder of this
discussion assumes that the acquisition of a Corporate MEDS will be treated as
an acquisition of a note and purchase contract for U.S. federal, state and local
income and franchise tax purposes.
The purchase price of each Corporate MEDS will be allocated between the note and
the purchase contract in proportion to their respective fair market values at
the time of purchase. Such allocation will establish your initial tax basis in
the note and the purchase contract. We will report the initial fair market value
of each note as $50 and the initial fair market value of each purchase contract
as $0. This position will be binding on you (but not on the IRS) unless you
explicitly disclose a contrary position on a statement attached to your timely
filed United States federal income tax return for the taxable year in which you
acquire the Corporate MEDS. Thus, absent such disclosure, you should allocate
the purchase price for the Corporate MEDS in accordance with the foregoing. The
remainder of this discussion assumes that this allocation of the purchase price
will be respected for United States federal income tax purposes.
NOTES
Accrual of Interest
Because of the manner in which the interest rate on the notes is reset, the
notes will be classified as contingent payment debt obligations under the
Treasury regulations. Under the indenture governing the notes, we and each
holder of the notes agree, for U.S. federal income tax purposes, to treat the
notes as indebtedness that is subject to the regulations governing contingent
payment debt obligations in the manner described below. As discussed more fully
below, the effect of these Treasury regulations will be to:
require you, regardless of your usual method of tax accounting, to use the
accrual method with respect to the notes;
possibly result in the accrual of original issue discount by you in excess
of stated interest payments actually received by you; and
generally result in ordinary rather than capital treatment of any gain, and
to some extent loss, on the sale, exchange, or other disposition of the
notes.
Under the contingent payment debt rules, you will be required to include
original issue discount in income each year, regardless of your usual method of
tax accounting, based on the comparable yield of the notes. Actual cash payments
of interest on the notes will not be reported separately as taxable income. In
order to determine your income, these rules require us to determine, as of the
issue date, the comparable yield for the notes. The comparable yield of the
notes will generally be the rate at which we would issue a fixed rate debt
instrument with terms and conditions similar to the notes.
We are required to provide the comparable yield to you and, solely for tax
purposes, are also required to provide a projected payment schedule that
includes the actual interest payments on the notes and estimates the amount and
timing of contingent payments on the notes. We have determined that the
comparable yield is an annual rate of 5.65%, compounded quarterly. Based on the
comparable yield, the projected payment schedule per note is $0.68 for the
period ending on
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August 16, 2002, $0.61 for each subsequent quarter ending on or prior to the
remarketing date and $0.80 for each quarter ending after the remarketing date
(which does not include the payment of principal at maturity). By acceptance of
a beneficial interest in the notes you will be deemed to have agreed in the
indenture, for United States federal income tax purposes, to be bound by our
determination of the comparable yield and projected payment schedule. For United
States federal income tax purposes, you must use the comparable yield determined
by us and the projected payments set forth in the projected payment schedule
above in determining your interest accruals, and the adjustments thereto, in
respect of the notes.
THE COMPARABLE YIELD AND THE PROJECTED PAYMENT SCHEDULE ARE NOT PROVIDED FOR ANY
PURPOSE OTHER THAN THE DETERMINATION OF YOUR INTEREST ACCRUALS AND ADJUSTMENTS
THEREOF IN RESPECT OF THE NOTES AND DO NOT CONSTITUTE A REPRESENTATION REGARDING
THE ACTUAL AMOUNT OF ANY PAYMENT ON A NOTE.
The amount of original issue discount on a note for each accrual period is
determined by multiplying the comparable yield of the note, adjusted for the
length of the accrual period, by the note's adjusted issue price at the
beginning of the accrual period, determined in accordance with the rules set
forth in the contingent payment debt regulations. The adjusted issue price of
each note at the beginning of each accrual period will equal $50, increased by
any original issue discount previously accrued on the note and decreased by the
amount of any fixed payments and projected amount of any contingent payments
previously made on the note during the period. The amount of original issue
discount so determined is then allocated on a ratable basis to each day in the
accrual period that you held the note. We are required to provide information
returns stating the amount of original issue discount accrued on notes held of
record by persons other than corporations and other exempt owners.
If after the remarketing date, the remaining amounts of interest payable on the
notes differ from the payments set forth on the foregoing projected payment
schedule, negative or positive adjustments reflecting such differences should be
taken into account by you as adjustments to interest income in a reasonable
manner over the period to which they relate.
TREASURY MEDS
Substitution of Treasury Security to Create Treasury MEDS
If you deliver a Treasury security to the collateral agent in substitution for
the note, you generally will not recognize gain or loss upon the delivery of the
Treasury security or the release of the note. You will continue to take into
account items of income or deduction otherwise includible or deductible,
respectively, with respect to the note and Treasury security, and your tax basis
in the note, Treasury security and the purchase contract will not be affected by
the delivery and release.
Ownership of Treasury Securities
By acquiring Treasury MEDS, you agree to treat yourself as the owner, for United
States federal, state and local income and franchise tax purposes, of the
Treasury security that is a part of the Treasury MEDS beneficially owned by you.
We also agree to treat you as the owner of the Treasury security. Your initial
tax basis in the Treasury security that is a part of the Treasury MEDS will be
equal to the amount paid for the Treasury security. Your adjusted tax basis in
the Treasury security will be increased by the amount of any original issue
discount included in income with respect thereto.
Interest Income and Original Issue Discount
A holder of a Treasury MEDS will be required to treat its pro rata portion of
the Treasury security as a bond that was originally issued on the date acquired
by such holder and that has original issue discount equal to the holder's pro
rata portion of the excess of the amount payable on such Treasury security over
the value of the Treasury security at the time the holder acquires it. A holder
whether on the cash or accrual method of tax accounting will be required to
include original issue discount (other than original issue discount on a
short-term U.S. Treasury security, as
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defined below) in income for United States federal income tax purposes as it
accrues on a constant yield to maturity basis. Consequently, a portion of each
scheduled payment to holders will be treated as a return of such holder's
investment in the Treasury security and will not be considered current income
for United States federal income tax purposes.
In the case of any Treasury security with a maturity of one year or less from
the date of its issue (a 'short-term U.S. Treasury security'), in general only
accrual basis taxpayers will be required to include original issue discount in
income as it accrues. Unless you are an accrual basis holder who elects to
accrue the original issue discount on a short-term U.S. Treasury security on a
constant yield to maturity basis, you will accrue such original issue discount
on a straight-line basis.
Substitution of Notes to Recreate Corporate MEDS
If you deliver notes to the collateral agent to recreate Corporate MEDS, you
generally will not recognize gain or loss upon the delivery of the notes or the
release of the Treasury security. You will continue to take into account items
of income or deduction otherwise includible or deductible, respectively, with
respect to the Treasury security and the notes, and your tax basis in the notes,
the Treasury security and the purchase contract will not be affected by the
delivery and release.
PURCHASE CONTRACTS
Contract Adjustment Payments
There is no direct authority addressing the treatment of the contract adjustment
payments under current law, and their treatment is unclear. Contract adjustment
payments may constitute taxable income to you when received or accrued, in
accordance with your method of tax accounting. To the extent we are required to
file information returns with respect to contract adjustment payments, we intend
to report such payments as taxable income to you. You should consult your own
tax advisor concerning the treatment of contract adjustment payments. The
treatment of contract adjustment payments could affect your tax basis in a
purchase contract or our common stock received under a purchase contract or your
amount realized upon the sale or disposition of a Corporate MEDS or Treasury
MEDS or the termination of a purchase contract. See ' -- Acquisition of Common
Stock Under a Purchase Contract,' ' -- Sale or Disposition of Corporate MEDS or
Treasury MEDS' and ' -- Termination of Purchase Contract.'
Acquisition of Common Stock Under a Purchase Contract
You generally will not recognize gain or loss on the purchase of our common
stock under a purchase contract, except with respect to any cash paid in lieu of
a fractional share of common stock. Subject to the following discussion, your
aggregate initial tax basis in the common stock received under a purchase
contract generally should equal (a) the purchase price paid for such common
stock, plus (b) your tax basis in the purchase contract, if any, less (c) the
portion of such purchase price and tax basis allocable to the fractional share.
To determine your holding period for common stock received under a purchase
contract, you will begin counting on the day after the common stock is acquired.
Early Settlement of Purchase Contract
You will not recognize gain or loss on the receipt of your proportionate share
of the notes or Treasury security, upon early settlement of a purchase contract,
and you will have the same tax basis in such notes or Treasury security, as the
case may be, as before such early settlement.
Termination of Purchase Contract
If a purchase contract terminates, you will recognize capital gain or loss equal
to the difference between your amount realized, if any, upon such termination
and your adjusted tax basis, if any, in the purchase contract at the time of
such termination. Contract adjustment payments, if any,
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received by you, but not includible in income, should either reduce your basis
in the purchase contract or result in an amount realized on the termination of
the purchase contract. See ' -- Contract Adjustment Payments.' Capital gains of
individuals derived in respect of capital assets held for more than one year are
subject to tax at preferential rates. The deductibility of capital losses is
subject to limitations.
You will not recognize gain or loss on the receipt of your proportionate share
of the notes or Treasury security upon termination of the purchase contract and
you will have the same tax basis in such notes or Treasury security, as the case
may be, as before such termination. If the termination of the purchase contract
occurs when the purchase contract has a negative value, see ' -- Sale or
Disposition of Corporate MEDS or Treasury MEDS.' You should consult your own tax
advisor regarding the termination of the purchase contract when the purchase
contract has a negative value.
Adjustment to Settlement Rate
You might be treated as receiving a constructive distribution from us if (i) the
settlement rate is adjusted and as a result of such adjustment your
proportionate interest in our assets or earnings and profits is increased and
(ii) the adjustment is not made pursuant to a bona fide, reasonable
anti-dilution formula. An adjustment in the settlement rate would not be
considered made pursuant to such a formula if the adjustment were made to
compensate you for certain taxable distributions with respect to our common
stock. Thus under certain circumstances, an increase in the settlement rate
might give rise to a taxable dividend to you even though you would not receive
any cash related thereto. In addition, in certain situations, you might be
treated as receiving a constructive distribution if we fail to adjust the
settlement rate.
SALE OR DISPOSITION OF CORPORATE MEDS OR TREASURY MEDS
Upon a disposition of a Corporate MEDS or Treasury MEDS, you will be treated as
having sold, exchanged or disposed of the purchase contract and the note or
Treasury security, as the case may be, that constitute such Corporate MEDS or
Treasury MEDS. You generally will have gain or loss equal to the difference
between the portion of your proceeds allocable to the purchase contract and the
note or Treasury security, as the case may be, and your respective adjusted tax
bases in the purchase contract and the note or Treasury security. For purposes
of determining gain or loss, your proceeds will not include an amount equal to
accrued and unpaid interest on the Treasury security not previously included in
income, which amount will be treated as ordinary interest income. Further, to
the extent you are treated as having received an amount with respect to accrued
contract adjustment payments, such amounts may be treated as ordinary income to
the extent not previously included in income. Alternatively, contract adjustment
payments that you did not previously include in income could either reduce your
tax basis in the purchase contract or result in an increase of the amount
realized on the disposition of the purchase contract. See ' -- Contract
Adjustment Payments.'
In the case of the purchase contracts and the Treasury security, such gain or
loss generally will be capital gain or loss. Capital gains of individuals
derived in respect of capital assets held for more than one year are subject to
tax at preferential rates. The deductibility of capital losses is subject to
limitations. If the disposition of a Corporate MEDS or Treasury MEDS occurs when
the purchase contract has a negative value, you should be considered to have
received additional consideration for the note or Treasury security in an amount
equal to such negative value, and to have paid such amount to be released from
your obligation under the purchase contract. You should consult your tax advisor
regarding a disposition of a Corporate MEDS or Treasury MEDS at a time when the
purchase contract has a negative value.
Gain on the sale, exchange or other disposition of a note prior to the date six
months after the interest rate on the note is reset generally will be treated as
ordinary income. Gain on the sale, exchange or other disposition of a note that
occurs during the six month period following the date the interest rate is reset
will generally be treated as ordinary income unless no further payments
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are due during the remainder of the six month period. Loss from the disposition
of a note prior to such date will be treated as ordinary loss to the extent of
your prior net interest inclusions (reduced by the total net negative
adjustments previously allowed as an ordinary loss). Any loss in excess of such
amount will be treated as capital loss. Gain recognized on the sale, exchange or
other disposition of a note starting from the earlier of the date that is six
months after the interest rate on the notes is reset or the date when no further
payments are due during the six month period after the interest rate on notes is
reset will be ordinary income to the extent attributable to the excess, if any,
of the present value of the total remaining principal and interest payments due
on the note over the total remaining payments set forth on the projected payment
schedule for such note. Any gain recognized in excess of such amount and any
loss recognized in excess of your prior net interest inclusions on such sale,
exchange or other disposition generally will be treated as capital gain or loss.
Capital gains of individuals derived in respect of capital assets held for more
than one year are subject to tax at preferential rates. Because gain or loss on
the disposition of a note may be treated as ordinary income or loss, disposition
of a Corporate MEDS consisting of a note and purchase contract may give rise to
capital gain or loss on the purchase contract and ordinary income or loss on the
note, which must be reported separately for United States federal income tax
purposes.
Special rules apply in determining the tax basis of a note. Your basis in a note
is generally increased by original issue discount you previously accrued on the
note, and reduced by the fixed payments you receive and by the contingent
payments projected to be made during the period you held the note.
REMARKETING OR TAX EVENT REDEMPTION OF THE NOTES
A remarketing or tax event redemption of the notes will be a taxable event for
holders of notes that will be subject to tax in the manner described above under
' -- Sale or Disposition of Corporate MEDS or Treasury MEDS.'
Ownership of the Treasury Portfolio
After the remarketing settlement date or tax event redemption date (if prior to
the purchase contract settlement date), your Corporate MEDS will include a
beneficial interest in a Treasury portfolio instead of a note. We and, by
acquiring a Corporate MEDS, you agree to treat yourself as the owner, for United
States federal, state and local income and franchise tax purposes, of the
beneficial interest in the Treasury portfolio that is a part of the Corporate
MEDS owned by you. Your initial tax basis in your applicable ownership interest
in the Treasury portfolio will equal your pro rata portion of the amount paid by
the remarketing agent or collateral agent, as the case may be, for the Treasury
portfolio. Your adjusted tax basis in the Treasury portfolio will be increased
by the amount of original issue discount included in income with respect thereto
and decreased by the amount of cash received in respect of the Treasury
portfolio.
Interest Income and Original Issue Discount
The Treasury portfolio and the tax event Treasury portfolio will consist of
stripped U.S. Treasury securities. Following a remarketing or tax event
redemption of the notes, a holder of a Corporate MEDS will be required to treat
its pro rata portion of each Treasury security in the applicable Treasury
portfolio as a bond that was originally issued on the date the remarketing agent
or collateral agent acquired the relevant Treasury securities underlying the
Treasury portfolio and that has original issue discount equal to the holder's
pro rata portion of the excess of the amounts payable on such Treasury
securities over the value of the Treasury securities at the time the remarketing
agent or collateral agent acquires them on behalf of holders of Corporate MEDS.
A holder whether on the cash or accrual method of tax accounting will be
required to include original issue discount (other than original issue discount
on short-term U.S. Treasury securities, as defined below) in income for United
States federal income tax purposes as it accrues on a constant yield to maturity
basis. Consequently, a portion of each scheduled payment to holders will
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be treated as a return of such holder's investment in the Treasury portfolio and
will not be considered current income for United States federal income tax
purposes.
In the case of any Treasury security with a maturity of one year or less from
the date of its issue (a 'short-term U.S. Treasury security'), in general only
accrual basis taxpayers will be required to include original issue discount in
income as it accrues. Unless you are an accrual basis holder who elects to
accrue the original issue discount on a short-term U.S. Treasury security on a
constant yield to maturity basis, you will accrue such original issue discount
on a straight-line basis.
NON-UNITED STATES HOLDERS
The following discussion only applies to Non-United States Holders. You are a
'Non-United States Holder' if you are not a United States person. Special rules
may apply to you if you are a 'controlled foreign corporation,' 'passive foreign
investment company,' 'foreign personal holding company,' a corporation that
accumulates earnings to avoid United States federal income tax or, in certain
circumstances, a U.S. expatriate, and such Non-U.S. Holders should consult their
own tax advisors.
United States Federal Withholding Tax
The 30% United States federal withholding tax will not apply to any payment of
principal or interest (including original issue discount) on the notes or
Treasury securities provided that:
you do not actually (or constructively) own 10% or more of the total
combined voting power of all classes of our voting stock within the meaning
of the Code and the Treasury regulations;
you are not a controlled foreign corporation that is related to us through
stock ownership;
you are not a bank whose receipt of interest on the notes or Treasury
securities is described in section 881(c)(3)(A) of the Code; and
(a) you provide your name and address on an IRS Form W-8BEN (or other
applicable form), and certify, under penalties of perjury, that you are not
a United States person, or (b) if you hold your Corporate MEDS, Treasury
MEDS, notes or Treasury securities through certain foreign intermediaries,
you satisfy the certification requirements of applicable United States
Treasury regulations. Special certification requirements apply to certain
Non-United States Holders that are pass-through entities rather than
individuals.
If you cannot satisfy the requirements described above, payments of interest
(including original issue discount) made to you will be subject to the 30%
United States federal withholding tax, unless you provide us with a properly
executed:
IRS Form W-8BEN (or other applicable form) claiming an exemption from, or
reduction in the rate of, withholding under the benefit of an applicable
tax treaty; or
IRS Form W-8ECI (or other applicable form) stating that interest paid on
the notes or Treasury securities is not subject to withholding tax because
it is effectively connected with your conduct of a trade or business in the
United States.
The 30% United States federal withholding tax will not apply to any gain that
you realize on the sale, exchange, or other disposition of the Corporate MEDS,
Treasury MEDS, Treasury securities, notes and our common stock acquired under
the purchase contract. However, interest income including original issue
discount and any gain treated as ordinary income that you realize on the sale,
exchange or other disposition of a note will be subject to withholding in
certain circumstances unless the conditions described in the four bullet points
above are satisfied.
We will generally withhold tax at a 30% rate on contract adjustment payments and
dividends paid on our common stock acquired under a purchase contract or such
lower rate as may be specified by an applicable income tax treaty. However,
contract adjustment payments or dividends that are effectively connected with
the conduct of a trade or business by the Non-United States Holder within the
United States and, where a tax treaty applies, are attributable to a United
States
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permanent establishment of the Non-United States Holder, are not subject to the
withholding tax, provided the relevant certification requirements are satisfied,
but instead are subject to United States federal income tax, as described below.
A Non-United States Holder of our common stock or a purchase contract who wishes
to claim the benefit of an applicable treaty rate for dividends or contract
adjustment payments (or to avoid back-up withholding, as discussed below), will
be required to satisfy certain certification and disclosure requirements
described in the fourth bullet point above.
A Non-United States Holder eligible for a reduced rate of United States
withholding tax on payments pursuant to an income tax treaty may obtain a refund
of any excess amounts withheld by filing an appropriate claim for refund with
the IRS.
United States Federal Income Tax
If you are engaged in a trade or business in the United States and interest
(including original issue discount) on the notes or Treasury securities,
dividends on our common stock, or to the extent they constitute taxable income,
contract adjustment payments from the purchase contracts are effectively
connected with the conduct of that trade or business, you will be subject to
United States federal income tax on the interest, dividends or contract
adjustment payments on a net income basis (although exempt from the 30%
withholding tax), in the same manner as if you were a United States person as
defined under the Code. Certain certification and disclosure requirements must
be complied with in order for effectively connected income to be exempt from
withholding. In addition, if you are a foreign corporation, you may be subject
to a branch profits tax equal to 30% (or lower applicable treaty rate) of your
earnings and profits for the taxable year, subject to adjustments, that are
effectively connected with the conduct by you of a trade or business in the
United States. For this purpose, interest on the notes or Treasury securities,
dividends on our common stock and, to the extent they constitute taxable income,
the contract adjustment payments from the purchase contracts will be included in
earnings and profits.
Any gain realized on the disposition of a Treasury security, note (to the extent
not treated as interest income under the OID rules), purchase contract or share
of our common stock generally will not be subject to United States federal
income tax unless:
that gain or income is effectively connected with the conduct of a trade or
business by you in the United States; or
you are an individual who is present in the United States for 183 days or
more in the taxable year of that disposition, and certain other conditions
are met; or
in the case of Corporate MEDS, Treasury MEDS or our common stock, we are or
have been a 'United States real property holding corporation' for United
States federal income tax purposes (subject to the discussion below).
An individual Non-United States Holder described in the first bullet above will
be subject to tax on the net gain derived from the sale under regular graduated
United States federal income tax rates. An individual Non-United States Holder
described in the second bullet point above will be subject to a flat 30% tax on
the gain derived from the sale, which may be offset by United States source
capital losses (even though the individual is not considered a resident of the
United States). If a Non-United States Holder that is a foreign corporation
falls under the first bullet above, it will be subject to tax on its gain under
regular graduated United States federal income tax rates and, in addition, may
be subject to the branch profits tax equal to 30% of its effectively connected
earnings and profits or at such lower rate as may be specified by an applicable
income tax treaty.
We believe we are not and do not anticipate becoming a 'U.S. real property
holding corporation' for U.S. federal income tax purposes. If we become a
'United States real property holding corporation,' so long as our common stock
continues to be regularly traded on an established securities market:
you will not be subject to United States federal income tax on the
disposition of our common stock if you hold or held (at any time during the
shorter of the five-year period
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preceding the date of disposition or such holder's holding period) less
than or equal to 5% of the total outstanding shares of our common stock;
and
you will not be subject to United States federal income tax on the
disposition of the purchase contracts if on the day you acquired the
purchase contracts, the purchase contracts you acquired had a fair market
value less than 5% of the fair market value of all of the purchase
contracts.
United States Federal Estate Tax
Your estate will not be subject to United States federal estate tax on the
notes, or Treasury securities beneficially owned by you at the time of your
death, provided that:
you do not own 10% or more of the total combined voting power of all
classes of our voting stock, within the meaning of the Code and United
States Treasury regulations; and
interest on those notes or Treasury securities would not have been, if
received at the time of your death, effectively connected with the conduct
by you of a trade or business in the United States.
Our common stock acquired under a purchase contract and owned by you at the time
of your death will be subject to United States federal estate tax unless an
applicable estate tax treaty provides otherwise. Purchase contracts owned by you
at the time of your death may be subject to United States federal estate tax
unless an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
United States Holders
In general, information reporting requirements may apply to payments on
Corporate MEDS, Treasury MEDS, notes, Treasury securities, and our common stock
made to you and to the proceeds of the sale or other disposition of such
instruments, unless you are an exempt recipient such as a corporation. Backup
withholding may apply if you fail to supply an accurate taxpayer identification
number or otherwise fail to comply with applicable United States information
reporting or certification requirements.
Any amounts withheld under the backup withholding rules will be allowed as a
refund or a credit against your United States federal income tax liability
provided the required information is furnished to the IRS.
Non-United States Holders
The amount of the interest, contract adjustment payments and dividends on our
common stock paid to you and the tax withheld with respect to such interest,
contract adjustment payments and dividends, regardless of whether withholding
was required, must be reported annually to the IRS and to you. Copies of the
information returns reporting such interest, contract adjustment payments,
dividends and withholding may also be made available to the tax authorities in
the country in which you reside under the provisions of an applicable income tax
treaty.
In general, no backup withholding will be required regarding payments on the
Corporate MEDS, Treasury MEDS, notes, Treasury securities, or our common stock
(except possibly with respect to contract adjustment payments) that we make to
you provided that we do not have actual knowledge or reason to know that you are
a United States person and you have delivered the statement described above
under 'Non-United States Holders -- United States Federal Withholding Tax.'
In addition, no information reporting or backup withholding will be required
regarding the proceeds of the sale of Corporate MEDS, Treasury MEDS, notes,
Treasury securities, or our common stock made within the United States or
conducted through certain United States financial intermediaries if:
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(1) the payor receives the statement described above and (2) does not have
actual knowledge that you are a United States person; or
you otherwise establish an exemption.
Backup withholding may apply if you fail to comply with applicable United States
information reporting or certification requirements.
Any amounts withheld under the backup withholding rules will be allowed as a
refund or a credit against your United States federal income tax liability
provided the required information is furnished to the IRS.
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ERISA CONSIDERATIONS
The following is a summary of certain considerations associated with the
purchase of the MEDS Equity Units by employee benefit plans that are subject to
Title I of the U.S. Employee Retirement Income Security Act of 1974, as amended
('ERISA'), plans, individual retirement accounts and other arrangements that are
subject to Section 4975 of the Code or provisions under any federal, state,
local, non-U.S. or other laws or regulations that are similar to such provisions
of the Code or ERISA (collectively, 'Similar Laws'), and entities whose
underlying assets are considered to include 'plan assets' of such plans,
accounts and arrangements (each, a 'Plan').
GENERAL FIDUCIARY MATTERS
ERISA and the Code impose certain duties on persons who are fiduciaries of a
Plan subject to Title I of ERISA or Section 4975 of the Code (an 'ERISA Plan')
and prohibit certain transactions involving the assets of an ERISA Plan and its
fiduciaries or other interested parties. Under ERISA and the Code, any person
who exercises any discretionary authority or control over the administration of
such an ERISA Plan or the management or disposition of the assets of such an
ERISA Plan, or who renders investment advice for a fee or other compensation to
such a Plan, is generally considered to be a fiduciary of the ERISA Plan.
In considering an investment in the MEDS Equity Units of a portion of the assets
of any Plan, a fiduciary should determine whether the investment is in
accordance with the documents and instruments governing the Plan and the
applicable provisions of ERISA, the Code or any Similar Law relating to a
fiduciary's duties to the Plan including, without limitation, the prudence,
diversification, delegation of control and prohibited transaction provisions of
ERISA, the Code and any other applicable Similar Laws.
Any insurance company proposing to invest assets of its general account in the
MEDS Equity Units should consider the extent that such investment would be
subject to the requirements of ERISA in light of the U.S. Supreme Court's
decision in John Hancock Mutual Life Insurance Co. v. Harris Trust and Savings
Bank and under any subsequent legislation or other guidance that has or may
become available relating to that decision, including the enactment of Section
401(c) of ERISA by the Small Business Job Protection Act of 1996 and the
regulations promulgated thereunder.
PROHIBITED TRANSACTION ISSUES
Section 406 of ERISA and Section 4975 of the Code prohibit ERISA Plans from
engaging in specified transactions involving plan assets with persons or
entities who are 'parties in interest,' within the meaning of ERISA, or
'disqualified persons,' within the meaning of Section 4975 of the Code, unless
an exemption is available. A party in interest or disqualified person who
engaged in a non-exempt prohibited transaction may be subject to excise taxes
and other penalties and liabilities under ERISA and the Code. In addition, the
fiduciary of the ERISA Plan that engaged in such a non-exempt prohibited
transaction may be subject to penalties and liabilities under ERISA and the
Code.
The acquisition and/or holding of the MEDS Equity Units by an ERISA Plan with
respect to which we or any underwriter is considered a party in interest or a
disqualified person may constitute or result in a direct or indirect prohibited
transaction under Section 406 of ERISA and/or Section 4975 of the Code, unless
the investment is acquired and is held in accordance with an applicable
statutory, class or individual prohibited transaction exemption. In this regard,
the U.S. Department of Labor (the 'DOL') has issued prohibited transaction class
exemptions, or 'PTCEs,' that may apply to the acquisition and holding of the
Corporate MEDS. These class exemptions include, without limitation:
PTCE 84-14 respecting transactions determined by independent qualified
professional asset managers;
PTCE 90-1 respecting insurance company pooled separate accounts;
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PTCE 91-38 respecting bank collective investment funds;
PTCE 95-60 respecting life insurance company general accounts; and
PTCE 96-23 respecting transactions determined by in-house asset managers,
although there can be no assurance that all of the conditions of any such
exemptions will be satisfied.
PLAN ASSET ISSUES
ERISA and the Code do not define 'plan assets.' However, regulations (the 'Plan
Asset Regulations') promulgated under ERISA by the DOL generally provide that
when an ERISA Plan acquires an equity interest in an entity that is neither a
'publicly-offered security' nor a security issued by an investment company
registered under the Investment Company Act, the ERISA Plan's assets include
both the equity interest and an undivided interest in each of the underlying
assets of the entity unless it is established either that equity participation
in the entity by 'benefit plan investors' is not significant or that the entity
is an 'operating company,' in each case as defined in the Plan Asset
Regulations.
We anticipate that investing Plans' assets will not include an undivided
interest in each of our underlying assets because we will, at all relevant
times, be considered an 'operating company.' However, due to the facts and
circumstances nature of the inquiries, no assurances can be given that the DOL
or any particular court would agree that we qualify as an 'operating company.'
Even if we are not considered an operating company, our underlying assets might
still not be plan assets because the MEDS Equity Units may be considered
publicly offered securities under the Plan Asset Regulations, although no
assurance can be made in this regard.
REPRESENTATION
Accordingly, by acceptance of MEDS Equity Units, each purchaser and subsequent
transferee of MEDS Equity Units will be deemed to have represented and warranted
that either:
no portion of the assets used by such purchaser or transferee to acquire
the MEDS Equity Units constitutes assets of any Plan; or
the purchase and holding of the MEDS Equity Units by such purchaser or
transferee will not constitute a non-exempt prohibited transaction under
Section 406 of ERISA or Section 4975 of the Code or similar violation under
any applicable Similar Laws.
The foregoing discussion is general in nature and is not intended to be all
inclusive. Due to the complexity of these rules and the penalties that may be
imposed upon persons involved in non-exempt prohibited transactions, it is
particularly important that fiduciaries, or other persons considering purchasing
the MEDS Equity Units on behalf of, or with the assets of, any Plan, consult
with their counsel regarding the potential applicability of ERISA, Section 4975
of the Code and any Similar Laws to such investment and whether an exemption
would be applicable to the purchase and holding of the MEDS Equity Units.
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UNDERWRITING
We are selling the Corporate MEDS to the underwriters named in the table below
pursuant to an underwriting agreement dated the date of this prospectus
supplement. Subject to the terms of the underwriting agreement, we have agreed
to sell to each of the underwriters, and each of the underwriters has severally
agreed to purchase, the number of Corporate MEDS set forth opposite that
underwriter's name in the table below:
<Table>
<Caption>
NUMBER OF
UNDERWRITER CORPORATE MEDS
----------- --------------
J.P. Morgan Securities Inc. ..................... 4,400,000
Lehman Brothers Inc. ............................ 1,600,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated......................... 1,600,000
Goldman, Sachs & Co. ............................ 160,000
Credit Lyonnais Securities (USA) Inc. ........... 80,000
Scotia Capital (USA) Inc. ....................... 80,000
The Williams Capital Group, L.P. ................ 80,000
---------
Total........................................ 8,000,000
---------
---------
</Table>
Under the terms and conditions of the underwriting agreement, the underwriters
must buy all of the Corporate MEDS if they buy any of them. The underwriting
agreement provides that the obligations of the underwriters pursuant thereto are
subject to certain conditions. In the event of a default by an underwriter, the
underwriting agreement provides that, in certain circumstances, the purchase
commitments of the non-defaulting underwriters may be increased or the
underwriting agreement may be terminated. The underwriters will sell the
Corporate MEDS to the public when and if the underwriters buy the Corporate MEDS
from us.
We have agreed to indemnify the underwriters against, or contribute to payments
the underwriters may be required to make in respect of, certain liabilities,
including liabilities under the Securities Act of 1933.
OVERALLOTMENT
We have granted an option to the underwriters to purchase, within 13 days of the
date of the original issuance of the Corporate MEDS, up to an additional
1,200,000 Corporate MEDS at the public offering price less the underwriting
discount, solely to cover any over-allotments, if any. If the underwriters
exercise this option, each will be obligated, subject to conditions contained in
the underwriting agreement, to purchase approximately the same percentage of
additional Corporate MEDS as the number set forth next to the underwriter's name
in the preceding table bears to the total number of Corporate MEDS set forth
next to the names of all underwriters in the preceding table.
UNDERWRITING DISCOUNTS AND COMMISSIONS
The following table shows the per MEDS Equity Unit and total underwriting
discounts and commissions we will pay to the underwriters. These amounts are
shown assuming both no exercise and full exercise of the underwriters'
over-allotment option to purchase additional MEDS Equity Units.
<Table>
<Caption>
WITHOUT WITH
PER MEDS OVER-ALLOTMENT OVER-ALLOTMENT
EQUITY UNIT EXERCISE EXERCISE
----------- -------- --------
Public offering price........................ $50.00 $400,000,000 $460,000,000
Underwriting discount........................ $ 1.50 $ 12,000,000 $ 13,800,000
Proceeds, before expenses, to us............. $48.50 $388,000,000 $446,200,000
</Table>
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We estimate that the total expenses of this offering, excluding underwriting
discounts and commissions, will be approximately $750,000. The underwriters have
agreed to pay a portion of our expenses in connection with this offering.
The underwriters propose to offer the MEDS Equity Units directly to the public
at the initial public offering price set forth on the cover page of this
prospectus supplement and to certain dealers at that price less a concession not
in excess of $0.30 per MEDS Equity Unit. After the initial public offering of
the MEDS Equity Units, the underwriters may change the offering price and other
selling terms.
NO SALE OF SIMILAR SECURITIES
We and, subject to the exceptions listed below, certain of our executive
officers have agreed that, without the prior written consent of J.P. Morgan
Securities Inc., as the representative of the underwriters, we and they will not
for a period of 90 days after the date of this prospectus supplement:
offer, pledge, announce the intention to sell, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase or otherwise transfer
or dispose of, directly or indirectly, any MEDS Equity Units, purchase
contracts or shares of our common stock or any securities convertible into
or exercisable or exchangeable for MEDS Equity Units, purchase contracts or
shares of our common stock; or
enter into any swap or other agreement that transfers, in whole or in part,
any of the economic consequences of ownership of the MEDS Equity Units,
purchase contracts or shares of our common stock,
whether any such transaction described above is to be settled by delivery of
MEDS Equity Units, purchase contracts or shares of our common stock or such
other securities, in cash or otherwise.
The foregoing sentence shall not apply to:
in our case:
the sale of any Corporate MEDS to the underwriters pursuant to the
underwriting agreement;
sales or issuances by us pursuant to existing employee or director benefit
plans (including, without limitation, employee stock purchase plans) or
pursuant to dividend reinvestment plans; and
any securities issuable in connection with the Treasury MEDS or Corporate
MEDS to be created or recreated upon substitution of pledged securities, or
shares of our common stock issuable upon settlement of the Corporate MEDS
or Treasury MEDS;
in the case of each executive officer:
sales of shares of our common stock made to satisfy loans incurred to
finance the purchase of such shares of common stock, if that satisfaction
is required by the lender pursuant to margin regulations;
charitable donations of shares of our common stock that are consistent with
such officer's prior years' practice, if the donee agrees to be bound by
the terms of the restrictions set forth in the preceding paragraph with
respect to sales of such common stock during the 90-day period referred to
above; and
sales of up to 10% of shares of the common stock owned by such officer on
the date of this prospectus supplement after the period ending 60 days
after the date of this prospectus supplement. For purposes of this
sentence, shares of common stock owned by such officer shall be deemed to
include any vested and unvested options to purchase shares of our common
stock that are held by such officer on the date of this prospectus
supplement.
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NEW YORK STOCK EXCHANGE LISTING
The Corporate MEDS have been approved for listing on the NYSE under the symbol
'KSE PrA.' We do not have any obligation or current intention to apply for any
separate listing of the Treasury MEDS or notes. We have been advised by the
underwriters that they intend to make a market in the Corporate MEDS, Treasury
MEDS and notes. The underwriters are not obligated to do so and may discontinue
their market making at any time without notice. There can be no assurance that
an active trading market will develop for the Corporate MEDS or that the MEDS
Equity Units will trade at or above the initial public offering price in the
public market subsequent to the offering.
PRICE STABILIZATION AND SHORT POSITIONS
Until the distribution of the MEDS Equity Units offered hereby is completed, SEC
rules may limit the underwriters and selling group members from bidding for or
purchasing the MEDS Equity Units or shares of our common stock. However, the
underwriters may engage in transactions that stabilize the price of the MEDS
Equity Units or our common stock, such as bids or purchases that peg, fix or
maintain the price of the MEDS Equity Units or our common stock.
In connection with the offering, the underwriters may make short sales of the
Corporate MEDS. Short sales involve the sale by the underwriters, at the time of
the offering, of a greater number of Corporate MEDS than they are required to
purchase in the offering. Covered short sales are sales made in an amount not
greater than the overallotment option. The underwriters may close out any
covered short position by either exercising the overallotment option or
purchasing Corporate MEDS in the open market. In determining the source of
Corporate MEDS to close out the covered short position, the representative of
the underwriters will consider, among other things, the price of Corporate MEDS
available for purchase in the open market as compared to the price at which they
may purchase the Corporate MEDS through the overallotment option. Naked short
sales are sales in excess of the overallotment option. The representative must
close out any naked short position by purchasing Corporate MEDS in the open
market. A naked short position is more likely to be created if the
representative is concerned that there may be downward pressure on the price of
the Corporate MEDS or our common stock in the open market after pricing that
could adversely affect investors who purchase in the offering. Similar to other
purchase transactions, purchases by the underwriters to cover syndicate short
positions may have the effect of raising or maintaining the market price of the
Corporate MEDS and our common stock or preventing or retarding a decline in the
market price of the Corporate MEDS and our common stock. As a result, the prices
of the Corporate MEDS and our common stock may be higher than they would
otherwise be in the absence of these transactions.
Neither we nor any of the underwriters make any representation or prediction as
to the direction or magnitude of any effect that the transactions described
above may have on the price of the Corporate MEDS or our common stock. In
addition, neither we nor any of the underwriters make any representation that
the representative will engage in these transactions or that these transactions,
once commenced, will not be discontinued without notice.
EARLY SETTLEMENT AND REMARKETING
This prospectus supplement and the accompanying prospectus, as amended or
supplemented, may be used in connection with the early settlement of the stock
purchase contracts and the remarketing of the notes.
OTHER RELATIONSHIPS
Certain of the underwriters and their affiliates engage in transactions with,
and perform services for, us and our subsidiaries and affiliates in the ordinary
course of business and have engaged, and may in the future engage, in commercial
banking and investment banking transactions with us and our subsidiaries and
affiliates.
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JPMorgan Chase Bank, who is acting as purchase contract agent and trustee, is an
affiliate of J.P. Morgan Securities Inc.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the Corporate MEDS to
be sold in the offering will be passed upon for us by Simpson Thacher &
Bartlett, New York, New York. Certain legal matters will be passed upon for the
underwriters by Davis Polk & Wardwell, New York, New York.
EXPERTS
The financial statements incorporated by reference in this prospectus supplement
from our annual report on Form 10-K/A for the year ended December 31, 2001 have
been audited by Arthur Andersen LLP, independent auditors, as stated in their
report, which is incorporated herein by reference, and has been so incorporated
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
Information related to the estimated proved reserves attributable to certain oil
and gas properties of our subsidiaries as of December 31, 2001 and estimates of
future net cash flows and present value of the reserves have been incorporated
by reference in our Annual Report on Form 10-K/A for the year ended December 31,
2001, which is incorporated herein by reference, in reliance on the reserve
report, dated January 30, 2002, prepared by Netherland, Sewell & Associates,
Inc., independent petroleum consultants, and the reserve report, dated February
1, 2002 prepared by Miller and Lents, Ltd., independent oil and gas consultants.
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STATEMENT OF DIFFERENCES
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The service mark symbol shall be expressed as ...........................'sm'