As Filed Pursuant to Rule 424(b)(2)
Registration No. 333-37034
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED JUNE 20, 2000
[IBM LOGO]
INTERNATIONAL BUSINESS MACHINES CORPORATION
$1,000,000,000
IBM NOTES
WITH MATURITIES OF 1 YEAR OR MORE FROM DATE OF ISSUE
We plan to offer and sell notes with various terms, which may include the
following:
- maturity of one year or more from the date of issue,
- interest at a fixed rate,
- interest payment dates at monthly, quarterly, semi-annual or annual
intervals,
- book-entry form through The Depository Trust Company,
- redemption and/or repayment provisions, if applicable, whether mandatory,
at our option or the option of the holder, and
- minimum denominations of $1,000 and integral multiples of $1,000.
We will specify the final terms of each note, which may be different from
the terms described in this prospectus supplement, in the applicable pricing
supplement. You must pay for the notes by delivering the purchase price to an
agent, unless you make other payment arrangements. Generally, we will not list
the notes on any securities exchange. We may, however, from time to time do so.
INVESTING IN THE NOTES INVOLVES CERTAIN RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE S-5 TO READ ABOUT CERTAIN FACTORS YOU OUGHT TO CONSIDER BEFORE BUYING
THE NOTES.
We may offer the notes as follows:
- Through agents who have agreed to use reasonable efforts to solicit offers
to purchase the notes. Unless otherwise specified in the pricing
supplement, we will pay the agents commissions ranging from 0.20% to 2.50%
of the principal amount of the notes offered.
- Through one or more agents purchasing the notes as principal and acting as
underwriter or dealer. We will pay those agents an underwriting discount
or commission to be negotiated at the time of sale.
- Directly to investors. We will not pay a discount or commission to any
agent if we sell the notes directly to investors.
If we sell all of the notes, we expect to receive aggregate proceeds of
between $975,000,000 and $998,000,000, after paying the agents' discounts and
commissions of between $2,000,000 and $25,000,000. The agents' discounts and
commissions may exceed these amounts with respect to sales of notes with stated
maturities in excess of 30 years, or if otherwise specified in a pricing
supplement.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
ABN AMRO FINANCIAL SERVICES, INC.
A.G. EDWARDS & SONS, INC.
EDWARD JONES & CO., L.P.
FIDELITY CAPITAL MARKETS
(A DIVISION OF NATIONAL FINANCIAL SERVICES LLC)
MERRILL LYNCH & CO.
MORGAN STANLEY
PRUDENTIAL SECURITIES
SALOMON SMITH BARNEY
CHARLES SCHWAB & CO., INC.
UBS PAINEWEBBER INC.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS JUNE 28, 2002
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
--------
Summary of Prospectus Supplement............................ S-3
About This Prospectus Supplement And Pricing Supplements.... S-5
Risk Factors................................................ S-5
Ratio of Earnings to Fixed Charges.......................... S-7
Selected Financial Data..................................... S-8
Description of Notes........................................ S-9
General................................................... S-9
Payment of Principal and Interest......................... S-10
Redemption at Our Option.................................. S-12
Repayment at Holder's Option.............................. S-12
Repayment Upon Death...................................... S-13
Book-Entry System......................................... S-16
Certain United States Federal Income Tax Consequences....... S-19
United States Holders..................................... S-19
Non-U.S. Holders.......................................... S-25
Backup Withholding........................................ S-26
Possible European Union Requirements...................... S-27
Supplemental Plan of Distribution........................... S-27
Legal Opinions.............................................. S-29
PROSPECTUS
Summary..................................................... 3
Ratios of Earnings to Fixed Charges and Earnings to Combined
Fixed Charges and Preferred Stock Dividends............... 4
Where You Can Find More Information......................... 5
Description of the Company.................................. 6
Use of Proceeds............................................. 6
Description of the Debt Securities.......................... 6
Description of the Preferred Stock.......................... 19
Description of the Depositary Shares........................ 21
Description of the Capital Stock............................ 24
Description of the Warrants................................. 24
Plan of Distribution........................................ 25
Legal Opinions.............................................. 26
Experts..................................................... 26
YOU SHOULD RELY ONLY ON THE INFORMATION INCORPORATED BY REFERENCE OR
CONTAINED IN THIS PROSPECTUS SUPPLEMENT, THE ATTACHED PROSPECTUS AND THE
APPLICABLE PRICING SUPPLEMENT. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
DIFFERENT INFORMATION AND IF YOU RECEIVE ANY ADDITIONAL INFORMATION YOU SHOULD
NOT RELY ON IT. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN ANY PLACE
WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION
CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT, THE
ATTACHED PROSPECTUS OR ANY PRICING SUPPLEMENT IS ACCURATE AS OF ANY DATE OTHER
THAN THE DATE ON THE FRONT OF THE APPLICABLE DOCUMENT.
S-2
SUMMARY OF PROSPECTUS SUPPLEMENT
You should read the more detailed information appearing elsewhere in this
prospectus supplement, the accompanying prospectus and the applicable pricing
supplement. Unless the context requires otherwise, references in the prospectus
supplement to IBM, we, us and our, refer to International Business Machines
Corporation.
Issuer............................... International Business Machines Corporation
Purchasing Agent..................... ABN AMRO Financial Services, Inc.
Title................................ IBM Notes, which we refer to as the notes.
Amount............................... Up to $1,000,000,000 aggregate principal amount.
Denomination......................... We will issue and sell notes in denominations of $1,000 and
any integral multiple of $1,000 if such notes are
denominated in U.S. dollars, and such other denominations as
is determined from time to time with respect to notes that
are denominated in currencies other than U.S. dollars.
Ranking.............................. The notes will be senior notes, ranking equally with all of
our other unsecured, unsubordinated debt. The notes will not
be secured by any collateral.
Maturities........................... The notes will mature one year or more from the date of
issue, as specified in the applicable pricing supplement.
Interest............................. Each note will bear interest from the issue at a fixed rate,
which will be zero in the case of a zero-coupon note.
We will pay interest on each note, other than a zero-coupon
note, on either monthly, quarterly, semi-annual or annual
interest payment dates and at maturity.
Unless otherwise specified in the applicable pricing
supplement, interest on the notes will be computed on the
basis of a 360-day year of twelve 30-day months.
Principal............................ The principal amount of the notes will be payable on the
maturity date of such notes at the corporate trust office of
the trustee.
Redemption and Repayment............. Unless otherwise provided in the applicable pricing
supplement:
--the notes may not be redeemed by us or repaid at the
option of the holder prior to maturity; and
--the notes will not be subject to any sinking fund.
S-3
The pricing supplement relating to any note will indicate
whether the holder of such note will have the right to
require us to repay a note prior to maturity, including upon
the death of the owner of such note.
Form of Notes........................ Book entry only. The notes will be represented by one or
more global securities deposited with or on behalf of the
Depositary, The Depository Trust Company, and registered in
the name of the depositary's nominee. Global notes will be
exchangeable for definitive notes only in limited
circumstances. See Description of Notes--Book-Entry System.
Depositary........................... The Depository Trust Company (DTC).
Trustee.............................. JPMorgan Chase Bank, 450 West 33rd Street, New York, NY
10001, under an Indenture dated October 1, 1993, as
supplemented by a First Supplemental Indenture dated as of
December 15, 1995, as may be supplemented from time to time,
which we refer to as the Indenture.
Agents............................... ABN AMRO Financial Services, Inc., A.G. Edwards & Sons,
Inc., Edward Jones & Co., L.P., Fidelity Capital Markets (a
division of National Financial Services LLC), Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co.
Incorporated, Prudential Securities, Salomon Smith Barney
Inc., Charles Schwab & Co., Inc., and UBS PaineWebber Inc.,
as agents of IBM in connection with the offering of the
notes.
Selling Group Members................ Broker-dealers and other securities firms that have executed
dealer agreements with the purchasing agent and have agreed
to market and sell the notes in accordance with the terms of
these agreements and all other applicable laws and
regulations. You may call 1-800-327-1546 for a list of
selling group members.
S-4
ABOUT THIS PROSPECTUS
SUPPLEMENT AND PRICING
SUPPLEMENTS
We may use this prospectus supplement, together with the attached prospectus
and a pricing supplement, to offer our IBM Notes from time to time. The total
initial public offering price of notes that may be offered by using this
prospectus supplement is $1,000,000,000. That amount may be reduced so as to
ensure that the total amount of securities we issue under our shelf registration
statement (No. 333-37034) does not exceed the maximum amount of securities
registered under that shelf registration statement.
This prospectus supplement sets forth terms of the notes that we may offer.
It supplements the description of the debt securities contained in the attached
prospectus. If information in this prospectus supplement is inconsistent with
the prospectus, this prospectus supplement will apply and will supersede that
information in the prospectus.
Each time we issue notes, we will issue a pricing supplement to supplement
this prospectus supplement. The pricing supplement will contain the specific
description of the notes being offered and the terms of the offering. The
pricing supplement may also add, update or change any of the information in this
prospectus supplement or the attached prospectus. Any information in the pricing
supplement, including any changes in the method of calculating interest on any
note, that is inconsistent with this prospectus supplement and/or prospectus
will apply and will supersede that information in this prospectus supplement
and/or prospectus respectively.
We think it is very important for you to read and consider all information
contained in this prospectus supplement and the attached prospectus and pricing
supplement in making your investment decision. You should also read and consider
the information in the documents we have referred you to in "WHERE YOU CAN FIND
MORE INFORMATION" on page 5 of the attached prospectus.
RISK FACTORS
Your investment in the notes will involve a number of risks. You should
consider carefully the following risks before you decide that an investment in
the notes is suitable for you. You should also consult with your own financial
and legal advisors regarding the risks and suitability of an investment in the
notes.
REDEMPTION--IF YOUR NOTES ARE REDEEMABLE AT IBM'S OPTION, WE MAY CHOOSE TO
REDEEM THEM.
If stated in the pricing supplement, we may redeem notes at any time, or
after a specific point in time, in accordance with that pricing supplement. For
example, we may choose to exercise our ability to redeem notes when prevailing
interest rates are relatively low. If your notes are redeemable by us, we will
advise you as to how and when we may redeem in the pricing supplement. If we
choose to redeem your notes, you will have to consider what you are going to do
with the redemption proceeds. If interest rates are lower, you will not be able
to invest in a comparable security at an effective interest rate as high as the
interest rate on the notes being redeemed. You ought to consult with a competent
professional on related consequences of purchasing redeemable notes before
purchasing them.
S-5
UNCERTAIN TRADING MARKET--WE CANNOT ASSURE YOU THAT A TRADING MARKET FOR YOUR
NOTES WILL EVER DEVELOP OR BE MAINTAINED.
We cannot assure you that a trading market for your notes will ever develop
or be maintained. If liquidity is important to you, this is something you ought
to consider before buying the notes. We do not make a market in our notes, and
we are not giving any assurances that anyone else will either. Also, there are
many factors independent of IBM's name and creditworthiness which can and do
affect the trading market for our notes (as well as notes generally), and the
market value of any notes you may hold. These factors include, among others:
- the rate of interest on the notes;
- the method of calculating the principal and interest for the notes;
- the time remaining to the maturity of the notes;
- the outstanding principal amount of the notes and other instruments;
- the redemption features of the notes;
- the level, direction and volatility of interest rates generally; and
- other market factors which we have no knowledge of, and have no control
over, but which can influence people's attitudes about us and our notes.
You should also consider the fact that there may be a limited number of
buyers in the market if and when you decide to sell your notes. A lack of buyers
will negatively affect the price you may receive for your notes if you decide
you want to sell your notes prior to maturity. You may have no ability to sell
your notes at all at certain times. In such a case, you will have to retain your
notes. Please keep this in mind before you invest in our notes.
SPECIAL CONSIDERATIONS FOR ZERO COUPON NOTES
Instead of making periodic interest payments on the notes, zero coupon notes
provide for a fixed payment amount at maturity. However, you will be required to
periodically include, and we will be required to periodically report to the
Internal Revenue Service, as interest income to you, the amount of original
issue discount (OID) as it accretes over the term of the note, even though we
are not concurrently paying you such interest income. This means, in effect,
that zero coupon notes produce current taxable income without periodic interest
payments. Generally, the amount of OID on a note is the excess of the note's
stated redemption price at maturity over its issue price. As a simple example, a
zero coupon note may be issued at $750 and provide for payment of $1,000 at
maturity. In that scenario, we must report, and you must include as interest
income, the $250 of OID as it accretes over the term of the note in advance of
your receipt of the additional $250 at maturity.
As compared to conventional fixed rate notes, holding a zero coupon note may
be an attractive option because you do not need to worry about finding an
appropriate reinvestment opportunity for the periodic payments of interest that
are made on conventional fixed rate notes. Therefore, zero coupon notes may be
suitable for you if you wish to match the maturities of your assets with those
of your liabilities. However, remember that you will be responsible for paying
periodically the taxes imposed on the amount of OID as it accretes over the term
of the note, and such amount will be taxable as interest income even though we
are not making any periodic payments to you. Moreover, because market prices on
zero coupon notes are volatile, you may not find a ready market if you want to
sell your zero coupon note prior to maturity, and any such sale might be at a
substantial discount. (See "UNCERTAIN TRADING MARKET" above.) Therefore, you
should consult
S-6
with a competent financial advisor before purchasing a zero coupon note.
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges has been computed by dividing
earnings before income taxes (which excludes (a) amortization of capitalized
interest and (b) IBM's share in the income and losses of less than 50% owned
affiliates) and fixed charges (excluding capitalized interest) by fixed charges.
"Fixed charges" consist of interest expense, capitalized interest and that
portion of rental expense deemed to be representative of interest.
YEAR ENDED DECEMBER 31
THREE MONTHS ENDED ----------------------------------------------------
MARCH 31, 2002 2001 2000 1999 1998 1997
------------------ -------- -------- -------- -------- --------
Ratio of earnings to fixed charges............ 6.1 7.5 7.0 7.0 5.3 5.4
S-7
SELECTED FINANCIAL DATA
The following consolidated summary sets forth selected financial data for
IBM and its subsidiaries for the three-month period ended March 31, 2002 and
each of the years in the five-year period ended December 31, 2001. This
summary's historical data is derived from IBM's annual financial statements for
the years ended December 31, 1997 through 2001, which are audited, and IBM's
interim financial statements for the three-month period ended March 31, 2002,
which are unaudited. The following summary should be read in conjunction with
the financial information incorporated in this prospectus supplement and
accompanying prospectus by reference to other documents. See "WHERE YOU CAN FIND
MORE INFORMATION" in the accompanying prospectus.
YEAR ENDED DECEMBER 31,
THREE MONTHS ENDED ----------------------------------------------------
FOR THE PERIOD: MARCH 31, 2002 2001 2000 1999 1998 1997
--------------- ------------------ -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS EXCEPT RATIOS AND PER SHARE AMOUNTS)
Revenue.............................. $18,551 $85,866 $88,396 $87,548 $81,667 $78,508
Net income........................... 1,192 7,723 8,093 7,712 6,328 6,093
Per share of common stock:
Basic............................ 0.69 4.45 4.58 4.25 3.38 3.09
Assuming dilution................ 0.68 4.35 4.44 4.12 3.29 3.00
Reported net income:................. 1,192 7,723 8,093 7,712 NA NA
Add: Goodwill amortization net of tax
effects............................ -- 262 436 420 NA NA
------- ------- ------- ------- ------- -------
Adjusted net income.................. 1,192 7,985* 8,529* 8,132* NA NA
Basic earnings per share:
Reported net income................ 0.69 4.45 4.58 4.25 NA NA
Goodwill amortization.............. -- 0.15 0.25 0.24 NA NA
------- ------- ------- ------- ------- -------
Adjusted basic earnings per
share............................ 0.69 4.60* 4.83* 4.49* NA NA
Diluted earnings per share:
Reported net income................ 0.68 4.35 4.44 4.12 NA NA
Goodwill amortization.............. -- 0.15 0.24 0.22 NA NA
------- ------- ------- ------- ------- -------
Adjusted diluted earnings per
share............................ 0.68 4.50* 4.68* 4.34* NA NA
Cash dividends paid on common
stock.............................. 241 956 909 859 814 763
Per share of common stock.......... 0.14 0.55 0.51 0.47 0.43 0.3875
Investment in plant, rental machines
and other property................. 1,373 5,660 5,616 5,959 6,520 6,793
Return on stockholders' equity....... 32.3% 35.1% 39.7% 39.0% 32.6% 29.7%
AT END OF PERIOD:
-------------------------------------
Total assets......................... $83,056 $88,313 $88,349 $87,495 $86,100 $81,499
Net investment in plant, rental
machines and other property........ 16,629 16,504 16,714 17,590 19,631 18,347
Working capital...................... 7,301 7,342 7,474 3,577 5,533 6,911
Total debt........................... 24,908 27,151 28,576 28,354 29,413 26,926
Stockholders' equity................. 23,051 23,614 20,624 20,511 19,433 19,816
* These amounts have been adjusted to exclude goodwill amortization, which is
no longer recorded under Statement of Financial Accounting Standards (SFAS)
No. 142, "Goodwill and Other Intangible Assets." In July 2001, the Financial
Accounting Standards Board issued SFAS No. 142. This standard eliminates the
amortization of goodwill, requires annual impairment testing of goodwill and
introduces the concept of indefinite life intangible assets. The new rule
also prohibits the amortization of goodwill associated with business
combinations that close after June 30, 2001. An initial impairment test of
goodwill must be performed in 2002 as of January 1, 2002. The company
completed this initial transition impairment test and determined that its
goodwill is not impaired.
"NA" means "Not Adjusted."
S-8
DESCRIPTION OF NOTES
The notes we are offering by this prospectus supplement constitute a series
of senior debt securities for purposes of our Indenture. The notes will rank
"parri passu", or with the same rights and privileges as other senior debt
securities we issue under the Indenture. For a description of the Indenture and
the rights of the holders of debt securities under the Indenture, including the
notes, see--DESCRIPTION OF THE DEBT SECURITIES in the accompanying prospectus.
The following description of the terms and conditions of the notes
supplements, and to the extent inconsistent with, replaces the description of
the general terms of the debt securities described in the accompanying
prospectus. The terms and conditions described in this section will apply to
each note unless the applicable pricing supplement states otherwise.
GENERAL
The notes will be senior notes, ranking equally with all of our other senior
unsecured debt. We will issue the notes only in the form of one or more global
securities registered in the name of a nominee of The Depository Trust Company,
except as specified in Book-Entry System. For more information on certificated
and global securities, see BOOK-ENTRY SYSTEM.
We may offer from time to time up to $1,000,000,000 aggregate principal
amount of notes on terms determined at the time of sale. The notes will mature
one year or more from the date of issue, as determined by the initial purchaser
and agreed to by us.
In addition to conventional fixed rate notes, we may also issue original
issue discount notes, including zero-coupon notes, which are notes issued at a
discount from the principal amount payable at the maturity date. A discount note
may not have any periodic interest payments. For discount notes, interest
normally accrues during the life of the note, and is paid at the maturity date
or upon earlier redemption. Upon a redemption, repayment or acceleration of the
maturity of a discount note, the amount payable will be determined as set forth
under "REDEMPTION AT OUR OPTION". Normally, this amount is less than the amount
payable at the maturity date. For additional information regarding payments upon
the acceleration of the maturity of an original issue discount note, and
regarding the United States federal income tax consequences of original issue
discount notes, see--PAYMENT OF PRINCIPAL AND INTEREST and CERTAIN UNITED STATES
FEDERAL INCOME TAX CONSEQUENCES--UNITED STATES HOLDERS--ORIGINAL ISSUE DISCOUNT.
Original issue discount notes will be treated as original issue discount
securities for purposes of the Indenture.
The notes may be registered for transfer or exchange at the principal office
of the Corporate Trust Department of JPMorgan Chase Bank, the trustee under the
Indenture, in The City of New York. The transfer or exchange of global
securities will be effected as specified in BOOK-ENTRY SYSTEM.
Except as described in the Description of the Debt Securities in the
accompanying prospectus, the Indenture does not limit our ability to incur
unsecured debt. In addition, the Indenture does not contain any provision that
would protect holders of the notes in the event of a transaction that may
adversely affect our creditworthiness.
As used in this prospectus supplement, business day means, with respect to
any note, any day, other than a Saturday or Sunday, that is neither a legal
holiday nor a day on which commercial banks are authorized or required by law,
regulation or executive order to close in The City of New York.
S-9
PAYMENT OF PRINCIPAL AND INTEREST
Payments of principal and interest, if any, at maturity will be made in
immediately available funds, provided that the note is presented to the trustee
in time for the trustee to make the payments in immediately available funds in
accordance with its normal procedures. Payments of interest, other than interest
payable at maturity, with respect to global securities will be paid in
immediately available funds to the depositary or its nominee. See BOOK-ENTRY
SYSTEM. Payments of interest, if any, with respect to any certificated notes
other than amounts payable at maturity, will be paid to the person or entity
entitled to the payments as it appears in the security register. With original
issue discount notes, no periodic interest payments are made.
Unless the applicable pricing supplement states otherwise:
- if we redeem any original issue discount note as described under
REDEMPTION AT OUR OPTION,
- if we repay any original issue discount note at the option of the holder
as described under REPAYMENT AT HOLDER'S OPTION and REPAYMENT UPON DEATH,
or
- if the principal of any original issue discount note is declared to be due
and payable immediately as described in the accompanying prospectus under
DESCRIPTION OF THE DEBT SECURITIES--EVENTS OF DEFAULT, NOTICE AND WAIVER,
the amount of principal due and payable with respect to the original issue
discount note shall be limited to the sum of:
- the aggregate principal amount of such note multiplied by the issue price,
expressed as a percentage of the aggregate principal amount, plus
- the original issue discount accrued from the date of issue to the date of
redemption, repayment or declaration, as applicable.
This accrual will be calculated using the interest method, computed in
accordance with generally accepted accounting principles in effect on the date
of redemption, repayment or declaration, as applicable.
S-10
Each note will bear interest from and including the date of issue, or in
the case of notes issued upon registration of transfer or exchange, from and
including the most recent interest payment date to which interest on such note
has been paid or duly provided for. Interest will be payable at the fixed rate
per year stated in such note and in the applicable pricing supplement until the
principal of such note is paid or made available for payment. Interest will be
payable on each interest payment date and at maturity. Interest will be payable
to the person in whose name a note is registered at the close of business on
the regular record date next preceding each interest payment date; provided,
however, that interest payable at maturity or upon redemption, repayment or
declaration will be payable to the person to whom principal is payable. The
first payment of interest on any note originally
issued between a regular record date and an interest payment date will be made
on the interest payment date following the next succeeding regular record date
to the registered owner of such note on such next succeeding regular record
date. If the interest payment date or the maturity for any note falls on a day
that is not a business day, the payment of principal and interest may be made
on the next succeeding business day, and no interest on such payment shall
accrue for the period from such interest payment date or maturity, as the case
may be. Unless the applicable pricing supplement states otherwise, interest on
the notes will be computed on the basis of a 360-day year of twelve 30-day
months.
Unless otherwise specified in a pricing supplement, the interest payment
dates for a note, other than a zero-coupon note, will be as follows:
INTEREST PAYMENTS INTEREST PAYMENT DATES
----------------- ------------------------------------------------------------
Monthly........................ Fifteenth day of each calendar month, commencing in the
first succeeding calendar month following the month in which
the note is issued.
Quarterly...................... Fifteenth day of every third month, commencing in the third
succeeding calendar month following the month in which the
note is issued.
Semi-annual.................... Fifteenth day of every sixth month, commencing in the sixth
succeeding calendar month following the month in which the
note is issued.
Annual......................... Fifteenth day of every twelfth month, commencing in the
twelfth succeeding calendar month following the month in
which the note is issued.
The regular record date with respect to any interest payment date will be
the date 15 calendar days prior to such interest payment date, whether or not
such date is a business day.
The interest rates on the notes may differ depending upon, among other
things, prevailing market conditions at the time of issuance as well as the
aggregate principal amount of notes issued in any single transaction. Although
we may change the interest rates and other variable terms of the notes we issue
from time to time, no change will affect any note we have already
S-11
issued, or as to which we have accepted an offer to purchase.
REDEMPTION AT OUR OPTION
Unless the applicable pricing supplement states otherwise, we may not redeem
the notes prior to maturity and the notes will not be subject to any sinking
fund. If, however, the applicable pricing supplement provides that we may redeem
the notes prior to maturity, it will also specify the redemption dates and
prices, or a method for determining such dates and prices. Unless otherwise
stated in the pricing supplement, notes may be redeemed in whole or in part from
time to time only upon not less than 30 nor more than 60 days' notice.
No interest will accrue or be paid to a noteholder for any period after the
date a note has been redeemed.
If a note is an original issue discount (OID) note, unless otherwise
provided in the pricing supplement, the amount payable in the event of
redemption or repayment prior to its stated maturity will be the amortized face
amount on the redemption or repayment date, as the case may be. The amortized
face amount of an original issue discount note will be equal to (i) the issue
price plus (ii) that portion of the difference between the issue price and the
principal amount of the note that has accrued at the yield to maturity described
in the pricing supplement (computed in accordance with generally accepted U.S.
bond yield computation principles) by the redemption or repayment date. However,
in no case will the amortized face amount of a discount note exceed its
principal amount.
We may at any time, and in our sole discretion, purchase notes at any price
in the open market or otherwise. Notes we purchase in this manner may, at our
discretion, be held, resold or surrendered to the trustee for cancellation.
REPAYMENT AT HOLDER'S OPTION
Unless we otherwise provide in the applicable pricing supplement, the notes
are not repayable at the option of the holder prior to the maturity date. If the
pricing supplement states that your note is repayable at your option prior to
its maturity date, we will require receipt of notice of the request for
prepayment at least 30 but not more than 60 days prior to the date or dates for
such repayment, as specified in the pricing supplement. We also must receive a
completed form entitled "Option to Elect Repayment" or such other documentation
as we have described in a pricing supplement relating to the note. Exercise of
the repayment option by the holder of a note is irrevocable. The Depositary's
nominee is considered the holder of the notes and therefore will be the only
entity that can exercise the right to repayment. See BOOK-ENTRY SYSTEM.
To ensure that the Depositary's nominee will timely exercise a right to
repayment with respect to a particular beneficial interest in a note, the
beneficial owner of such interest must instruct the broker or other direct or
indirect participant through which it holds a beneficial interest in the note to
notify the Depositary of its desire to exercise that right to repayment. Because
different firms have different cut-off times for accepting instructions from
their customers, each beneficial owner should consult the broker or other direct
or indirect participant through which it holds an interest in a note to
determine the cut-off time by which the instruction must be given for timely
notice to be delivered to the Depositary. Conveyance of notices and other
communications by the Depositary to participants, by participants to indirect
participants and by participants and indirect participants to beneficial owners
of the notes will be governed by agreements among the parties concerned and any
applicable statutory or regulatory requirements. The actual repayment normally
will occur on the interest payment date
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or dates following receipt of a valid notice. Unless otherwise specified in the
pricing supplement, the repayment price will equal 100% of the principal amount
of the note plus accrued interest to the date or dates of repayment, or at a
price equal to the amortized face amount for original issue discount notes and
zero coupon notes on the date of such repayment.
REPAYMENT UPON DEATH
The pricing supplement relating to a note will indicate whether the holder
of the note will have the right to require us to repay a note prior to its
maturity date upon the death of the owner of the note as described below (the
"Survivor's Option"). See the applicable pricing supplement to determine whether
the Survivor's Option applies to any particular note.
Pursuant to the exercise of the Survivor's Option, if applicable, we will,
at our option, either repay or purchase any note (or portion thereof) properly
tendered for repayment by or on behalf of the person (the "Representative") that
has authority to act on behalf of the deceased owner of the beneficial interest
in the note under the laws of the appropriate jurisdiction (including, without
limitation, the personal representative, executor, surviving joint tenant or
surviving tenant by the entirety of such deceased beneficial owner) at a price
equal to 100% of the principal amount of the beneficial interest of the deceased
owner in the note, plus accrued interest to the date of such repayment (or at a
price equal to the Amortized Face Amount for Original Issue Discount Notes and
Zero-Coupon Notes on the date of such repayment), SUBJECT TO THE FOLLOWING
LIMITATIONS:
- The Survivor's Option may not be exercised until 12 months following the
date of issue of the applicable note.
- Repayments under the Survivor's Option will be made only on the first
June 15 or December 15 that occurs 20 or more calendar days following the
acceptance of all documentation described herein.
- We may, in our sole discretion, limit the aggregate principal amount of
notes as to which exercises of the Survivor's Option will be accepted in
any calendar year (the "Annual Put Limitation") to one percent (1%) of the
outstanding aggregate principal amount of the notes as of the end of the
most recent fiscal year, but not less than $1,000,000 in any such calendar
year, or such greater amount as IBM in its sole discretion, may determine
for any calendar year.
- We also may limit to $200,000, or such greater amount as we in our sole
discretion, may determine for any calendar year, the aggregate principal
amount of notes (or portions thereof) as to which the exercise of the
Survivor's Option will be accepted in a calendar year with respect to any
individual deceased owner of a beneficial interest in the notes (the
"Individual Put Limitation").
- We will not make principal repayments or purchases pursuant to exercise of
the Survivor's Option in amounts that are less than $1,000, or are not
integral multiples of $1,000, and, in the event that the Annual Put
Limitation or the Individual Put Limitation described in the preceding
sentence would result in the partial repayment or purchase of any note,
the principal amount of such note remaining outstanding after repayment
must be at least $1,000 (the minimum authorized denomination of the
notes). Any note (or portion thereof) tendered pursuant to exercise of the
Survivor's Option is irrevocable and may not be withdrawn.
Each note (or portion of a note) that is tendered pursuant to a valid
exercise of the
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Survivor's Option will be accepted sequentially; i.e., in the order all the
notes are tendered, except for any note (or portion of a note) the acceptance of
which would contravene (i) the Annual Put Limitation or (ii) the Individual Put
Limitation with respect to the relevant individual deceased owner of a
beneficial interest in a note. If, as of the end of any calendar year, the
aggregate principal amount of notes (or portions of a note) that have been
accepted pursuant to exercise of the Survivor's Option during such year has not
exceeded the Annual Put Limitation for the year, any exercise(s) of the
Survivor's Option with respect to notes (or portions of a note) not accepted
during the calendar year because acceptance would have contravened the
Individual Put Limitation with respect to an individual deceased owner of a
beneficial interest in a note will be accepted in the order all notes (or
portions of a note) were tendered, to the extent that any such exercise would
not trigger the Annual Put Limitation for the calendar year. Subject to the
limitations provided herein, any note (or portion of a note) accepted for
repayment pursuant to exercise of the Survivor's Option will be repaid on the
first June 15 or December 15 that occurs 20 or more calendar days after the date
of acceptance of all required materials. Each note (or any portion of a note)
tendered for repayment that is not accepted in any calendar year due to the
Annual Put Limitation, including notes that exceeded the Individual Put
Limitation, will be deemed to be tendered in the following calendar year in the
order in which all notes (or portions of a note) were originally tendered. Notes
(or portions of notes) not accepted in a prior year because of the Annual and
Individual Put Limitations will be given precedence over Notes tendered to the
Company in the following year.
In the event that a note (or any portion of a note) tendered for repayment
pursuant to a valid exercise of the Survivor's Option is not accepted, the
Trustee will deliver a notice by first-class mail to the registered holder at
the last known address as indicated in each agent's note register, that states
the reason why the note (or portion of a note) has not been accepted for
payment.
Subject to the foregoing, in order for a Survivor's Option to be validly
exercised with respect to any note (or portion thereof), the Trustee must
receive from the Representative of the deceased owner:
(1) an original written request for repayment signed by the Representative;
the signature must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.
(the "NASD") or a commercial bank or trust company having an office or
correspondent in the United States,
(2) tender of the note (or portion of the note) to be repaid,
(3) appropriate evidence satisfactory to the Trustee that: (a) the
Representative has authority to act on behalf of the deceased beneficial owner,
(b) the death of the beneficial owner has in fact occurred (i.e., an original
death certificate must be tendered) and (c) the deceased was the owner of a
valid beneficial interest in the note at the time of death (i.e., a verified
brokerage account statement),
(4) if applicable, a properly executed assignment or endorsement,
(5) if the beneficial interest in the note is held by a nominee of the
deceased beneficial owner, a certificate satisfactory to the Trustee from such
nominee attesting to the deceased's ownership of a beneficial interest in the
note, and
(6) such other items as the Trustee may request following receipt and
review of items (1) through (5) above.
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Subject to our right to limit the aggregate principal amount of notes as to
which exercises of the Survivor's Option will be accepted in any one calendar
year, all questions as to the eligibility or validity of any exercise of the
Survivor's Option will be determined by the Trustee, in its sole discretion,
which determination will be final and binding on all parties. In making any such
determinations, the Trustee may elect, in the exercise of its own discretion, to
consult with competent Company personnel and seek advice, but it is in no way
obligated to do so. The Trustee is entitled to conclusively rely on any advice
of the Company which the Trustee follows in connection with determining any of
the matters described herein.
The death of a person owning a note in joint tenancy or tenancy by the
entirety with another or others will be deemed the death of the holder of the
note, and the entire principal amount of the note so held will be subject to
repayment, together with interest accrued thereon to the repayment date. The
death of a person owning a note by tenancy in common will be deemed the death of
a holder of a note only with respect to the deceased holder's interest in the
note so held by tenancy in common; except that in the event a note is held by a
husband and wife as tenants in common, the death of either will be deemed the
death of the holder of the note, and the entire principal amount of the note so
held will be subject to repayment. The death of a person who, during his or her
lifetime, was entitled to substantially all of the beneficial interests of
ownership of a note, will be deemed the death of the holder thereof for purposes
of this provision, regardless of the registered holder, if such beneficial
interest can be established to the satisfaction of the Trustee. Such beneficial
interest will be deemed to exist in typical cases of nominee ownership,
ownership under the Uniform Gifts to Minors Act, community property or other
joint ownership arrangements between a husband and wife and trust arrangements
where one person has substantially all of the beneficial ownership interests in
the note during his or her lifetime.
In the case of repayment pursuant to the exercise of the Survivor's Option,
for notes represented by the Master Note, the Depositary or its nominee will be
the holder of the note and will be the only entity that can exercise the
Survivor's Option for the note. To obtain repayment pursuant to exercise of the
Survivor's Option with respect to the note, the Representative must provide to
the broker or other entity through which the beneficial interest in the note is
held by the deceased owner:
(1) the documents described in clauses (1) and (3) of the third preceding
paragraph, and
(2) instructions to such broker or other entity to notify the Depositary of
the Representative's desire to obtain repayment pursuant to exercise of the
Survivor's Option.
Such broker or other entity will provide to the Trustee:
(1) the documents received from the Representative referred to in
clause (1) of the preceding paragraph,
(2) a certificate satisfactory to the Trustee from such broker or other
entity stating that it represents the deceased beneficial owner,
(3) a detailed description of the note, including CUSIP, principal amount,
coupon rate, if any, and maturity date, and
(4) the deceased's social security number.
The broker or other entity will be responsible for disbursing any payments
it receives pursuant to exercise of the Survivor's Option to the appropriate
Representative. See BOOK-ENTRY SYSTEM.
A Representative may obtain the information and forms used to exercise the
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Survivor's Option from JPMorgan Chase Bank, our Trustee, at 450 West 33rd
Street, 15th Floor, New York, New York 10001, or by calling Institutional Trust
Services at (212) 946-7135, during normal business hours.
BOOK-ENTRY SYSTEM
All of the notes we offer will be issued in book-entry only form. This means
that we will not issue actual notes or certificates. Instead, we will issue one
or more Master Note Certificates which represent Global notes in registered form
(each, a "Global Note"). Each Global Note is held through THE DEPOSITORY TRUST
COMPANY ("DTC"), as Depositary, and is registered in the name of Cede & Co., as
nominee of DTC. Accordingly, Cede & Co. will be the holder of record of the
notes. Each note is represented by a beneficial interest in that Global Note.
Beneficial interests in a Global Note are shown on, and transfers are effected
through, records maintained by DTC or its participants. In order to own a
beneficial interest in a note, you must be an institution that has an account
with DTC or have a direct or indirect account with such an institution.
Transfers of ownership interests in the notes will be accomplished by making
entries in DTC participants' books acting on behalf of beneficial owners.
Beneficial owners of these notes will not receive certificates representing
their ownership interest, unless the use of the book-entry system is
discontinued. So long as DTC or its nominee is the registered owner of a Global
Note, DTC or its nominee, as the case may be, will be the sole holder of the
notes represented thereby for all purposes, including payment of principal and
interest, under the Indenture. Except as otherwise provided below, the
beneficial owners of the notes are not entitled to receive physical delivery of
certificated notes and will not be considered the holders for any purpose under
the Indenture. Accordingly, each beneficial owner must rely on the procedures of
DTC and, if such beneficial owner is not a DTC participant, on the procedures of
the DTC participant through which such beneficial owner owns its interest in
order to exercise any rights of a holder of a note under the Indenture. The laws
of some jurisdictions require that certain purchasers of notes take physical
delivery of such notes in certificated form. Those limits and laws may impair
the ability to transfer beneficial interests in the notes. Each Global Note
representing notes will be exchangeable for certificated notes of like tenor and
terms and of differing authorized denominations in a like aggregate principal
amount, only if (i) the Depositary notifies us that it is unwilling or unable to
continue as Depositary for the Global Notes or we become aware that the
Depositary has ceased to be a clearing agency registered under the Securities
Exchange Act of 1934 and, in any such case we fail to appoint a successor to the
Depositary within 60 calendar days, or (ii) we, in our sole discretion,
determine that the Global Notes shall be exchangeable for certificated notes.
Upon any such exchange, the certificated notes shall be registered in the names
of the beneficial owners of the Global Note representing the notes.
The following is based on information furnished by DTC: DTC will act as
securities depository for the notes. The notes will be issued as
fully-registered notes registered in the name of Cede & Co. (DTC's partnership
nominee) or such other name as may be requested by an authorized representative
of DTC. Generally, one fully registered Global Note will be issued for all of
the principal amount of the notes. If, however, the aggregate principal amount
of any note exceeds $500 million, one certificate will be issued with respect to
each $500 million of principal amount and an additional certificate will be
issued with respect to any remaining principal amount of such note. DTC is a
limited-purpose trust company organized under the New York Banking Law, a
"banking organization"
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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. DTC holds securities that
its participants deposit with DTC. DTC also facilitates the settlement among
direct participants of securities transactions, such as transfers and pledges,
in deposited securities through electronic computerized book-entry changes in
direct 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. DTC is owned by a number of its direct participants and by
the New York Stock Exchange, Inc., the American Stock Exchange LLC, and the
National Association of Securities Dealers, Inc. Access to the DTC system is
also available to others such as securities brokers and dealers, banks, and
trust companies that clear through or maintain a custodial relationship with a
direct participant, either directly or indirectly. The rules applicable to DTC
and its direct and indirect participants are on file with the SEC. Purchases of
the notes under the DTC system must be made by or through direct participants,
which will receive a credit for the notes on DTC's records. The beneficial
interest of each actual purchaser of each note is in turn to be recorded on the
direct and indirect participants' records. Beneficial owners will not receive
written confirmation from DTC of their purchase, but beneficial owners are
expected to receive written confirmations providing details of the transaction,
as well as periodic statements of their holdings, from the direct or indirect
participant through which the beneficial owner entered into the transaction.
Transfers of beneficial interests in the notes are to be accomplished by entries
made on the books of direct and indirect participants acting on behalf of
beneficial owners. Beneficial owners will not receive certificates representing
their beneficial interests in notes, except in the event that use of the
book-entry system for the notes is discontinued. To facilitate subsequent
transfers, all notes deposited by direct participants with DTC are registered in
the name of DTC's partnership nominee, Cede & Co. or such other name as may be
requested by an authorized representative of DTC. The deposit of the notes with
DTC and their registration in the name of Cede & Co. or such other nominee do
not effect any change in beneficial ownership. DTC has no knowledge of the
actual beneficial owners of the notes; DTC's records reflect only the identity
of the direct participants to whose accounts such notes are credited, which may
or may not be the beneficial owners. The direct and indirect participants will
remain responsible for keeping account of their holdings on behalf of their
customers. Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants, and by direct
participants and indirect participants to beneficial owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time. Beneficial owners of the notes may wish to
take certain steps to augment transmission to them of notices of significant
events with respect to the notes, such as redemption, tenders, defaults, and
proposed amendments to the security documents. Beneficial owners of the notes
may wish to ascertain that the nominee holding the notes for their benefit has
agreed to obtain and transmit notices to beneficial owners. Neither DTC nor
Cede & Co. (nor such other DTC nominee) will consent or vote with respect to the
notes. Under its usual procedures, DTC mails an Omnibus Proxy to us as soon as
possible after the regular record date. The Omnibus Proxy assigns Cede & Co.'s
consenting or voting rights to those direct participants to whose accounts the
notes are
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credited on the regular record date (identified in a listing attached to the
Omnibus Proxy). We will pay principal and any premium or interest payments on
the notes in immediately available funds directly to DTC. DTC's practice is to
credit direct participants' accounts on the applicable payment date in
accordance with their respective holdings shown on DTC's records unless DTC has
reason to believe that it will not receive payment on such date. Payments by
participants to beneficial owners will be governed by standing instructions and
customary practices, as is the case with securities held for the accounts of
customers in bearer form or registered in "street name." These payments will be
the responsibility of these participants and not of DTC or any other party,
subject to any statutory or regulatory requirements that may be in effect from
time to time. Payment of principal and any premium or interest to DTC is our
responsibility, disbursement of such payments to direct participants is the
responsibility of DTC, and disbursement of such payments to the beneficial
owners is the responsibility of the direct or indirect participant. We will send
any redemption notices to Cede & Co. If less than all of the notes are being
redeemed, DTC's practice is to determine by lot the amount of the interest of
each direct participant in such issue to be redeemed. DTC may discontinue
providing its services as securities depository for the notes at any time by
giving us reasonable notice. Under such circumstances, if a successor securities
depository is not obtained, we will print and deliver certificated notes. The
information in this section concerning DTC and DTC's system has been obtained
from sources that we believe to be reliable, but we take no responsibility for
its accuracy.
REGISTRATION, TRANSFER AND PAYMENT OF CERTIFICATED NOTES
If we ever issue notes in certificated form, those notes may be presented
for registration, transfer and payment at the office of the Trustee or at the
office of any transfer agent designated and maintained by us for specific notes.
JPMorgan Chase Bank has initially been appointed to act in those capacities for
the notes. The Trustee or transfer agent will make the transfer or registration
only if it is satisfied with the documents of title and identity of the person
making the request. There will not be a service charge for any exchange or
registration of transfer of the notes, but we may require payment of a sum
sufficient to cover any tax, duty, impost or other governmental charge that may
be imposed in connection with the exchange. At any time we may change transfer
agents or approve a change in the location through which any transfer agent
acts. We may also designate additional transfer agents for any notes at any
time. We will not be required to (i) issue, exchange or register the transfer of
any note to be redeemed for a period of 15 days after the selection of the notes
to be redeemed; or (ii) exchange or register the transfer of any note that was
selected, called or is being called for redemption, except the unredeemed
portion of any note being redeemed in part. We will pay principal and any
premium and interest on any certificated notes at the offices of the paying
agents we may designate from time to time. Generally, we will pay interest on a
note on any interest payment date to the person in whose name the note is
registered at the close of business on the regular record date for that payment.
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CERTAIN UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES
This section summarizes certain United States federal income tax
consequences of the purchase, ownership and disposition of the notes.
It is based upon laws, regulations, rulings and decisions now in effect, all
of which are subject to change or differing interpretations. It deals only with
notes held as capital assets and does not deal with persons in special tax
situations, such as financial institutions, insurance companies, regulated
investment companies, dealers in securities or currencies, traders in securities
who elect to use a mark-to-market method of accounting for their securities
holdings, partnerships or other entities classified as partnerships for U.S.
federal tax purposes, persons subject to the alternative minimum tax, persons
that own, or are deemed to own 10% or more of the stock of IBM, persons holding
notes as a hedge against currency risks or as a position in a straddle for tax
purposes, or persons whose functional currency is not the United States dollar.
It also does not deal with holders other than original purchasers (except where
otherwise specifically noted). It also does not deal with state, local or
foreign law. Moreover, we have not requested a ruling from the IRS on the
consequences of owning the notes. As a result, the IRS could disagree with
portions of this discussion. Persons considering the purchase of the notes
should consult their own tax advisors concerning the application of United
States federal income tax laws to their particular situations as well as any
consequences of the purchase, ownership and disposition of the notes arising
under the laws of any other taxing jurisdiction.
BECAUSE THE EXACT PRICING AND OTHER TERMS OF THE NOTES WILL VARY, NO
ASSURANCE CAN BE GIVEN THAT THE CONSIDERATIONS DESCRIBED BELOW WILL APPLY TO A
PARTICULAR ISSUANCE OF THE NOTES.
As used herein, the term U.S. Holder means a beneficial owner of a note that
is for United States federal income tax purposes:
- a citizen or resident of the United States,
- a corporation, including an entity treated as a corporation for United
States federal income tax purposes, created or organized in or under the
laws of the United States, any state thereof or the District of Columbia,
or
- an estate or trust whose income is subject to United States federal income
tax regardless of its source.
As used herein, the term non-U.S. Holder means a beneficial owner of a note
that is not a U.S. Holder and is not a partnership.
If a partnership holds notes, the tax treatment of a partner will generally
depend upon the status of the partner and upon the activities of the
partnership. We suggest that any partner of a partnership holding notes consult
its tax advisor.
UNITED STATES HOLDERS
PAYMENTS OF INTEREST
Payments of interest on a note, other than interest on an Original Issue
Discount note that is not qualified stated interest, each as defined below,
generally will be taxable to a U.S. Holder as ordinary interest income at the
time such payments are accrued or are received, in accordance with the U.S.
Holder's regular method of tax accounting.
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ORIGINAL ISSUE DISCOUNT
The following summary is a general discussion of the United States federal
income tax consequences to U.S. Holders of the purchase, ownership and
disposition of notes issued with original issue discount (Original Issue
Discount notes). The following summary is based upon final Treasury regulations
(the OID Regulations) released by the Internal Revenue Service (IRS) under the
original issue discount provisions of the Internal Revenue Code of 1986, as
amended (the Code).
For United States federal income tax purposes, original issue discount is
the excess of the stated redemption price at maturity of a note over its issue
price, if such excess equals or exceeds a DE MINIMIS amount. This amount is
generally 1/4 of 1% of the note's stated redemption price at maturity multiplied
either by the number of complete years to its maturity from its issue date or,
in the case of a note providing for the payment prior to maturity of any amount
other than qualified stated interest, as defined below, multiplied by the
weighted average maturity of such note. The issue price of each note in an issue
of notes equals the first price at which a substantial amount of such notes has
been sold, ignoring sales to bond houses, brokers or similar persons or
organizations acting in the capacity of underwriters, placement agents or
wholesalers. The stated redemption price at maturity of a note is the sum of all
payments provided by the note other than qualified stated interest payments. The
term qualified stated interest generally means stated interest that is
unconditionally payable in cash or property, other than debt instruments of the
issuer, at least annually over the entire term of the note at a single fixed
rate or in certain cases, one or more floating rates that appropriately take
into account the length of the interval between stated interest payments.
Payments of qualified stated interest on a note are taxable to a U.S. Holder
as ordinary interest income at the time such payments are accrued or are
received, in accordance with the U.S. Holder's regular method of tax accounting.
A U.S. Holder of an Original Issue Discount note having a maturity of more than
one year from its date of issue must include original issue discount in income
as ordinary interest income for United States federal income tax purposes as it
accrues under a constant yield method in advance of receipt of the cash payments
attributable to such income, regardless of such U.S. Holder's regular method of
tax accounting. In general, the amount of original issue discount included in
income by the initial U.S. Holder of an Original Issue Discount note is the sum
of the daily portions of original issue discount with respect to such Original
Issue Discount note for each day during the taxable year (or portion of the
taxable year) on which such U.S. Holder held such Original Issue Discount note.
The daily portion of original issue discount on any Original Issue Discount note
is determined by allocating to each day in any accrual period a ratable portion
of the original issue discount allocable to that accrual period. An accrual
period may be of any length and the accrual periods may vary in length over the
term of the Original Issue Discount note, provided that each accrual period is
no longer than one year and each scheduled payment of principal or interest
occurs either on the final day of an accrual period or on the first day of an
accrual period. The OID Regulations contain certain rules that generally allow
any reasonable method to be used in determining the amount of original issue
discount allocable to a short initial accrual period (if all other accrual
periods are of equal length) and require that the amount of original issue
discount allocable to the final accrual period equal the excess of the amount
payable at the maturity of the Original Issue Discount note (other than any
payment of qualified stated interest) over the Original Issue Discount note's
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adjusted issue price as of the beginning of such final accrual period. The
amount of original issue discount allocable to each accrual period is generally
equal to the difference between:
- the product of the Original Issue Discount note's adjusted issue price at
the beginning of such accrual period and its yield to maturity (determined
on the basis of compounding at the close of each accrual period and
appropriately adjusted to take into account the length of the particular
accrual period) and
- the amount of any qualified stated interest payments allocable to such
accrual period.
The adjusted issue price of an Original Issue Discount note at the beginning
of any accrual period is the sum of the issue price of the Original Issue
Discount note plus the amount of original issue discount allocable to all prior
accrual periods minus the amount of any prior payments on the Original Issue
Discount note that were not qualified stated interest payments. Under these
rules, U.S. Holders generally will have to include in income increasingly
greater amounts of original issue discount in successive accrual periods.
If (1) a portion of the initial purchase price of a note is attributable to
interest that accrued prior to the note's issue date (pre-issuance accrued
interest), (2) the first stated interest payment on the note is to be made
within one year of the note's issue date and (3) such payment will equal or
exceed the amount of pre-issuance accrued interest, then the U.S. Holder may
elect to decrease the issue price of the note by the amount of pre-issuance
accrued interest, in which case a portion of the first stated interest payment
will be treated as a return of the excluded pre-issuance accrued interest and
not as an amount payable on the note.
ACQUISITION PREMIUM
A U.S. Holder who purchases an Original Issue Discount note for an amount
that is greater than its adjusted issue price as of the purchase date and less
than or equal to the sum of all amounts payable on the Original Issue Discount
note after the purchase date, other than payments of qualified stated interest,
will be considered to have purchased the Original Issue Discount note at an
acquisition premium. Under the acquisition premium rules, the amount of original
issue discount which such U.S. Holder must include in its gross income with
respect to such Original Issue Discount note for any taxable year or portion
thereof in which the U.S. Holder holds the Original Issue Discount note, will be
reduced, but not below zero, by the portion of the acquisition premium properly
allocable, on a constant yield basis, to the period.
OPTIONAL REDEMPTION
In the case of certain notes, we may have a call option to redeem the notes
prior to their stated maturity, or the holders of the notes may have a put
option to receive repayment prior to maturity. Notes containing such features
may be subject to rules that differ from the general rules discussed above. For
purposes of accruing original issue discount, a call option exercisable by us or
a put option exercisable by a holder will be presumed to be exercised if, by
utilizing any date on which the note may be redeemed or repaid as its maturity
date and the amount payable on that date in accordance with the terms of the
note (the redemption price) as its stated redemption price at maturity, the
yield on the note is:
- in the case of a call option exercisable by us, lower than its yield to
maturity in the absence of the exercise of such option, or
- in the case of a put option exercisable by a holder, greater than its
yield to maturity
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in the absence of the exercise of such option.
If such an option is not in fact exercised when presumed to be, the note
will be treated, solely for purposes of accruing original issue discount, as if
it were redeemed, and a new note issued, on the presumed exercise date for an
amount equal to its adjusted issue price on that date. Investors intending to
purchase notes with such features should consult their own tax advisors, since
the original issue discount consequences will depend, in part, on the particular
terms and features of the purchased notes.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT
U.S. Holders may generally, upon election, include in income all interest,
including stated interest, acquisition discount, original issue discount, DE
MINIMIS original issue discount, market discount, DE MINIMIS market discount,
and unstated interest, as adjusted by any amortizable bond premium or
acquisition premium, that accrues on a debt instrument by using the constant
yield method applicable to original issue discount, subject to certain
limitations and exceptions. This election applies only to the note for which it
is made and cannot be revoked without the consent of the IRS. A U.S. Holder
considering such an election should consult a tax advisor.
INFORMATION REPORTING
Because the notes will constitute publicly offered debt instruments as
defined by the OID Regulations, we are required to report to the IRS on
Form 8281, within 30 days after the issue date, certain information relating to
original issue discount with respect to each such issue. We will report annually
to the IRS and to each holder of record the amount of original issue discount
includable in the gross income of a Holder of notes for each calendar year
determined without regard to any acquisition premium paid by any holder, except
certain exempt holders, including corporations. Additional information reporting
requirements are discussed below under BACKUP WITHHOLDING.
SHORT-TERM NOTES
In the case of notes that have a fixed maturity of one year or less
(Short-Term notes) no interest will be qualified stated interest. The amount of
original issue discount is calculated in the same manner as described above,
taking this rule into account. In general, an individual or other cash method
U.S. Holder is not required to accrue such original issue discount unless the
U.S. Holder elects to do so. If such an election is not made, you are taxed when
you actually receive payments, and any gain recognized by the U.S. Holder on the
sale, exchange or maturity of the Short-Term note will be ordinary income to the
extent of the original issue discount accrued on a straight-line basis, or upon
such election, under the constant yield method based on daily compounding,
through the date of sale or maturity, and a portion of the deductions otherwise
allowable to the U.S. Holder for interest on borrowings allocable to the
Short-Term note will be deferred until a corresponding amount of income is
realized. U.S. Holders who report income for United States federal income tax
purposes under the accrual method, and certain other holders including banks and
dealers in securities, are required to accrue original issue discount on a
Short-Term note on a straight-line basis unless an election is made to accrue
the original issue discount under a constant yield method, based on daily
compounding.
MARKET DISCOUNT
If a U.S. Holder purchases a note, other than an Original Issue Discount
note, at original
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issue for an amount that is less than its issue price or, in the case of a
subsequent purchaser, its stated redemption price at maturity or, in the case of
an Original Issue Discount note, for an amount that is less than its adjusted
issue price as of the purchase date, such U.S. Holder will be treated as having
purchased such note at a market discount, unless such market discount is less
than a specified DE MINIMIS amount.
Under the market discount rules, a U.S. Holder will be required to treat any
partial principal payment or, in the case of an Original Issue Discount note,
any payment that does not constitute qualified stated interest on, or any gain
realized on the sale, exchange, retirement or other disposition of, a note as
ordinary income to the extent of the lesser of:
- the amount of such payment or realized gain, or
- the market discount which has not previously been included in income and
is treated as having accrued on such note at the time of such payment or
disposition.
Market discount will be considered to accrue ratably during the period from
the date of acquisition to the maturity date of the note, unless the U.S. Holder
elects (as described below) to accrue market discount on a constant yield basis.
A U.S. Holder may be required to defer the deduction of all or a portion of
the interest paid or accrued on any indebtedness incurred or maintained to
purchase or carry a note with market discount until the maturity of the note or
certain earlier dispositions, because a current deduction is only allowed to the
extent the interest expense exceeds an allocable portion of market discount. A
U.S. Holder may elect to include market discount in income currently as it
accrues on either a ratable or constant yield basis, in which case the rules
described above regarding the treatment as ordinary income of gain upon the
disposition of the note and upon the receipt of certain cash payments and
regarding the deferral of interest deductions will not apply. Generally, such
currently included market discount is treated as ordinary interest for United
States federal income tax purposes. Such an election will apply to all debt
instruments acquired by the U.S. Holder on or after the first day of the first
taxable year to which such election applies and may be revoked only with the
consent of the IRS.
PREMIUM
If a U.S. Holder purchases a note for an amount that is greater than the sum
of all amounts payable on the note after the purchase date, other than payments
of qualified stated interest, such U.S. Holder will be considered to have
purchased the note with amortizable bond premium equal in amount to such excess.
In the case of a note that may be optionally redeemed prior to maturity,
however, the amount of amortizable bond premium is determined by substituting
the first date on which the debt instrument may be redeemed (the redemption
date) for the maturity date and the applicable redemption price on the
redemption date for the amount payable at maturity if the result would increase
the holder's yield to maturity (i.e., result in a smaller amount of amortizable
bond premium properly allocable to the period before the redemption date). If
the issuer does not in fact exercise its right to redeem the note on the
applicable redemption date, the note will be treated (for purposes of the
amortizable bond premium rules) as having matured and then as having been
reissued for the holder's adjusted acquisition price, which is an amount equal
to the holder's basis in the debt instrument (as determined under Treasury
regulations governing amortizable bond premium), less the sum of:
- any amortizable bond premium allocable to prior accrual periods and
S-23
- any payments previously made on the note other than payments of qualified
stated interest.
The note deemed to have been reissued will again be subject to the
amortizable bond premium rules with respect to the remaining dates on which it
is redeemable.
A U.S. Holder must make an election to amortize bond premium on a debt
instrument. Once made, the election applies to all taxable debt instruments then
owned and thereafter acquired by the U.S. Holder on or after the first day of
the taxable year to which such election applies, and may be revoked only with
the consent of the IRS. In general, a holder amortizes bond premium by
offsetting the qualified stated interest allocable to an accrual period with the
bond premium allocable to the accrual period, which is determined under a
constant yield method. If the bond premium allocable to an accrual period
exceeds the qualified stated interest allocable to such period, the excess is
treated by the holder as a bond premium deduction. The bond premium deduction
for each accrual period is limited to the amount by which the holder's total
interest inclusions on the debt instrument in prior accrual periods exceed the
total amount treated by such holder as a bond premium deduction on the debt
instrument in prior accrual periods. Any amounts not deductible in an accrual
period may be carried forward to the next accrual period and treated as bond
premium allocable to that period.
DISPOSITION OF A NOTE
Except as discussed above, upon the sale, exchange or retirement of a note,
a U.S. Holder generally will recognize taxable gain or loss equal to the
difference between the amount realized on the sale, exchange or retirement,
other than amounts representing accrued and unpaid interest, and such U.S.
Holder's adjusted tax basis in the note. However, if a U.S. Holder sells its
note between interest payment dates, the portion of the amount received that
reflects accrued but unpaid interest will be treated as ordinary interest income
and not as sale proceeds. A U.S. Holder's adjusted tax basis in a note generally
will equal such U.S. Holder's initial investment in the note increased by any
original issue discount included in income and accrued market discount, if any,
if the U.S. Holder has included such market discount in income and decreased by
the amount of any payments, other than qualified stated interest payments,
received and amortizable bond premium taken with respect to such note. Such gain
or loss generally will be long-term capital gain or loss if the note is held for
more than the applicable holding period. Non-corporate taxpayers are generally
subject to reduced maximum rates on long-term capital gains and are generally
subject to tax at ordinary income rates on short-term capital gains. The
deductibility of capital losses is subject to certain limitations. Prospective
investors should consult their own tax advisors concerning these tax law
provisions.
INTEGRATION OF NOTES WITH HEDGES
The OID Regulations generally provide that, if a Holder of a note hedges the
note with a financial instrument and the combined cash flows under the note and
the financial instrument are substantially equivalent to the cash flows on a
fixed or variable rate debt instrument, the note and the financial instrument
may be taxed as an integrated transaction by treating the positions as a
synthetic debt instrument. Such treatment applies if the taxpayer identifies the
positions as part of an integrated transaction on its books and records and
certain other requirements are satisfied. In addition, the IRS can require the
positions to be taxed as an integrated transaction under certain circumstances.
U.S. Holders should consult their
S-24
tax advisors regarding the possible application of these rules to the notes.
NON-U.S. HOLDERS
Subject to the discussion below under BACKUP WITHHOLDING, a non-U.S. Holder
will generally not be subject to United States withholding taxes on payments of
principal, premium, if any, or interest, including original issue discount, if
any, on a note, unless such non-U.S. Holder actually or constructively owns 10%
or more of the total combined voting power of all classes of our stock entitled
to vote, is a controlled foreign corporation related to us through stock
ownership or is a bank receiving interest described in section 881(c)(3)(A) of
the Code. However, to qualify for the exemption from withholding, the non-U.S.
Holder must meet one of the following requirements.
- It provides a completed Form W-8BEN (or substitute form) to the bank,
broker or other intermediary through which it holds its notes. The
Form W-8BEN contains the non-U.S. Holder's name, address and a statement
that it is the beneficial owner of the notes and that it is not a U.S.
Holder,
- It holds its notes directly through a "qualified intermediary", and the
qualified intermediary has sufficient information in its files indicating
that the non-U.S. Holder is not a U.S. Holder. A qualified intermediary is
a bank, broker or other intermediary that (1) is either a U.S. or non-U.S.
entity, (2) is acting out of a non-U.S. branch or office and (3) has
signed an agreement with the IRS providing that it will administer all or
part of the U.S. tax withholding rules under specified procedures, or
- It is entitled to an exemption from withholding tax or interest under a
tax treaty between the U.S. and its country of residence. To claim this
exemption, the non-U.S. Holder must generally complete Form W-8BEN and
fill out Part II of the form to state its claim for treaty benefits. In
some cases, the non-U.S. Holder may instead be permitted to provide
documentary evidence of its claim to the intermediary, or a qualified
intermediary may already have some or all of the necessary evidence in its
files.
Even if the non-U.S. Holder meets one of the above requirements, interest
paid to it will be subject to withholding tax under any of the following
circumstances:
- The withholding agent or an intermediary knows or has reason to know that
the non-U.S. Holder is not entitled to an exemption from withholding tax.
Specific rules apply for this test.
- The IRS notifies the withholding agent that information that the non-U.S.
Holder or an intermediary provided concerning the non-U.S. Holder's status
is false.
- An intermediary through which the non-U.S. Holder holds the notes fails to
comply with the procedures necessary to avoid withholding taxes on the
notes. In particular, an intermediary is generally required to forward a
copy of the non-U.S. Holder's Form W-8BEN (or other documentary
information concerning the non-U.S. Holder's status) to the withholding
agent for the notes. However if the non-U.S. Holder holds its notes
through a qualified intermediary--or if there is a qualified intermediary
in the chain of title between the non-U.S. Holder and the withholding
agent for the notes--the qualified intermediary will not generally forward
this information to the withholding agent.
S-25
Interest payments made to a non-U.S. Holder will generally be reported to
the IRS and to the non-U.S. Holder on Form 1042-S. However, this reporting does
not apply to the non-U.S. Holder if one of the following conditions applies:
- It holds its notes directly through a qualified intermediary and the
applicable procedures are complied with.
- It files Form W-8ECI.
The rules regarding withholding are complex and vary depending on a non-U.S.
Holder's individual situation. They are also subject to change. In addition,
special rules apply to certain types of non-U.S. Holders of notes, including
partnerships, trusts, and other entities treated as pass-through entities for
U.S. federal income tax purposes. We suggest that a non-U.S. Holder consult its
tax advisor regarding the specific methods for satisfying these requirements.
Notwithstanding the foregoing, a non-U.S. Holder generally will be taxed in
the same manner as a U.S. Holder with respect to interest income that is
effectively connected with a U.S. trade or business of the non-U.S. Holder,
except to the extent that an applicable tax treaty provides otherwise. Under
certain circumstances, effectively connected interest income of a corporate
non-U.S. Holder may be subject to an additional branch profits tax at a 30% rate
(or, if applicable, a lower treaty rate). Even though effectively connected
interest income is subject to U.S. federal income tax, and may be subject to the
branch profits tax, it is not subject to withholding tax if it is not exempt
from U.S. tax under a tax treaty and the non-U.S. Holder properly completes IRS
Form W-8ECI.
Generally, a non-U.S. Holder will not be subject to federal income taxes on
any amount which constitutes capital gain upon retirement or disposition of a
note, provided none of the following apply: (1) the gain is effectively
connected with the conduct of a trade or business in the United States by the
non-U.S. Holder; (2) the non-U.S. Holder is an individual, it is present in the
U.S. for at least 183 days during the year in which it disposes of the note, and
certain other conditions are satisfied; or (3) the gain represents accrued
interest or original issue discount, in which case the rules for interest would
apply.
The notes will not be includable in the estate of a non-U.S. Holder unless
at the time of death such individual actually or constructively owned 10% or
more of the total combined voting power of all classes of our stock entitled to
vote, or payments in respect of the notes would have been effectively connected
with the conduct by such individual of a trade or business in the United States.
BACKUP WITHHOLDING
Backup withholding of United States federal income tax at a rate of up to
31% may apply to payments made in respect of the notes to registered owners who
are not exempt recipients and who fail to provide certain identifying
information, such as the registered owner's taxpayer identification number, in
the required manner. Generally, individuals are not exempt recipients, whereas
corporations and certain other entities generally are exempt recipients.
Information concerning payments made in respect of the notes must be reported to
the IRS and to the registered owner on IRS Form 1099, unless the registered
owner is an exempt recipient or establishes an exemption. In the case of the
non-U.S. Holders, compliance with the procedures required to qualify for an
exemption from United Sates withholding taxes, as described in the preceding
section, would also establish an exemption from backup withholding and from such
reporting of information. However, this exemption does not apply if the
withholding agent or an intermediary knows or
S-26
has reason to know that the non-U.S. Holder should be subject to the usual
information reporting and backup withholding rules. In addition, as described
above, interest payments made to a non-U.S. Holder may be reported to the IRS on
Form 1042-S.
In addition, upon the sale of a note to or through a United States broker or
a broker with certain connections to the United States, the broker must withhold
up to 31% of the entire purchase price, unless either:
- the broker determines that the seller is a corporation or other exempt
recipient or
- the seller provides, in the required manner, certain identifying
information and, in the case of a non-U.S. Holder, certifies that such
seller is a non-U.S. Holder and certain other conditions are met.
Such a sale must also be reported by the broker to the IRS, unless either:
- the broker determines that the seller is an exempt recipient or
- the seller certifies its non-U.S. status and certain other conditions are
met.
Certification of the registered owner's non-U.S. status would be made
normally on an IRS Form W-8BEN under penalties of perjury, although in certain
cases it may be possible to submit other documentary evidence.
Any amounts withheld under the backup withholding rules from a payment to a
beneficial owner would be allowed as a refund or a credit against such
beneficial owner's United States federal income tax provided the required
information is furnished to the IRS.
POSSIBLE EUROPEAN UNION REQUIREMENTS
The European Union is currently considering proposals for a new directive
regarding the taxation of savings income. Subject to a number of important
conditions being met, it is proposed that, if interest or other similar income
is paid by a person within the jurisdiction of one member state to an individual
resident in another member state, the former member state will be required to
provide the latter member state with information concerning such payment.
However, certain member states would be permitted to elect not to provide such
information but instead to impose withholding tax on such payments for a
transitional period of time.
The European Union has not yet made a decision to adopt these requirements.
Even if it does so, it is not clear what the effective date will be. We advise
holders of notes to consult their tax advisors about the possible implications
of these requirements.
SUPPLEMENTAL PLAN OF
DISTRIBUTION
Under the terms of the Selling Agent Agreement, dated as of June 28, 2002,
the notes are offered from time to time by us through ABN AMRO Financial
Services, Inc., A.G. Edwards & Sons, Inc., Edward Jones & Co., L.P., Fidelity
Capital Markets (a division of National Financial Services LLC), Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated,
Prudential Securities, Salomon Smith Barney Inc., Charles Schwab & Co., Inc.,
and UBS PaineWebber Inc., as agents thereunder. The agents have agreed to use
their reasonable best efforts to solicit purchases of the notes. We may appoint
S-27
additional agents to solicit offers to purchase notes on terms substantially
identical to those contained in the Agency Agreement. In addition, under certain
circumstances we may sell notes directly on our own behalf to investors without
the assistance of agents. The agents will not be entitled to any discounts or
commissions for sales we make directly to investors without their assistance.
We will pay the agents, through ABN AMRO Financial Services, Inc., a
commission to be divided among the agents as they shall agree for notes sold
through the agents on an agency basis. The commission will range from .20% to
2.50% of the principal amount for each note sold, depending upon the maturity of
the note. Commissions with respect to notes with maturities in excess of
30 years will be negotiated between us and the purchasing agent at the time of
sale. We will have the sole right to accept offers to purchase notes and may
reject any proposed purchase of notes in whole or in part. Each agent will have
the right, in its discretion reasonably exercised, to reject any proposed
purchase of notes in whole or in part received by it on an agency basis. We
reserve the right to withdraw, cancel or modify the offer without notice.
Following the solicitation of orders, the agents, severally and not jointly,
may purchase notes from us through the purchasing agent as principal for their
own accounts. Unless otherwise set forth in the applicable pricing supplement,
any note sold to an agent as principal will be purchased by the purchasing agent
from us at a discount to the principal amount not to exceed the concession
applicable to an agency sale of a note of identical maturity. Unless otherwise
set forth in the applicable pricing supplement, such notes will be resold to one
or more investors and other purchasers at a fixed public offering price.
In addition, the purchasing agent may, and with our consent the other agents
may, offer the notes they have purchased as principal to other dealers that are
part of the selling group. The purchasing agent may sell notes to other dealers
at a discount not in excess of the discount it receives when purchasing such
notes from us. And, if with our consent the other agents sell notes to dealers,
unless otherwise specified in the applicable pricing supplement, the discount
allowed to any dealer will not, during the distribution of the notes, exceed the
discount received by such agent from the purchasing agent. After the initial
public offering of notes to be resold by an agent to investors, the public
offering price (in the case of notes to be resold at a fixed public offering
price), concession and discount may be changed.
Each agent may be deemed to be an underwriter within the meaning of the
Securities Act of 1933. We have agreed to indemnify the agents against certain
liabilities, including liabilities under the Securities Act of 1933.
No note will have an established trading market when issued. We do not
intend to apply for the listing of the notes on any securities exchange, but we
have been advised by the agents that the agents intend to make a market in the
notes as permitted by applicable laws and regulations. The agents are not
obligated to do so, however, and the agents may discontinue making a market at
any time without notice. No assurance can be given as to the liquidity of any
trading market for any notes. All secondary trading in the notes will settle in
immediately available funds. See BOOK-ENTRY SYSTEM in this prospectus
supplement.
In connection with an offering of the notes, the rules of the SEC permit the
purchasing agent to engage in certain transactions that stabilize the price of
the notes. Such transactions may consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the
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notes. If the purchasing agent creates a short position in the notes in
connection with an offering of the notes (i.e. if it sells a larger principal
amount of the notes than is set forth on the cover page of the applicable
pricing supplement), the purchasing agent may reduce that short position by
purchasing notes in the open market. In general, purchases of a security for the
purpose of stabilization or to reduce a syndicate short position could cause the
price of the security to be higher than it might otherwise be in the absence of
such purchases. The purchasing agent makes no representation or prediction as to
the direction or magnitude of any effect that the transactions described above
may have on the price of the notes. In addition, the purchasing agent makes no
representation that, once commenced, such transactions will not be discontinued
without notice.
Other selling group members include broker-dealers and other securities
firms that have executed dealer agreements with ABN AMRO Financial
Services, Inc., as purchasing agent. In the dealer agreements, the selling group
members have agreed to market and sell notes in accordance with the terms of
those agreements and all applicable laws and regulations. You may call
1-800-327-1546 for a list of selling group members.
The agents and their affiliates may engage in various general financing and
banking transactions with us and our affiliates in the ordinary course of
business.
LEGAL OPINIONS
Opinions regarding the validity of the notes being offered will be issued
for us by Stuart S. Moskowitz, Senior Counsel of the Company, and for the agents
by Davis Polk & Wardwell, New York, New York. Mr. Moskowitz owns, has options to
purchase and has other interests in shares of common stock of IBM.
In the opinions described above, assumptions will be made regarding future
action required to be taken by us and the appropriate trustee in connection with
the issuance and sale of any particular notes, the specific terms of those notes
and other matters which may affect the validity of those notes but which cannot
be ascertained on the date of the relevant opinion.
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PROSPECTUS
INTERNATIONAL BUSINESS MACHINES CORPORATION
NEW ORCHARD ROAD
ARMONK, NEW YORK 10504
(914) 499-1900
$12,107,437,190
DEBT SECURITIES
PREFERRED STOCK
DEPOSITARY SHARES
CAPITAL STOCK
WARRANTS
------------------
WE WILL PROVIDE SPECIFIC TERMS OF THESE SECURITIES
IN SUPPLEMENTS TO THIS PROSPECTUS.
YOU SHOULD READ THIS PROSPECTUS AND ANY SUPPLEMENT CAREFULLY
BEFORE YOU INVEST.
------------------------
These securities have not been approved by the Securities and Exchange
Commission or any state securities commission, nor have these organizations
determined that this prospectus is accurate or complete. Any representation to
the contrary is a criminal offense.
The date of this prospectus is June 20, 2000.
TABLE OF CONTENTS
PAGE
--------
Summary..................................................... 3
Ratios of Earnings to Fixed Charges and Earnings to Combined
Fixed Charges and Preferred Stock Dividends................ 4
Where You Can find More Information......................... 5
Description of The Company.................................. 6
Use of Proceeds............................................. 6
Description of The Debt Securities.......................... 6
Description of the Preferred Stock.......................... 19
Description of the Depositary Shares........................ 21
Description of the Capital Stock............................ 24
Description of the Warrants................................. 24
Plan of Distribution........................................ 25
Legal Opinions.............................................. 26
Experts..................................................... 26
SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand the terms
of our securities, you should carefully read this document with the attached
prospectus supplement. Together these documents will give the specific terms of
the securities we are offering. You should also read the documents we have
incorporated by reference into this prospectus for information on us and our
financial statements. Certain capitalized terms used in this summary are defined
elsewhere in this prospectus.
THE SECURITIES WE MAY OFFER
This prospectus is part of a registration statement (No. 333-37034) that we
filed with the SEC utilizing a "shelf" registration process. Under this shelf
process, we may offer from time to time up to $12,107,437,190 of any of the
following securities, either separately or in units: DEBT, PREFERRED STOCK,
DEPOSITARY SHARES, CAPITAL STOCK AND WARRANTS. This prospectus provides you with
a general description of the securities we may offer. Each time we offer
securities, we will provide you with a prospectus supplement that will describe
the specific amounts, prices and terms of the securities being offered. The
prospectus supplement may also add, update or change information contained in
this prospectus.
DEBT SECURITIES
We may offer unsecured general obligations of our company, which may be
senior or subordinate. The senior debt securities and the subordinated debt
securities are together referred to in this prospectus as the "debt securities".
The senior debt securities will have the same rank as all of our other
unsecured, unsubordinated debt. The subordinated debt securities will be
entitled to payment only after payment on our senior indebtedness. Senior
indebtedness includes all indebtedness for money borrowed by us, except
indebtedness that is stated to be not superior to, or to have the same rank as,
the subordinated debt securities. In addition, the subordinated debt securities
will be effectively subordinated to creditors and preferred stockholders of our
subsidiaries.
The senior debt securities will be issued under an indenture between us and
The Chase Manhattan Bank, as the trustee. The subordinated debt securities will
be issued under an indenture between us and the trustee we name in the
prospectus supplement. We have summarized general features of the debt
securities from the indentures. We encourage you to read the indentures which
are exhibits to the registration statement and our recent periodic and current
reports that we file with the SEC.
GENERAL INDENTURE PROVISIONS THAT APPLY TO SENIOR AND SUBORDINATED DEBT
SECURITIES
Neither indenture limits the amount of debt that we may issue. In addition,
neither indenture provides holders any protection should there be a
recapitalization or restructuring involving our company.
The indentures allow us to merge or consolidate with another company, or to
sell all or most of our assets to another company. If these events occur, the
other company will be required to assume our responsibilities relating to the
debt securities, and we will be released from all liabilities and obligations.
The indentures provide that holders of a majority of the outstanding
principal amount of any series of debt securities may vote to change our
obligations or your rights concerning that series. However, to change the amount
or timing of principal, interest or other payments under the debt securities,
every holder in the series must consent.
We may discharge our obligations under the indenture relating to the senior
debt securities
3
by depositing with the trustee sufficient funds or government obligations to pay
the senior debt securities when due.
EVENTS OF DEFAULT. Each indenture provides that the following are events of
default:
- If we do not pay interest for 30 days after its due date.
- If we do not pay principal or premium when due.
- If we do not make any sinking fund payment for 30 days after its due date.
- If we continue to breach a covenant for 90 days after notice.
- If we enter bankruptcy or become insolvent.
If an event of default occurs under any series of debt securities, the
trustee or holders of 25% of the outstanding principal amount of that series may
declare the principal amount of the series immediately payable. However, holders
of a majority of the principal amount may rescind this action.
GENERAL INDENTURE PROVISIONS THAT APPLY ONLY TO SENIOR DEBT SECURITIES
The indenture relating to the senior debt securities contains covenants
restricting our ability to incur secured indebtedness and enter into sale and
leaseback transactions.
GENERAL INDENTURE PROVISIONS THAT APPLY ONLY TO SUBORDINATED DEBT SECURITIES
The subordinated debt securities will be subordinated to all senior
indebtedness. In addition, claims of our subsidiaries' creditors and preferred
stockholders generally will have priority with respect to the subsidiaries'
assets and earnings over the claims of our creditors, including holders of the
subordinated debt securities. The subordinated debt securities, therefore, will
be effectively subordinated to creditors and preferred stockholders of our
subsidiaries.
The indenture relating to the subordinated debt securities does not provide
holders any protection in the event of a highly leveraged transaction.
PREFERRED STOCK AND DEPOSITARY SHARES
We may issue our preferred stock, par value $0.01 per share, in one or more
series. Our Board of Directors will determine the dividend, voting, conversion
and other rights of the series being offered and the terms and conditions
relating to its offering and sale at the time of the offer and sale. We may also
issue fractional shares of preferred stock that will be represented by
depositary shares and depositary receipts.
CAPITAL STOCK
We may issue our capital stock, par value $0.20 per share. Holders of
capital stock are entitled to receive dividends if and when those dividends are
declared by our Board of Directors, subject to rights of preferred stockholders.
Each holder of capital stock is entitled to one vote per share. The holders of
capital stock have no preemptive rights or cumulative voting rights.
WARRANTS
We may issue warrants for the purchase of debt securities, preferred stock
or capital stock. We may issue warrants independently or together with other
securities.
RATIOS OF EARNINGS TO FIXED CHARGES AND EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
The ratio of earnings to fixed charges and the ratio of earnings to combined
fixed charges
4
and preferred stock dividends for each of the periods indicated are as follows:
THREE
MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- -------- --------
Ratio of earnings to
fixed charges.......... 5.71 5.37 7.0 5.3 5.4 5.3 5.0
Ratio of earnings to
combined fixed charges
and preferred stock
dividends.............. 5.63 5.29 6.9 5.3 5.4 5.3 4.9
We compute the ratio of earnings to fixed charges by dividing earnings,
which includes income before taxes and fixed charges, by fixed charges. This
calculation excludes the effects of accounting changes which have been made over
time. We compute the ratio of earnings to combined fixed charges and preferred
stock dividends by dividing earnings by the sum of fixed charges and dividends
on preferred stock. For purposes of calculating this ratio, the preferred stock
dividend requirements were assumed to be equal to the pre-tax earnings that
would be required to cover such dividend requirements based on our effective
income tax rates for the respective periods. "Fixed charges" consist of interest
on debt and a portion of rentals determined to be representative of interest.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference room in Washington, D.C. Please call the SEC at
1-800-SEC-0330 for further information on their public reference room. Our SEC
filings are also available to the public at the SEC's web site at
(http://www.sec.gov).
The SEC allows us to "incorporate by reference" into this prospectus the
information we file with it. This 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, 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 Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 until our offering is completed:
i. Annual Report on Form 10-K for the year ended December 31, 1999;
ii. Quarterly report on Form 10-Q for the quarter ended March 31, 2000; and
iii. Current Reports on Form 8-K, filed on January 20, 2000, April 13, 2000,
April 19, 2000 and May 5, 2000.
We encourage you to read our periodic and current reports. Not only do we
think these items are interesting reading, we think these reports provide
additional information about our company which prudent investors find important.
You may request a copy of these filings at no cost, by writing to or telephoning
our transfer agent at the following address:
EquiServe, the First Chicago Trust Division
Mail Suite 4688
P.O. Box 2530
Jersey City, New Jersey 07303-2530
(201) 324-0405
You should rely only on the information incorporated by reference or
provided in this prospectus or any prospectus supplement. We have not authorized
anyone else to provide you with different information. We are not making an
offer of these securities in any state where the offer is not permitted. You
should not assume that the information in this prospectus or any prospectus
supplement is accurate as of any date other than the date on the front of the
document.
5
DESCRIPTION OF THE COMPANY
We were originally incorporated in the State of New York on June 16, 1911,
as the Computing-Tabulating-Recording Co. (C-T-R). C-T-R was a consolidation of
the Computing Scale Co. of America, the Tabulating Machine Co., and The
International Time Recording Co. of New York. In 1924, C-T-R adopted the name
International Business Machines Corporation, also known more simply as IBM.
We use advanced information technology to provide customer solutions. We
operate primarily in a single industry using several segments that create value
by offering a variety of solutions that include, either singularly or in some
combination, technologies, systems, products, services, software and financing.
Organizationally, our major operations comprise three hardware products
segments--Technology, Personal Systems and Enterprise Systems; a Global Services
segment; a Software segment; a Global Financing segment and an Enterprise
Investment segment. The segments are determined based on several factors,
including customer base, homogeneity of products, technology and delivery
channels.
We offer our products through our global sales and distribution
organization. The sales and distribution organization has both a geographic
focus (in the Americas, Europe/Middle East/ Africa, and Asia Pacific) and a
specialized and global industry focus. In addition, this organization includes a
global sales and distribution effort devoted exclusively to small and medium
businesses. We also offer our products through a variety of third party
distributors and resellers, as well as through our on-line channels.
USE OF PROCEEDS
Unless we otherwise specify in the applicable prospectus supplement, the net
proceeds we receive from the sale of the securities offered by this prospectus
and the accompanying prospectus supplement will be used for general corporate
purposes. General corporate purposes may include the repayment of debt,
investments in or extensions of credit to our subsidiaries, redemption of
preferred stock, or the financing of possible acquisitions or business
expansion. The net proceeds may be invested temporarily or applied to repay
short-term debt until they are used for their stated purpose.
DESCRIPTION OF THE DEBT SECURITIES
The following description of the terms of the debt securities sets forth
general terms that may apply to the debt securities. The particular terms of any
debt securities will be described in the prospectus supplement relating to those
debt securities.
The debt securities will be either our senior debt securities or our
subordinated debt securities. The senior debt securities will be issued under an
indenture dated as of October 1, 1993, as supplemented on December 15, 1995,
between us and The Chase Manhattan Bank, as trustee. This indenture is referred
to as the "senior indenture". The subordinated debt securities will be issued
under an indenture to be entered into between us and the trustee named in a
prospectus supplement. This indenture is referred to as the "subordinated
indenture". The senior indenture and the subordinated indenture are together
called the "indentures".
The following is a summary of the most important provisions of the
indentures. Copies of the entire indentures are exhibits to the registration
statement of which this prospectus is a part. Section references below are to
the section in the applicable indenture. The referenced sections of the
indentures are incorporated by reference. We encourage you to read our
indentures.
6
GENERAL
Neither indenture limits the amount of debt securities that we may issue.
Each indenture provides that debt securities may be issued up to the principal
amount authorized by us from time to time. The senior debt securities will be
unsecured and will have the same rank as all of our other unsecured and
unsubordinated debt. The subordinated debt securities will be unsecured and will
be subordinated and junior to all senior indebtedness.
The debt securities may be issued in one or more separate series of senior
debt securities and/or subordinated debt securities. The prospectus supplement
relating to the particular series of debt securities being offered will specify
the particular amounts, prices and terms of those debt securities. These terms
may include:
- the title of the debt securities;
- any limit upon the aggregate principal amount of the debt securities;
- the maturity date or dates, or the method of determining the maturity
dates;
- the interest rate or rates, or the method of determining those rates;
- the interest payment dates and, for debt securities in registered form,
the regular record dates;
- the places where payments may be made;
- any mandatory or optional redemption provisions;
- any sinking fund or analogous provisions;
- any conversion or exchange provisions;
- any terms for the attachment to the debt securities of warrants, options
or other rights to purchase or sell our securities;
- the portion of principal amount of the debt security payable upon
acceleration of maturity if other than the full principal amount;
- any deletions of, or changes or additions to, the events of default or
covenants;
- if other than U.S. dollars, the currency or currencies, including the euro
and other composite currencies, in which payments on the debt securities
will be payable and whether the holder may elect payment to be made in a
different currency;
- the method of determining the amount of any payments on the debt
securities which are linked to an index;
- whether the debt securities will be issued in fully registered form
without coupons or in bearer form, with or without coupons, or any
combination of these, and whether they will be issued in the form of one
or more global securities in temporary or definitive form;
- any terms relating to the delivery of the debt securities if they are to
be issued upon the exercise of warrants;
- whether and on what terms we will pay additional amounts to holders of the
debt securities that are not U.S. persons for any tax, assessment or
governmental charge withheld or deducted and, if so, whether and on what
terms we will have the option to redeem the debt securities rather than
pay the additional amounts; and
- any other specific terms of the debt securities.
(Sections 202 and 301)
Unless we otherwise specify in the prospectus supplement:
- the debt securities will be registered debt securities;
- registered debt securities denominated in U.S. dollars will be issued in
denominations of $1,000 or an integral multiple of $1,000; and
7
- bearer debt securities denominated in U.S. dollars will be issued in
denominations of $5,000.
Debt securities may bear legends required by United States Federal tax law
and regulations. (Section 401)
If any of the debt securities are sold for any foreign currency or currency
unit, or if any payments on the debt securities are payable in any foreign
currency or currency unit, the prospectus supplement will contain any
restrictions, elections, tax consequences, specific terms and other information
relating to the debt securities and the foreign currency or currency unit.
Some of the debt securities may be issued as original issue discount debt
securities. Original issue discount securities bear no interest or bear interest
at below-market rates. These are sold at a discount below their stated principal
amount. If we issue these securities, the prospectus supplement will describe
any special tax, accounting or other information which we think is important.
EXCHANGE, REGISTRATION AND TRANSFER
Debt securities may be transferred or exchanged at the corporate trust
office of the security registrar or at any other office or agency which is
maintained for these purposes. No service charge will be payable upon the
transfer or exchange, except for any applicable tax or governmental charge.
The designated security registrar in the United States for the senior debt
securities is The Chase Manhattan Bank, located at 450 West 33rd Street, New
York, New York 10001. The security registrar for the subordinated debt
securities will be designated in a prospectus supplement.
If debt securities are issuable in both registered and bearer form, the
bearer securities will be exchangeable for registered securities. If a bearer
security with related coupons is surrendered in exchange for a registered
security between a record date and the date set for the payment of interest, the
bearer security will be surrendered without the coupon relating to that interest
payment. That interest payment will be made only to the holder of the coupon
when due.
In the event of any redemption in part of any series of debt securities, we
will not be required to:
- issue, register the transfer of, or exchange, debt securities of any
series between the opening of business 15 business days before any
selection of debt securities of that series to be redeemed and the close
of business on:
- the day of mailing of the relevant notice of redemption (if debt
securities of the series are issuable only in registered form), and
- the day of the first publication of the relevant notice of redemption
(if the debt securities of the series are issuable in bearer form) or,
- the day of mailing of the relevant notice of redemption (if the debt
securities of the series are issuable in bearer and registered form)
and there is no publication;
- register the transfer of, or exchange, any registered security selected
for redemption, in whole or in part, except the unredeemed portion of any
registered security being redeemed in part; or
- exchange any bearer security selected for redemption, except to exchange
it for a registered security which is simultaneously surrendered for
redemption.
(Section 404)
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PAYMENT AND PAYING AGENT
We will pay principal, interest and any premium on fully registered
securities in the designated currency or currency unit at the office of the
paying agent. Payment of interest on fully registered securities may be made by
check mailed to the persons in whose names the debt securities are registered on
days specified in the indentures or any prospectus supplement. (Sections 406 and
410)
We will pay principal, interest and any premium on bearer securities in the
designated currency or currency unit at the office of the paying agent or agents
outside of the United States. Payments will be made at the offices of the paying
agent in the United States only if the designated currency is U.S. dollars and
payment outside of the United States is illegal or effectively precluded.
(Sections 410 and 1102)
If any amount payable on any debt security or coupon remains unclaimed at
the end of two years after the amount became due and payable, the paying agent
will release any unclaimed amounts to us. (Section 1103)
Our paying agent in the United States for the senior debt securities is The
Chase Manhattan Bank, located at 450 West 33rd Street, New York, New York 10001.
If and when we issue subordinated debt securities, we'll designate the paying
agent for those subordinated debt securities in the applicable prospectus
supplement.
GLOBAL SECURITIES
The debt securities of a series may be issued in whole or in part in the
form of one or more global certificates. Those certificates will be deposited
with a depositary that we will identify in a prospectus supplement. Global debt
securities may be issued in either registered or bearer form and can be in
either temporary or definitive form. All global securities in bearer form will
be deposited with a depositary outside of the United States. We will describe
the specific terms of the depositary arrangement relating to a series of debt
securities in the prospectus supplement.
Other than for payments, we can treat a person having a beneficial interest
in a definitive global security as the holder of the principal amount of
outstanding debt securities represented by the global security. For these
purposes, we can rely upon a written statement delivered to the trustee by the
holder of the definitive global security, or, in the case of a definitive global
security in bearer form, by Morgan Guaranty Trust Company of New York, Brussels
office, as operator of the Euroclear System, and Clearstream Banking, societe
anonyme (Clearstream, Luxembourg). (Section 411)
Neither we, the trustee nor any of our respective agents will be responsible
for any aspect of the records relating to or payments made on account of
beneficial ownership interests in a global security or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests. (Section 411)
Unless we otherwise specify in a prospectus supplement, we anticipate that
the following provisions will apply to our depositary arrangements:
TEMPORARY GLOBAL SECURITIES
All or any portion of the debt securities of a series that are issuable in
bearer form initially may be represented by one or more temporary global
securities, without interest coupons. The temporary global securities will be
deposited with a depositary in London for Euroclear and Clearstream for credit
to the accounts of the beneficial owners of the debt securities or to such other
accounts as they may direct.
On and after an exchange date provided in the applicable prospectus
supplement, each temporary global security will be exchangeable
9
for definitive debt securities in bearer form, registered form, definitive
global bearer form or a combination of these, as will be specified in the
prospectus supplement.
No bearer security delivered in exchange for a portion of a temporary global
security will be mailed or delivered to any location in the United States.
(Sections 402 and 403)
Interest on a temporary global security will be paid to Euroclear and/or
Clearstream for the portion held for its account only after a certificate is
delivered to the trustee stating that the portion:
- is not beneficially owned by a United States person;
- has not been acquired by or on behalf of a United States person or for
offer to resell or for resale to a United States person or any person
inside the United States; or
- if a beneficial interest has been acquired by a United States person,
that:
- such person is a financial institution (as defined in the Internal
Revenue Code), purchasing for its own account or has acquired the debt
security through a financial institution; and
- that the debt securities are held by a financial institution that has
agreed in writing to comply with the requirements of Section
165(j)(3)(A), (B) or (C) of the Internal Revenue Code and the
regulations thereunder, and that it did not purchase for resale inside
the United States.
The certificate must be based on statements provided by the beneficial
owners of interests in the temporary global security. Each of Euroclear and
Clearstream will credit the interest received by it to the accounts of the
beneficial owners of the debt security, or to other accounts as they may direct.
(Section 403)
DEFINITIVE GLOBAL SECURITIES
BEARER SECURITIES. The applicable prospectus supplement will describe the
exchange provisions, if any, of debt securities issuable in definitive global
bearer form. We will not deliver any bearer securities in exchange for a portion
of a definitive global security to any location in the United States. (Section
404)
U.S. BOOK-ENTRY SECURITIES. Debt securities of a series represented by a
definitive global registered security and deposited with or on behalf of a
depositary in the United States will be registered in the name of the depositary
or its nominee. These securities are referred to as "book-entry securities".
When a global security is issued and deposited with the depositary, the
depositary will credit, on its book-entry registration and transfer system, the
respective principal amounts represented by that global security to the accounts
of institutions that have accounts with the depositary or its nominee.
Institutions that have accounts with the depositary or its nominee are referred
to as "participants".
The accounts to be credited shall be designated by the underwriters or
agents for the sale of such book-entry securities or by us, if we offer and sell
those securities directly.
Ownership of book-entry securities are limited to participants or persons
that may hold interests through participants. In addition, ownership of these
securities will be evidenced only by, and the transfer of that ownership will be
effected only through, records maintained by the depositary or its nominee or by
participants or persons that hold through other participants.
So long as the depositary, or its nominee, is the registered owner of a
global security, that depositary or nominee will be considered the sole owner or
holder of the book-entry securities
10
represented by the global security for all purposes under the indenture.
Payments of principal, interest and premium on those securities will be made to
the depositary or its nominee as the registered owner or the holder of the
global security.
Owners of book-entry securities:
- will not be entitled to have the debt securities registered in their
names;
- will not be entitled to receive physical delivery of the debt securities
in definitive form; and
- will not be considered the owners or holders of those debt securities
under the indenture.
The laws of some jurisdictions require that purchasers of securities take
physical delivery of the securities in definitive form. These laws impair the
ability to purchase or transfer book-entry securities. We must comply with the
law.
We expect that the depositary for book-entry securities of a series will
immediately credit participants' accounts with payments received by the
depositary or nominee in amounts proportionate to the participants' beneficial
interests as shown on the records of such depositary.
We also expect that payments by participants to owners of beneficial
interests in a global security held through the participants will be governed by
standing instructions and customary practices, as is now the case with
securities held for the accounts of customers in bearer form or registered in
"street name". The payments by participants to the owners of beneficial
interests will be the responsibility of those participants.
PRACTICAL IMPLICATIONS OF HOLDING DEBT SECURITIES IN STREET NAME
Investors who hold debt securities in accounts at banks or brokers will not
generally be recognized by us as the legal holders of debt securities. Since we
recognize as the holder the bank or broker, or the financial institution the
bank or broker uses to hold its debt securities, it is the responsibility of
these intermediary banks, brokers and other financial institutions to pass along
principal, interest and other payments on the debt securities, either because
they agree to do so in their agreements with their customers, or because they
are legally required to do so. If you hold debt securities in street name, you
really ought to check with your own institution to find out:
- How it handles securities payments and notices;
- Whether it imposes additional fees or charges;
- How it would handle voting and related issues if ever required;
- How it would pursue or enforce rights under the debt securities if there
were a default or other event triggering the need for direct holders to
act to protect their interests; and
- Whether and how it would react on other matters which are important to
persons who hold debt securities in "street name".
SATISFACTION AND DISCHARGE; DEFEASANCE
We may be discharged from our obligations on the debt securities of any
series that have matured or will mature or be redeemed within one year if we
deposit with the trustee enough cash to pay all the principal, interest and any
premium due to the stated maturity date or redemption date of the debt
securities. (Section 501)
Each indenture contains a provision that permits us to elect:
1. to be discharged after 90 days from all of our obligations (subject to
limited
11
exceptions) with respect to any series of debt securities then
outstanding; and/or
2. to be released from our obligations under the following covenants and
from the consequences of an event of default or cross-default resulting
from a breach of these covenants:
a. the limitations on mergers, consolidations and sale of assets,
b. the limitations on sale and leaseback transactions under the senior
indenture, and
c. the limitations on secured indebtedness under the senior indenture.
To make either of the above elections, we must deposit in trust with the
trustee enough money to pay in full the principal, interest and premium on the
debt securities. This amount may be made in cash and/or U.S. government
obligations, if the debt securities are denominated in U.S. dollars. This amount
may be made in cash, and/or foreign government securities if the debt securities
are denominated in a foreign currency. As a condition to either of the above
elections, we must deliver to the trustee an opinion of counsel that the holders
of the debt securities will not recognize income, gain or loss for Federal
income tax purposes as a result of the action. (Section 503)
If either of the above events occur, the holders of the debt securities of
the series will not be entitled to the benefits of the indenture, except for
registration of transfer and exchange of debt securities and replacement of
lost, stolen or mutilated debt securities. (Sections 501 and 503)
EVENTS OF DEFAULT, NOTICE AND WAIVER
If an event of default for any series of debt securities occurs and
continues, the trustee or the holders of at least 25% in principal amount of the
debt securities of the series may declare the entire principal amount of all the
debt securities of that series to be due and payable immediately.
The declaration may be annulled and past defaults may be waived by the
holders of a majority of the principal amount of the debt securities of that
series. However, payment defaults that are not cured may only be waived by all
holders of the debt securities. (Sections 602 and 613)
Each indenture defines an event of default in connection with any series of
debt securities as one or more of the following events:
- we fail to pay interest on any debt security of the series for 30 days
when due;
- we fail to pay the principal or any premium on any debt securities of the
series when due;
- we fail to make any sinking fund payment for 30 days when due;
- we fail to perform any other covenant in the debt securities of the series
or in the applicable indenture relating to debt securities of that series
for 90 days after being given notice; and
- we enter into bankruptcy or become insolvent.
An event of default for one series of debt securities is not necessarily an
event of default for any other series of debt securities. (Section 601)
Each indenture requires the trustee to give the holders of a series of debt
securities notice of a default for that series within 90 days unless the default
is cured or waived. However, the trustee may withhold this notice if it
determines in good faith that it is in the interest of those holders. The
trustee may not, however, withhold this notice in the case of a payment default.
(Section 702)
12
Other than the duty to act with the required standard of care during an
event of default, a trustee is not obligated to exercise any of its rights or
powers under the indenture at the request or direction of any of the holders of
debt securities, unless the holders have offered to the trustee reasonable
indemnification. (Section 703)
Generally, the holders of a majority in principal amount of outstanding debt
securities of any series may direct the time, method and place of conducting any
proceeding for any remedy available to the trustee, or exercising any trust or
other power conferred on the trustee. (Section 612)
Each indenture includes a covenant that we will file annually with the
trustee a certificate of no default, or specifying any default that exists.
(Section 1106)
Street name and other indirect holders should consult their banks and
brokers for information on their requirements for giving notice or taking other
actions upon a default.
MODIFICATION OF THE INDENTURES
Together with the trustee, we may modify the indentures without the consent
of the holders for limited purposes, including adding to our covenants or events
of default, establishing forms or terms of debt securities, curing ambiguities
and other purposes which do not adversely affect the holders in any material
respect. (Section 1001)
Together with the trustee, we may also make modifications and amendments to
each indenture with the consent of the holders of a majority in principal amount
of the outstanding debt securities of all affected series. However, without the
consent of each affected holder, no modification may:
- change the stated maturity of any debt security;
- reduce the principal, premium (if any) or rate of interest on any debt
security;
- change any place of payment or the currency in which any debt security is
payable;
- impair the right to enforce any payment after the stated maturity or
redemption date;
- adversely affect the terms of any conversion right;
- reduce the percentage of holders of outstanding debt securities of any
series required to consent to any modification, amendment or waiver under
the indenture;
- change any of our obligations for any outstanding series of debt
securities to maintain an office or agency in the places and for the
purposes specified in the indenture for that series; or
- change the provisions in the indenture that relate to its modification or
amendment.
(Section 1002)
MEETINGS
The indentures contain provisions for convening meetings of the holders of
debt securities of a series. (Section 1401)
A meeting may be called at any time by the trustee, upon request by us or
upon request by the holders of at least 10% in principal amount of the
outstanding debt securities of the series. In each case, notice will be given to
the holders of debt securities of the series. (Section 1402)
Persons holding a majority in principal amount of the outstanding debt
securities of a series will constitute a quorum at a meeting. A meeting called
by us or the trustee that did not have a quorum may be adjourned for not less
than 10 days, and if there is not a quorum at the
13
adjourned meeting, the meeting may be further adjourned for not less than 10
days.
Generally, any resolution presented at a meeting at which a quorum is
present may be adopted by the affirmative vote of the holders of a majority in
principal amount of the outstanding debt securities of that series. However, to
change the amount or timing of payments under the debt securities, every holder
in the series must consent.
In addition, if the indenture provides that an action may be taken by the
holders of a specified percentage in principal amount of outstanding debt
securities of a series, that action may be taken at a meeting at which a quorum
is present by the affirmative vote of the holders of such specified percentage
in principal amount of the outstanding debt securities of that series. Any
resolution passed or decision taken at any meeting of holders of debt securities
of any series duly held in accordance with an indenture will be binding on all
holders of debt securities of that series and the related coupons. (Section
1404)
NOTICES TO HOLDERS
In most instances, notices to holders of bearer securities will be given by
publication at least once in a daily newspaper in The City of New York and in
London. Notices may also be published in another city or cities as may be
specified in the securities. In addition, notices to holders of bearer
securities will be mailed to those persons whose names and addresses were
previously filed with the applicable trustee. Notice to holders of registered
securities will be given by mail to the addresses of the holders as they appear
in the security register. (Section 106)
TITLE
Title to any bearer securities and any related coupons will pass by
delivery. We, the trustee and any agent of ours or the trustee may treat the
holder of any bearer security or related coupon as the absolute owner of that
security for all purposes. We may also treat the registered owner of any
registered security as the absolute owner of that security for all purposes.
(Section 407)
REPLACEMENT OF SECURITIES AND COUPONS
We think it's very important for you to keep your securities safe. If you
don't, you'll have to follow these procedures. We'll replace debt securities or
coupons that have been mutilated, but you'll have to pay for the replacement,
and you'll have to surrender the mutilated debt security or coupon to the
security registrar first. Debt securities or coupons that become destroyed,
stolen or lost will only be replaced by us, again at your expense, upon your
providing evidence of destruction, loss or theft which we and the security
registrar think is good. In the case of a destroyed, lost or stolen debt
security or coupon, we may also require you, as the holder of the debt security
or coupon, to indemnify the security registrar and us before we'll go about
issuing any replacement debt security or coupon. (Section 405)
GOVERNING LAW
The indentures, the debt securities and the coupons will be governed by, and
construed under, the laws of the State of New York.
OUR RELATIONSHIP WITH THE TRUSTEE
We may from time to time maintain lines of credit, and have other customary
banking relationships, with the trustee under the senior indenture or the
trustee under the subordinated indenture.
SENIOR DEBT SECURITIES
The senior debt securities will be unsecured and will rank equally with all
of our other unsecured and non-subordinated debt.
14
COVENANTS IN THE SENIOR INDENTURE
COVENANTS ARE PROMISES. We must keep our promises or we could be placed in
default.
LIMITATION ON MERGER, CONSOLIDATION AND CERTAIN SALES OF ASSETS. We may,
without the consent of the holders of the debt securities, merge into or
consolidate with any other corporation, or convey or transfer all or
substantially all of our properties and assets to another person provided that:
- the successor is a U.S. corporation;
- the successor assumes on the same terms and conditions all the obligations
under the debt securities and the indentures; and
- immediately after giving effect to the transaction, there is no default
under the applicable indenture. (Section 901)
The remaining or acquiring corporation will take over all of our rights and
obligations under the indentures. (Section 902)
LIMITATION ON SECURED INDEBTEDNESS. Neither we nor any Restricted Subsidiary
will create, assume, incur or guarantee any Secured Indebtedness without
securing the senior debt securities equally and ratably with, or prior to, that
Secured Indebtedness, unless the sum of the following amounts would not exceed
10% of Consolidated Net Tangible Assets:
- the total amount of all Secured Indebtedness that the senior debt
securities are not secured equally and ratably with, and
- the discounted present value of all net rentals payable under leases
entered into in connection with sale and leaseback transactions entered
into after July 15, 1985.
You should note that we don't include in this calculation any leases entered
into by a Restricted Subsidiary before the time it became a Restricted
Subsidiary. (Section 1104)
LIMITATION ON SALE AND LEASEBACK TRANSACTIONS. Neither we nor any
Restricted Subsidiary will enter into any lease longer than three years covering
any of our Principal Property or any Restricted Subsidiary that is sold to any
other person in connection with that lease unless either:
1. the sum of the following amounts does not exceed 10% of Consolidated Net
Tangible Assets:
- the discounted present value of all net rentals payable under all
these leases entered into after July 15, 1985; and
- the total amount of all Secured Indebtedness that the senior debt
securities are not secured equally and ratably with.
We don't include in this calculation any leases entered into by a Restricted
Subsidiary before the time it became a Restricted Subsidiary.
or
2. an amount equal to the greater of the following amounts is applied
within 180 days to the retirement of our long-term debt or the debt of a
Restricted Subsidiary:
- the net proceeds to us or a Restricted Subsidiary from the sale; and
- the discounted present value of all net rentals payable under the
lease.
Amounts applied to debt which is subordinated to the senior debt securities
or which is owing to us or a Restricted Subsidiary will not be included in
this calculation. (Section 1105)
15
We think it's important for you to be aware that this limitation on sale and
leaseback transactions won't apply to any leases that we may enter into relating
to newly acquired, improved or constructed property.
We think it's also important for you to note that the holders of a majority
in principal amount of all affected series of outstanding debt securities may
waive compliance with each of the above covenants. (Section 1107)
DEFINITIONS
"Secured Indebtedness" means our indebtedness or indebtedness of a
Restricted Subsidiary for borrowed money secured by any lien on, or any
conditional sale or other title retention agreement covering, any Principal
Property or any stock or indebtedness of a Restricted Subsidiary. Excluded from
this definition is all indebtedness:
- outstanding on July 15, 1985, secured by liens, or arising from
conditional sale or other title retention agreements, existing on that
date;
- incurred after July 15, 1985 to finance the acquisition, improvement or
construction of property, and either secured by purchase money mortgages
or liens placed on the property within 180 days of acquisition,
improvement or construction or arising from conditional sale or other
title retention agreements;
- secured by liens on Principal Property or on the stock or indebtedness of
Restricted Subsidiaries, and, in either case, existing at the time of its
acquisition;
- owing to us or any Restricted Subsidiary;
- secured by liens, or conditional sale or other title retention devices,
existing at the time a corporation became or becomes a Restricted
Subsidiary after July 15, 1985;
- arising from any sale and leaseback transaction;
- incurred to finance the acquisition or construction of property secured by
liens in favor of any country or any political subdivision; and
- constituting any replacement, extension or renewal of any indebtedness to
the extent the amount of indebtedness is not increased.
"Principal Property" means land, land improvements, buildings and associated
factory, laboratory and office equipment constituting a manufacturing,
development, warehouse, service or office facility owned by or leased to us or a
Restricted Subsidiary which is located within the United States and which has an
acquisition cost plus capitalized improvements in excess of 0.15% of
Consolidated Net Tangible Assets as of the date of such determination. Principal
Property does not include:
- products marketed by us or our subsidiaries;
- any property financed through the issuance of tax-exempt governmental
obligations;
- any property which our Board of Directors determines is not of material
importance to us and our Restricted Subsidiaries taken as a whole; or
- any property in which the interest of us and all of our subsidiaries does
not exceed 50%.
"Consolidated Net Tangible Assets" means the total assets of us and our
subsidiaries, less current liabilities and intangible assets. We include in
intangible assets the balance sheet value of:
- all trade names, trademarks, licenses, patents, copyrights and goodwill;
- organizational and development costs;
16
- deferred charges other than prepaid items such as insurance, taxes,
interest, commissions, rents and similar items and tangible items we are
amortizing; and
- unamortized debt discount and expense minus unamortized premium.
We don't include in intangible assets any program products.
"Restricted Subsidiary" means:
1. any of our subsidiaries:
a. which has substantially all its property in the United States;
b. which owns or is a lessee of any Principal Property; and,
c. in which our investment and the investment of our subsidiaries
exceeds 0.15% of Consolidated Net Tangible Assets as of the date of
such determination; and
2. any other subsidiary the Board of Directors may designate as a
Restricted Subsidiary.
"Restricted Subsidiary" doesn't include financing subsidiaries and
subsidiaries formed or acquired after July 15, 1985 for the purpose of acquiring
the stock, business or assets of another person and that have not and do not
acquire all or any substantial part of our business or assets or the business or
assets of any Restricted Subsidiary. (Section 101 of Senior Indenture)
SUBORDINATED DEBT SECURITIES
The subordinated debt securities will be unsecured. The subordinated debt
securities will be subordinate in right of payment to all senior indebtedness.
(Section 1501 of Subordinated Indenture)
In addition, claims of our subsidiaries' creditors and preferred
stockholders generally will have priority with respect to the assets and
earnings of the subsidiaries over the claims of our creditors, including holders
of the subordinated debt securities, even though those obligations may not
constitute senior indebtedness. The subordinated debt securities, therefore,
will be effectively subordinated to creditors, including trade creditors, and
preferred stockholders of our subsidiaries.
The subordinated indenture defines "senior indebtedness" to mean the
principal of, premium, if any, and interest on:
- all indebtedness for money borrowed or guaranteed by us other than the
subordinated debt securities, unless the indebtedness expressly states to
have the same rank as, or to rank junior to, the subordinated debt
securities; and
- any deferrals, renewals or extensions of any senior indebtedness.
However, the term "senior indebtedness" will not include:
- any of our obligations to our subsidiaries;
- any liability for Federal, state, local or other taxes owed or owing by
us;
- any accounts payable or other liability to trade creditors arising in the
ordinary course of business, including guarantees of instruments
evidencing those liabilities;
- any indebtedness, guarantee or obligation of ours which is expressly
subordinate or junior in right of payment in any respect to any other
indebtedness, guarantee or obligation of ours, including any senior
subordinated indebtedness and any subordinated obligations;
- any obligations with respect to any capital stock; or
- any indebtedness incurred in violation of the Subordinated Indenture.
There is no limitation on our ability to issue additional senior
indebtedness. The senior debt securities constitute senior indebtedness under
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the subordinated indenture. The subordinated debt securities will rank equally
with our other subordinated indebtedness.
Under the subordinated indenture, no payment may be made on the subordinated
debt securities and no purchase, redemption or retirement of any subordinated
debt securities may be made in the event:
- any senior indebtedness is not paid when due, or
- the maturity of any senior indebtedness is accelerated as a result of a
default, unless the default has been cured or waived and the acceleration
has been rescinded or that senior indebtedness has been paid in full.
We may, however, pay the subordinated debt securities without regard to the
above restriction if the representatives of the holders of the applicable senior
indebtedness approve the payment in writing to us and the trustee.
The representatives of the holders of senior indebtedness may notify us and
the trustee in writing of a default which can result in the acceleration of that
senior indebtedness' maturity without further notice or the expiration of any
grace periods. In this event, we may not pay the subordinated debt securities
for 179 days after receipt of that notice. If the holders of senior indebtedness
or their representatives have not accelerated the maturity of the senior
indebtedness at the end of the 179 day period, we may resume payments on the
subordinated debt securities. Not more than one such notice may be given in any
consecutive 360-day period, irrespective of the number of defaults with respect
to senior indebtedness during that period. (Section 1503 of Subordinated
Indenture)
In the event we pay or distribute our assets to creditors upon a total or
partial liquidation, dissolution or reorganization of us or our property, the
holders of senior indebtedness will be entitled to receive payment in full of
the senior indebtedness before the holders of subordinated debt securities are
entitled to receive any payment. Until the senior indebtedness is paid in full,
any payment or distribution to which holders of subordinated debt securities
would be entitled but for the subordination provisions of the subordinated
indenture will be made to holders of the senior indebtedness. (Section 1502 of
Subordinated Indenture)
If a distribution is made to holders of subordinated debt securities that,
due to the subordination provisions, should not have been made to them, those
holders of subordinated debt securities are required to hold it in trust for the
holders of senior indebtedness, and pay it over to them as their interests may
appear. (Section 1505 of Subordinated Indenture)
If payment of the subordinated debt securities is accelerated because of an
event of default, either we or the trustee will promptly notify the holders of
senior indebtedness or their representatives of the acceleration. We may not pay
the subordinated debt securities until five business days after the holders of
senior indebtedness or their representatives receive notice of the acceleration.
Thereafter, we may pay the subordinated debt securities only if the
subordination provisions of the subordinated indenture otherwise permit payment
at that time. (Section 1505 of Subordinated Indenture)
As a result of the subordination provisions contained in the subordinated
indenture, in the event of insolvency, our creditors who are holders of senior
indebtedness may recover more, ratably, than the holders of subordinated debt
securities. In addition, our creditors who are not holders of senior
indebtedness may recover less, ratably, than holders of senior indebtedness and
may recover more, ratably, than the holders of subordinated indebtedness. It's
important to keep this in mind if you decide to hold our subordinated debt
securities.
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DESCRIPTION OF THE PREFERRED STOCK
The following is a description of general terms and provisions of the
preferred stock. The particular terms of any series of preferred stock will be
described in the applicable prospectus supplement.
All of the terms of the preferred stock are, or will be, contained in our
Certificate of Incorporation and the certificate of amendment relating to each
series of the preferred stock, which will be filed with the Securities and
Exchange Commission at or before the time we issue a series of the preferred
stock.
We are authorized to issue up to 150,000,000 shares of preferred stock, par
value $.01 per share. As of March 31, 2000, 2,546,011 shares of Series A 7 1/2%
Preferred Stock, liquidation preference $100 per share, were outstanding.
Subject to limitations prescribed by law, the Board of Directors is authorized
at any time to:
- issue one or more series of preferred stock;
- determine the designation for any series by number, letter or title that
shall distinguish the series from any other series of preferred stock; and
- determine the number of shares in any series.
The Board of Directors is authorized to determine, for each series of
preferred stock, and the prospectus supplement will set forth with respect to
the series the following information:
- whether dividends on that series of preferred stock will be cumulative,
noncumulative or partially cumulative;
- the dividend rate (or method for determining the rate);
- the liquidation preference per share of that series of preferred stock, if
any;
- any conversion provisions applicable to that series of preferred stock;
- any redemption or sinking fund provisions applicable to that series of
preferred stock;
- the voting rights of that series of preferred stock, if any; and
- the terms of any other preferences or rights, if any, applicable to that
series of preferred stock.
The preferred stock, when issued, will be fully paid and nonassessable.
DIVIDENDS
Holders of preferred stock will be entitled to receive, when, as and if
declared by our Board of Directors, cash dividends at the rates and on the dates
as set forth in the prospectus supplement. Generally, no dividends will be
declared or paid on any series of preferred stock unless full dividends for all
series of preferred stock, including any cumulative dividends still owing, have
been or contemporaneously are declared and paid. When those dividends are not
paid in full, dividends will be declared pro-rata so that the amount of
dividends declared per share on each series of preferred stock will bear to each
other series the same ratio that accrued dividends per share for each respective
series of preferred stock bear to aggregate accrued dividends for all
outstanding shares of preferred stock. In addition, generally, unless all
dividends on the preferred stock have been paid, no dividends will be declared
or paid on the capital stock and we may not redeem or purchase any capital
stock.
Payment of dividends on any series of preferred stock may be restricted by
loan
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agreements, indentures and other transactions we may enter into.
CONVERTIBILITY
No series of preferred stock will be convertible into, or exchangeable for,
other securities or property except as set forth in the applicable prospectus
supplement.
REDEMPTION AND SINKING FUND
No series of preferred stock will be redeemable or receive the benefit of a
sinking fund except as set forth in the applicable prospectus supplement.
Shares of preferred stock that we redeem or otherwise reacquire will resume
the status of authorized and unissued shares of preferred stock undesignated as
to series, and will be available for subsequent issuance. There are no
restrictions on repurchase or redemption of the preferred stock while there is
any arrearage on sinking fund installments except as may be set forth in a
prospectus supplement.
LIQUIDATION
In the event we voluntarily or involuntarily liquidate, dissolve or wind up
our affairs, the holders of each series of preferred stock will be entitled to
receive the liquidation preference per share specified in the prospectus
supplement, plus any accrued and unpaid dividends. Holders of preferred stock
will be entitled to receive these amounts before any distribution is made to the
holders of capital stock.
If the amounts payable to preferred stockholders are not paid in full, the
holders of preferred stock will share ratably in any distribution of assets
based upon the aggregate liquidation preference for all outstanding shares for
each series. After the holders of shares of preferred stock are paid in full,
they will have no right or claim to any of our remaining assets.
Neither the par value nor the liquidation preference is indicative of the
price at which the preferred stock will actually trade on or after the date of
issuance.
VOTING
Generally, the holders of preferred stock will not be entitled to vote.
However, if the equivalent of six quarterly dividends payable on any series of
preferred stock is in default, the number of directors constituting our Board of
Directors will be increased by two and the holders of such series of preferred
stock, voting together as a class with all other series of preferred stock
entitled to vote on such election of directors, will be entitled to elect those
additional directors. In the event of this type of default, the Board of
Directors will call a special meeting for the holders of all affected series
within 10 business days of the default for the purpose of electing the
additional directors. Alternatively, the holders of record of a majority of the
outstanding shares of all affected series who are entitled to participate in the
election of directors may elect those additional directors by written consent.
If all accumulated dividends on any series of preferred stock have been paid in
full, the holders of shares of that series will no longer have the right to vote
on directors, the term of office of each director so elected will terminate, and
the number of our directors will, without further action, be reduced by two.
Unless we otherwise specify in a prospectus supplement, the vote of the
holders of a majority of the outstanding shares of each series of preferred
stock voting together as a class, is required to authorize any amendment,
alteration or repeal of our Certificate of Incorporation or any certificate of
amendment which would adversely affect the powers, preferences, or special
rights of the preferred stock including authorizing any class of stock with
superior dividend and liquidation preferences.
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NO OTHER RIGHTS
The shares of a series of preferred stock will not have any preemptive
rights, preferences, voting powers or relative, participating, optional or other
special rights except as set forth above or in the prospectus supplement, the
Certificate of Incorporation or certificate of amendment or as otherwise
required by law.
TRANSFER AGENT AND REGISTRAR
We'll designate the transfer agent for each series of preferred stock in the
prospectus supplement.
DESCRIPTION OF THE DEPOSITARY SHARES
We may, at our option, elect to offer fractional shares of preferred stock,
rather than full shares of preferred stock. If we do, we will issue to the
public receipts for depositary shares, and each of these depositary shares will
represent a fraction of a share of a particular series of preferred stock. Each
owner of a depositary share will be entitled, in proportion to the applicable
fractional interest in shares of preferred stock underlying that depositary
share, to all rights and preferences of the preferred stock underlying that
depositary share. Those rights include dividend, voting, redemption and
liquidation rights.
The shares of preferred stock underlying the depositary shares will be
deposited with a depositary under a deposit agreement between us, the depositary
and the holders of the depositary receipts evidencing the depositary shares. The
depositary will be a bank or trust company selected by us. The depositary will
also act as the transfer agent, registrar and dividend disbursing agent for the
depositary shares.
Holders of depositary receipts agree to be bound by the deposit agreement,
which requires holders to take certain actions such as filing proof of residence
and paying certain charges.
The following is a summary of the most important terms of the depositary
shares. The deposit agreement, our Certificate of Incorporation and the
certificate of amendment for the applicable series of preferred stock that are,
or will be, filed with the SEC will set forth all of the terms relating to the
depositary shares.
DIVIDENDS
The depositary will distribute all cash dividends or other cash
distributions received relating to the series of preferred stock underlying the
depositary shares, to the record holders of depositary receipts in proportion to
the number of depositary shares owned by those holders on the relevant record
date. The record date for the depositary shares will be the same date as the
record date for the preferred stock.
In the event of a distribution other than in cash, the depositary will
distribute property received by it to the record holders of depositary receipts
that are entitled to receive the distribution. However, if the depositary
determines that it is not feasible to make the distribution, the depositary may,
with our approval, adopt another method for the distribution. The method may
include selling the property and distributing the net proceeds to the holders.
LIQUIDATION PREFERENCE
In the event of our voluntary or involuntary liquidation, dissolution or
winding up, the holders of each depositary share will be entitled to receive the
fraction of the liquidation preference accorded each share of the applicable
series of preferred stock, as set forth in the applicable prospectus supplement.
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REDEMPTION
If a series of preferred stock underlying the depositary shares is subject
to redemption, the depositary shares will be redeemed from the proceeds received
by the depositary resulting from the redemption, in whole or in part, of
preferred stock held by the depositary. Whenever we redeem any preferred stock
held by the depositary, the depositary will redeem, as of the same redemption
date, the number of depositary shares representing the preferred stock so
redeemed. The depositary will mail the notice of redemption to the record
holders of the depositary receipts promptly upon receiving the notice from us
and not less than 35 nor more than 60 days prior to the date fixed for
redemption of the preferred stock and the depositary shares.
VOTING
Upon receipt of notice of any meeting at which the holders of preferred
stock are entitled to vote, the depositary will mail the information contained
in the notice of meeting to the record holders of the depositary receipts
underlying the preferred stock. Each record holder of those depositary receipts
on the record date will be entitled to instruct the depositary as to the
exercise of the voting rights pertaining to the amount of preferred stock
underlying that holder's depositary shares. The record date for the depositary
shares will be the same date as the record date for the preferred stock. The
depositary will try, as far as practicable, to vote the preferred stock
underlying the depositary shares in a manner consistent with the instructions of
the holders of the depositary receipts. We will agree to take all action which
may be deemed necessary by the depositary in order to enable the depositary to
do so. The depositary will not vote the preferred stock to the extent that it
does not receive specific instructions from the holders of depositary receipts.
WITHDRAWAL OF PREFERRED STOCK
Owners of depositary shares are entitled, upon surrender of depositary
receipts at the principal office of the depositary and payment of any unpaid
amount due the depositary, to receive the number of whole shares of preferred
stock underlying the depositary shares. Partial shares of preferred stock will
not be issued. These holders of preferred stock will not be entitled to deposit
the shares under the deposit agreement or to receive depositary receipts
evidencing depositary shares for the preferred stock.
AMENDMENT AND TERMINATION OF DEPOSIT AGREEMENT
The form of depositary receipt evidencing the depositary shares and any
provision of the deposit agreement may be amended at any time and from time to
time by agreement between us and the depositary. However, any amendment which
materially and adversely alters the rights of the holders of depositary shares,
other than any change in fees, will not be effective unless the amendment has
been approved by at least a majority of the depositary shares then outstanding.
The deposit agreement may be terminated by us or the depositary only if:
- all outstanding depositary shares have been redeemed; or
- there has been a final distribution relating to the preferred stock in
connection with our dissolution, and that distribution has been made to
all the holders of depositary shares.
CHARGES OF DEPOSITARY
We'll pay all transfer and other taxes and governmental charges arising
solely from the existence of the depositary arrangements. We'll also pay charges
of the depositary in connection with the initial deposit of the preferred stock
22
and the initial issuance of the depositary shares, any redemption of the
preferred stock and all withdrawals of preferred stock by owners of depositary
shares. Holders of depositary receipts will pay transfer, income and other taxes
and governmental charges and certain other charges as provided in the deposit
agreement. In certain circumstances, the depositary may refuse to transfer
depositary shares, withhold dividends and distributions, and sell the depositary
shares evidenced by the depositary receipt, if the charges are not paid.
REPORTS TO HOLDERS
The depositary will forward to the holders of depositary receipts all
reports and communications we deliver to the depositary that we are required to
furnish to the holders of the preferred stock. In addition, the depositary will
make available for inspection by holders of depositary receipts at the principal
office of the depositary--and at other places as it thinks is advisable--any
reports and communications we deliver to the depositary as the holder of
preferred stock.
LIABILITY AND LEGAL PROCEEDINGS
Neither we nor the depositary will be liable if either of us are prevented
or delayed by law or any circumstance beyond our control in performing our
obligations under the deposit agreement. Our obligations and those of the
depositary will be limited to performance in good faith of our duties under the
deposit agreement. Neither we nor the depositary will be obligated to prosecute
or defend any legal proceeding in respect of any depositary shares or preferred
stock unless satisfactory indemnity is furnished. We and the depositary may rely
on written advice of counsel or accountants, on information provided by holders
of depositary receipts or other persons believed in good faith to be competent
to give such information and on documents believed to be genuine and to have
been signed or presented by the proper persons.
RESIGNATION AND REMOVAL OF DEPOSITARY
The depositary may resign at any time by delivering a notice to us of its
election to do so. We may also remove the depositary at any time. Any such
resignation or removal will take effect upon the appointment of a successor
depositary and its acceptance of such appointment. The successor depositary must
be appointed within 60 days after delivery of the notice for resignation or
removal. In addition, the successor depositary must be a bank or trust company
having its principal office in the United States of America and must have a
combined capital and surplus of at least $150,000,000.
FEDERAL INCOME TAX CONSEQUENCES
Owners of the depositary shares will be treated for Federal income tax
purposes as if they were owners of the preferred stock underlying the depositary
shares. Accordingly, the owners will be entitled to take into account for
Federal income tax purposes income and deductions to which they would be
entitled if they were holders of the preferred stock. In addition:
- no gain or loss will be recognized for Federal income tax purposes upon
the withdrawal of preferred stock in exchange for depositary shares;
- the tax basis of each share of preferred stock to an exchanging owner of
depositary shares will, upon the exchange, be the same as the aggregate
tax basis of the depositary shares exchanged; and
- the holding period for preferred stock in the hands of an exchanging owner
of depositary shares will include the period during which the person owned
the depositary shares.
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DESCRIPTION OF THE CAPITAL STOCK
As of the date of this prospectus, we are authorized to issue up to
4,687,500,000 shares of capital stock, $0.20 par value per share. As of
March 31, 2000, 1,772,836,653 shares of capital stock were outstanding.
DIVIDENDS. Holders of capital stock are entitled to receive dividends, in
cash, securities, or property, as may from time to time be declared by our Board
of Directors, subject to the rights of the holders of the preferred stock.
VOTING. Each holder of capital stock is entitled to one vote per share on
all matters requiring a vote of the stockholders.
RIGHTS UPON LIQUIDATION. In the event of our voluntary or involuntary
liquidation, dissolution, or winding up, the holders of capital stock will be
entitled to share equally in our assets available for distribution after payment
in full of all debts and after the holders of preferred stock have received
their liquidation preferences in full.
MISCELLANEOUS. Shares of capital stock are not redeemable and have no
subscription, conversion or preemptive rights.
DESCRIPTION OF THE WARRANTS
We may issue warrants for the purchase of debt securities, preferred stock
or capital stock. Warrants may be issued independently or together with our debt
securities, preferred stock or capital stock and may be attached to or separate
from any offered securities. Each series of warrants will be issued under a
separate warrant agreement to be entered into between us and a bank or trust
company, as warrant agent. The warrant agent will act solely as our agent in
connection with the warrants and will not have any obligation or relationship of
agency or trust for or with any holders or beneficial owners of warrants. A copy
of the warrant agreement will be filed with the SEC in connection with the
offering of warrants.
DEBT WARRANTS
The prospectus supplement relating to a particular issue of warrants to
issue debt securities will describe the terms of those warrants, including the
following:
- the title of the warrants;
- the offering price for the warrants, if any;
- the aggregate number of the warrants;
- the designation and terms of the debt securities purchasable upon exercise
of the warrants;
- if applicable, the designation and terms of the debt securities that the
warrants are issued with and the number of warrants issued with each debt
security;
- if applicable, the date from and after which the warrants and any debt
securities issued with them will be separately transferable;
- the principal amount of debt securities that may be purchased upon
exercise of a warrant and the price at which the debt securities may be
purchased upon exercise;
- the dates on which the right to exercise the warrants will commence and
expire;
- if applicable, the minimum or maximum amount of the warrants that may be
exercised at any one time;
- whether the warrants represented by the warrant certificates or debt
securities that may be issued upon exercise of the warrants will be issued
in registered or bearer form;
- information relating to book-entry procedures, if any;
24
- the currency or currency units in which the offering price, if any, and
the exercise price are payable;
- if applicable, a discussion of material United States federal income tax
considerations;
- anti-dilution provisions of the warrants, if any;
- redemption or call provisions, if any, applicable to the warrants; and
- any additional terms of the warrants, including terms, procedures and
limitations relating to the exchange and exercise of the warrants.
STOCK WARRANTS
The prospectus supplement relating to a particular issue of warrants to
issue capital stock or preferred stock will describe the terms of the warrants,
including the following:
- the title of the warrants;
- the offering price for the warrants, if any;
- the aggregate number of the warrants;
- the designation and terms of the capital stock or preferred stock that may
be purchased upon exercise of the warrants;
- if applicable, the designation and terms of the securities that the
warrants are issued with and the number of warrants issued with each
security;
- if applicable, the date from and after which the warrants and any
securities issued with the warrants will be separately transferable;
- the number of shares of capital stock or preferred stock that may be
purchased upon exercise of a warrant and the price at which the shares may
be purchased upon exercise;
- the dates on which the right to exercise the warrants commence and expire;
- if applicable, the minimum or maximum amount of the warrants that may be
exercised at any one time;
- the currency or currency units in which the offering price, if any, and
the exercise price are payable;
- if applicable, a discussion of material United States federal income tax
considerations;
- antidilution provisions of the warrants, if any;
- redemption or call provisions, if any, applicable to the warrants;
- any additional terms of the warrants, including terms, procedures and
limitations relating to the exchange and exercise of the warrants; and
- any other information we think is important about the warrants.
PLAN OF DISTRIBUTION
We may sell the securities:
- through underwriters;
- through agents; or
- directly to purchasers.
We'll describe in a prospectus supplement, the particular terms of the
offering of the securities, including the following:
- the names of any underwriters;
- the purchase price and the proceeds we will receive from the sale;
- any underwriting discounts and other items constituting underwriters'
compensation;
25
- any initial public offering price and any discounts or concessions allowed
or reallowed or paid to dealers;
- any securities exchanges on which the securities of the series may be
listed; and
- any other information we think is important.
If we use underwriters in the sale, the securities will be acquired by the
underwriters for their own account and may be resold from time to time in one or
more transactions, including negotiated transactions, either at a fixed public
offering price, or at varying prices determined at the time of sale.
The securities may be either offered to the public through underwriting
syndicates represented by managing underwriters or by underwriters without a
syndicate. The obligations of the underwriters to purchase securities will be
subject to conditions precedent, and the underwriters will be obligated to
purchase all the securities of a series if any are purchased. Any initial public
offering price and any discounts or concessions allowed or reallowed or paid to
dealers may be changed from time to time.
Securities may be sold directly by us or through agents designated by us
from time to time. Any agent involved in the offer or sale of the securities for
which this prospectus is delivered will be named, and any commissions payable by
us to that agent will be set forth, in the prospectus supplement. Unless
otherwise indicated in the prospectus supplement, any agent will be acting on a
best efforts basis for the period of its appointment.
We may authorize agents or underwriters to solicit offers by certain types
of institutions to purchase securities from us at the public offering price set
forth in the prospectus supplement pursuant to delayed delivery contracts. These
contracts will provide for payment and delivery on a specified date in the
future. The conditions to these contracts and the commissions payable for
solicitation of such contracts will be set forth in the applicable prospectus
supplement.
Agents and underwriters may be entitled to indemnification by us against
civil liabilities arising out of this prospectus, including liabilities under
the Securities Act of 1933, or to contribution for payments which the agents or
underwriters may be required to make relating to those liabilities. Agents and
underwriters may be customers of, engage in transactions with, or perform
services for, us in the ordinary course of business.
Each series of securities will be a new issue of securities with no
established trading market. Any underwriter may make a market in the securities,
but won't be obligated to do so, and may discontinue any market making at any
time without notice. We can't and won't give any assurances as to the liquidity
of the trading market for any of our securities.
LEGAL OPINIONS
The legality of the securities will be passed upon by Mr. David S.
Hershberg, our Vice President and Assistant General Counsel. Mr. Hershberg,
together with members of his family, owns, has options to purchase and has other
interests in shares of our common stock.
EXPERTS
The consolidated financial statements incorporated in this prospectus by
reference to the Annual Report on Form 10-K for the year ended December 31, 1999
have been so incorporated in reliance on the report of PricewaterhouseCoopers
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
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