Subject to Completion, Pricing Supplement dated September 27, 1996
PROSPECTUS Dated May 1, 1996 Pricing Supplement No. 40 to
PROSPECTUS SUPPLEMENT Registration Statement No. 333-01655
Dated May 1, 1996 Dated , 1996
Rule 424(b)(3)
$50,000,000
Morgan Stanley Group Inc.
MEDIUM-TERM NOTES, SERIES C
MSCI ALL-COUNTRY FAR EAST FREE EX JAPAN INDEX NOTES DUE 2001
--------------
The MSCI All-Country Far East Free ex Japan Index Notes due
2001 (the "Notes") are Medium-Term Notes, Series C of Morgan Stanley Group
Inc. (the "Company"), as further described herein and in the Prospectus
Supplement under "Description of Notes--Fixed Rate Notes" and "--Notes Linked
to Commodity Prices, Single Securities, Baskets of Securities or Indices." The
Notes are being issued in minimum denominations of $10,000 and will mature on
, 2001 (the "Maturity Date"). The Notes will bear interest at
the rate of % per annum payable on of each year (each an
"Interest Payment Date"), commencing , 1997. The Notes will not
be redeemable by the Company in whole or in part prior to the Maturity Date.
At maturity, the holder of a Note will receive the par amount
of such Note ("Par") plus accrued interest plus an amount (the "Supplemental
Redemption Amount") based on the percentage increase, if any, in the Final
Index Value (as defined herein) of the MSCI All-Country Far East Free ex Japan
Index (the "MSCI AC Far East Free ex Japan Index" or the "Index") over the
Initial Index Value (as defined herein), as further described in this Pricing
Supplement. The Index is calculated in U.S. dollars without dividend
reinvestment and is published by Morgan Stanley Capital International
("MSCI"), a unit of Morgan Stanley & Co. Incorporated, a subsidiary of the
Company. MSCI([Registered]) is a registered trademark and service mark of the
Company. See "MSCI AC Far East Free ex Japan Index--Affiliation" of MSCI and
the Company" in this Pricing Supplement. The Supplemental Redemption Amount,
if any, payable with respect to each Note at maturity will equal the product
of (i) the par amount of such Note and (ii) a fraction, the numerator of which
will be the Final Index Value less the Initial Index Value and the denominator
of which will be the Initial Index Value. The Supplemental Redemption Amount
cannot be less than zero. The Initial Index Value has been set to equal
. The Final Index Value will equal the closing value of the Index on
, 2001, (the "Determination Date"), except as described herein.
See "Determination Date" and "Market Disruption Event" in this Pricing
Supplement. If the Final Index Value is equal to or less than the Initial
Index Value, the holder of a Note will be repaid the par amount of such Note
plus accrued interest, but will not receive any Supplemental Redemption Amount.
For information as to the calculation of the Supplemental
Redemption Amount and certain tax consequences to beneficial owners of the
Notes, see "Supplemental Redemption Amount," "Final Index Value,"
"Determination Date" and "United States Federal Taxation" in this Pricing
Supplement.
The Company will cause the "Supplemental Redemption Amount" to
be determined by Morgan Stanley & Co. Incorporated ("MS & Co."), as
Calculation Agent, for The Chase Manhattan Bank, as Trustee under the Senior
Debt Indenture.
An investment in the Notes entails risks not associated with
similar investments in a conventional debt security, including, without
limitation, risks related to the affiliation of MSCI, MS & Co. and the
Company, as described under "Risk Factors" on PS-5 through PS-8 herein.
--------------
PRICE %
--------------
Price to Public Agent's Commissions(1) Proceeds to Company
--------------- ---------------------- -------------------
Per Note. % % %
Total.... $ $ $
- ------------
(1) The Company has agreed to indemnify the Agent against certain liabilities,
including liabilities under the Securities Act of 1933.
MORGAN STANLEY & CO.
Incorporated
INFORMATION CONTAINED IN THIS PRELIMINARY PRICING SUPPLEMENT IS SUBJECT TO
COMPLETION OR AMENDMENT. THESE SECURITIES MAY NOT BE DELIVERED PRIOR TO
THE TIME A FINAL PRICING SUPPLEMENT IS DELIVERED. THIS PRICING SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS AND PROSPECTUS SUPPLEMENT SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
Capitalized terms not defined herein have the meanings given to such terms in
the accompanying Prospectus Supplement.
Principal Amount.............. $50,000,000
Maturity Date................. , 2001
Interest Rate ................ %
Interest Payment Dates........
Specified Currency............ U.S. Dollars
Issue Price................... %
Settlement Date (Original
Issue Date)................... , 1996
Book Entry Note or
Certificated Note............. Book Entry
Senior Note or Subordinated
Note.......................... Senior
Minimum Denominations......... $10,000
Trustee....................... The Chase Manhattan Bank
Maturity Redemption Amount ... At maturity (including as a result of
acceleration or otherwise), the holder of a
Note will receive the par amount of such Note
("Par") plus accrued interest plus the
Supplemental Redemption Amount, if any.
Supplemental Redemption
Amount ....................... The Supplemental Redemption Amount, if any,
payable with respect to each Note at maturity
will equal the product of (i) the par amount
of such Note and (ii) a fraction, the
numerator of which will be the Final Index
Value less the Initial Index Value and the
denominator of which will be the Initial
Index Value. The Supplemental Redemption
Amount will not be less than zero. The
Supplemental Redemption Amount is described
by the following formula:
Par x (Final Index Value - Initial Index Value)
-----------------------------------------
Initial Index Value
The Company will cause MS & Co., as
Calculation Agent, to provide written notice
to the Trustee at its New York office, on
which notice the Trustee may conclusively
rely, of the Supplemental Redemption Amount,
on or prior to 11:00 a.m. on the Business Day
preceding the Maturity Date.
All percentages resulting from any
calculation with respect to the Notes will be
rounded to the nearest one hundred-thousandth
of a percentage point, with five
one-millionths of a percentage point rounded
upwards (e.g., 9.876545% (or .09876545) would
be rounded to 9.87655% (or .0987655)), and
all dollar amounts used in or resulting from
such calculation will be rounded to the
nearest cent with one-half cent being rounded
upwards.
Initial Index Value........... The Initial Index Value is .
Final Index Value............. The Final Index Value will be the Index
Closing Value (as defined below) on the
Determination Date, as determined by MS &
Co., as Calculation Agent.
Index Closing Value .......... The Index Closing Value will equal the
afternoon London closing value of the Index
or any Successor Index (as defined below) at
the regular official weekday time of
publication on the Determination Date. See
"MSCI AC Far East Free ex Japan Index--Index
Calculation" and "--Affiliation of MSCI and
the Company" and "Discontinuance of the MSCI
AC Far East Free ex Japan Index; Alteration
of Method of Calculation."
References herein to the Index will be deemed
to include any Successor Index, unless the
context requires otherwise.
Index Valuation Day........... Any day other than a Saturday or Sunday.
Determination Date............ The Determination Date will be ,
2001; provided that if a Market Disruption
Event occurs on such date, the Determination
Date will be the immediately succeeding Index
Valuation Day during which no Market
Disruption Event shall have occurred;
provided further that if a Market Disruption
Event has occurred on each of the five Index
Valuation Days immediately succeeding ,
2001, then (i) such fifth succeeding Index
Valuation Day will be deemed to be the
Determination Date, notwithstanding the
occurrence of a Market Disruption Event on
such day and (ii) with respect to any such
fifth Index Valuation Day on which a Market
Disruption Event occurs, MS & Co., as
Calculation Agent, will determine the value
of the Index on such fifth Index Valuation Day
in accordance with the formula for and method
of calculating the Index last in effect prior
to the commencement of the Market Disruption
Event, using the closing price (or, if
trading in the relevant security has been
materially suspended or materially limited,
its good faith estimate of the closing price
that would have prevailed but for such
suspension or limitation) on such Index
Valuation Day of each security most recently
comprising the Index.
Market Disruption Event....... "Market Disruption Event" means, with
respect to the Index:
(i) a suspension, absence or material
limitation of trading of 20% or more of the
securities in any component national index
included in the Index on the primary market
for such securities for more than two hours
of trading or during the one-half hour period
preceding the close of trading in such
market; or the suspension, absence or
material limitation of trading on the primary
market for trading in futures or options
contracts related to the Index or any
component national index included therein
during the one-half hour period preceding the
close of trading in the applicable market,
in each case as determined by MS & Co., as
Calculation Agent, in its sole discretion; and
(ii) a determination by MS & Co., as
Calculation Agent, in its sole discretion
that the event described in clause (i) above
materially interfered with the ability of the
Company or any of its affiliates to unwind
all or a material portion of the hedge with
respect to the Notes.
For purposes of determining whether a Market
Disruption Event has occurred: (1) a
limitation on the hours or number of days of
trading will not constitute a Market
Disruption Event if it results from an
announced change in the regular business
hours of the relevant exchange or market, (2)
a decision to permanently discontinue trading
in the relevant futures or options contract
will not constitute a Market Disruption
Event, (3) limitations on trading during
significant market fluctuations of the kind
exemplified in the United States by New York
Stock Exchange Rule 80A, as determined by MS
& Co., as Calculation Agent, will constitute a
suspension, absence or material limitation of
trading for purposes of clause (i) above, (4)
a suspension of trading in a futures or
options contract on the Index or any
component national index included therein by
the primary securities market trading such
contract by reason of (x) a price change
exceeding limits set by such exchange or
market, (y) an imbalance of orders relating to
such contracts or (z) a disparity in bid and
ask quotes relating to such contracts will
constitute a suspension or material
limitation of trading in futures or options
contracts related to the Index or such
component national index and (5) a
suspension, absence or material limitation of
trading on the primary market on which
futures or options contracts related to the
Index or any component national index
included therein are traded will not include
any time when such market is itself closed
for trading under ordinary circumstances.
Calculation Agent............. Morgan Stanley & Co. Incorporated
All determinations made by MS & Co., as
Calculation Agent, shall be at the sole
discretion of MS & Co. and shall, in the
absence of manifest error, be conclusive for
all purposes and binding on the Company and
holders of the Notes.
Because MS & Co. is an affiliate of the
Company, potential conflicts of interest may
exist between MS & Co., as Calculation Agent,
and the holders of the Notes, including with
respect to certain determinations and
judgments that MS & Co., as Calculation
Agent, must make in determining the Final
Index Value or whether a Market Disruption
Event has occurred. See "Discontinuance of
the MSCI AC Far East Free ex Japan Index;
Alteration of Method of Calculation" below
and "Market Disruption Event" above. MS &
Co. is obligated to carry out its duties and
functions as Calculation Agent in good faith
and using its reasonable judgment.
Furthermore, MSCI is a unit of MS & Co.
Because MS & Co. is an affiliate of the
Company, potential conflicts of interest may
also exist between MSCI and holders of the
Notes. See "MSCI AC Far East Free ex Japan
Index--Affiliation of MSCI and the Company."
Risk Factors.................. An investment in the Notes entails
significant risks not associated with similar
investments in a conventional security,
including the following.
Comparison to Other Debt Securities
If the Final Index Value of the Index does
not exceed the Initial Index Value, the
holders of the Notes will receive only the par
amount of each Note plus accrued interest at
maturity. Because the Final Index Value will
be based upon the closing value of the Index
on a specified day (the Determination Date),
a significant increase in the Index
subsequent to issuance may be substantially
or entirely offset by subsequent decreases in
the value of the Index on or prior to the
Determination Date.
Because the Supplemental Redemption Amount
may be equal to zero, the effective yield to
maturity may be less than that which would be
payable on a conventional fixed-rate debt
security having the same maturity date as the
Notes and issued by the Company on the
Original Issue Date.
The return of only the par amount of a Note
plus accrued interest at maturity is not
likely to compensate the holder for any
opportunity cost implied by inflation and
other factors relating to the time value of
money. The percentage appreciation of the
Index based on the Final Index Value over the
Initial Index Value does not reflect the
payment of dividends on the stocks underlying
the Index. Therefore, the yield to maturity
based on the Final Index Value relative to
the Initial Index Value will not be the same
yield as would be produced if such underlying
stocks were purchased and held for a similar
period.
Possible Illiquidity of the Secondary Market
The Notes will not be listed on any exchange.
There can be no assurance as to whether there
will be a secondary market in the Notes or if
there were to be such a secondary market,
whether such market would be liquid or
illiquid. It is expected that the secondary
market for the Notes will be affected by the
creditworthiness of the Company and by a
number of factors, including, but not limited
to, the volatility of the Index, dividend
rates on the stocks underlying the Index, the
time remaining to the Determination Date and
to the maturity of the Notes and market
interest rates. In addition, the Final Index
Value depends on a number of interrelated
factors, including economic, financial and
political events, over which the Company has
no control. The value of the Notes prior to
maturity is expected to depend primarily on
market interest rates and the extent of the
appreciation, if any, of the Final Index
Value over the Initial Index Value. If,
however, the Notes are sold prior to maturity
at a time when the Index exceeds the Initial
Index Value, the sale price may be at a
discount from the amount expected to be
payable to the holder if such excess were to
prevail on the Determination Date. The price
at which a holder will be able to sell the
Notes prior to maturity may be at a discount,
which could be substantial, from the par
amount thereof, if, at such time, the Index
or the Final Index Value, if determined, is
below, equal to or not sufficiently above the
Initial Index Value.
Relationship of the Notes and the MSCI AC Far
East Free ex Japan Index
The historical Index values should not be
taken as an indication of the future
performance of the Index during the term of
the Notes. It is impossible to predict
whether the value of the Index will rise or
fall. Trading prices of the stocks
underlying the Index will be influenced by
both the complex and interrelated political,
economic, financial and other factors that
can affect the capital markets generally and
the equity trading markets on which the
underlying stocks are traded, and by various
circumstances that can influence the values
of the underlying stocks in a specific market
segment or a particular underlying stock.
Social, Political and Economic Conditions
The component countries included in the Index
currently or in the future may be subject to
a greater degree of social, political and
economic instability than is the case in the
United States and Western European countries.
Such instability may result from (i)
authoritarian governments or military
involvement in political and economic
decision-making; (ii) popular unrest
associated with demands for improved
political, economic and social conditions;
(iii) internal insurgencies; (iv) hostile
relations with neighboring countries; and (v)
ethnic, religious, and racial disaffection.
The economies of these Far Eastern countries
continue to depend heavily upon international
trade and are accordingly affected by
protective trade barriers and the economic
conditions of their trading partners,
principally the United States, Japan, China
and the European Community. The enactment by
the United States or other principal trading
partners of projectionist trade legislation,
reduction of foreign investment in the local
economies, and general declines in the
international securities markets could have a
significant adverse effect upon the economies
and securities markets of these Far Eastern
countries.
Exchange Rate Exposure
Because the prices of the component stocks in
each component national index are converted
into U.S. Dollars for purposes of calculating
the value of the component national indices
and the Index, holders of the Notes will be
exposed to currency exchange rate risk with
respect to each of the currencies represented
in the Index. Currently, some of the
currencies represented in the Index are tied
to the U.S. Dollar; the degree of currency
exposure that holders of the Notes experience
may increase if any of such currencies are no
longer tied to the U.S. Dollar. A holder's
net exposure will depend on the extent to
which the currencies of the component
national indices strengthen or weaken against
the U.S. Dollar and the relative weight of
each component national index in the Index.
If, taking into account such weighting, the
dollar strengthens against the component
currencies, the value of the Index will be
adversely affected so that the Supplemental
Redemption Amount is reduced or eliminated.
See "MSCI AC Far East Free ex Japan
Index--Foreign Exchange Rates" and
"Historical Information on Exchange Rates"
below.
Affiliation of MSCI, MS & Co., as Calculation
Agent, and the Company.
In 1986, MS & Co. acquired the rights to the
indices and data bases developed by Capital
International Perspective, S.A. ("CIPSA"), a
corporation organized under Swiss law and
based in Geneva, that became the basis of the
Index and other MSCI([Registered]) indices.
MSCI([Registered]) is a registered trademark
and service mark of the Company. MSCI is
also a unit of MS & Co. MSCI and,
ultimately, the Company are responsible for
the Index and the guidelines and policies
governing its composition and calculation.
Currently, MSCI has retained CIPSA to
maintain the Index and make decisions
regarding the calculation of the Index,
including constituent additions and
deletions, adjustments to the component
stocks and other methodological modifications
to the Index. Nevertheless, there can be no
assurance that MSCI will continue to contract
out such maintenance work to CIPSA in the
future.
The policies and judgments for which MSCI is
responsible concerning additions, deletions,
substitutions and weightings of the component
national indices comprising the Index and of
the stocks underlying those component
national indices and the manner in which
certain changes affecting such underlying
stocks are taken into account may affect the
value of the Index. Furthermore, the
policies and judgments for which MSCI is
responsible with respect to the calculation
of the Index, including, without limitation,
the selection of the foreign exchange rates
used for the purpose of establishing the daily
prices of the stocks underlying the component
national indices, could also affect the level
of the Index. It is also possible that MSCI
may discontinue or suspend calculation or
dissemination of the Index and that,
consequently, MS & Co., as Calculation Agent,
also an affiliate of the Company, would have
to select a successor or substitute index
from which to calculate the Final Index Value
and the Supplemental Redemption Amount, if
any. Any such actions or judgments could
adversely affect the value of the Notes. See
"MSCI AC Far East Free ex Japan
Index--Foreign Exchange Rates" and
"--Affiliation of MSCI and the Company" and
"Discontinuance of the MSCI AC Far East Free
ex Japan Index; Alteration of Method of
Calculation" below.
Because MS & Co. is an affiliate of the
Company, potential conflicts of interest may
exist between MS & Co., as Calculation Agent,
and the holders of the Notes, including with
respect to certain determinations and
judgments that MS & Co. must make in
determining the Final Index Value or whether
a Market Disruption Event has occurred. See
"Discontinuance of the MSCI AC Far East Free
ex Japan Index; Alteration of Method of
Calculation" below and "Market Disruption
Event" above. MS & Co., as a registered
broker-dealer, and MSCI, as a unit of MS &
Co., are required to maintain policies and
procedures regarding the handling and use of
confidential proprietary information, and
such policies and procedures will be in
effect throughout the term of the Notes to
restrict the use of information relating to
the calculation of the Index and the Final
Index Value prior to the dissemination of such
information. MS & Co. and MSCI, as a unit of
MS & Co., are obligated to carry out their
duties and functions as Calculation Agent and
publisher of the Index, respectively, in good
faith and using their reasonable judgment.
Bankruptcy and Tax Matters
If a bankruptcy proceeding is commenced in
respect of the Company, the claim of a holder
of a Note may, under Section 502(b)(2) of
Title 11 of the United States Code, be
limited to the par amount of such Note.
It is suggested that prospective investors
who consider purchasing the Notes should
reach an investment decision only after
carefully considering the suitability of the
Notes in light of their particular
circumstances.
Investors should also consider the tax
consequences of investing in the Notes. See
"United States Federal Taxation" below.
MSCI AC Far East Free ex
Japan Index................... Composition of the Index
The Index is a stock index currently
calculated for MSCI by CIPSA and published
and disseminated by MSCI, a unit of MS & Co.
See "--Affiliation of MSCI and the Company"
below. The Index is intended to provide a
performance benchmark for the combined
developed and emerging equity markets in the
Far East excluding Japan. The Index is a
weighted averaging of the U.S. dollar values
of national indices compiled for each of the
markets in the Index. The weightings of the
component national indices are based on the
relative market capitalizations of such
indices (without dividend reinvestment) and
are readjusted on every Index Valuation Day.
The weightings as of September 20, 1996 are
set forth below.
Weight in
MSCI AC Far
Component Number of East Free ex
National Index Securities Japan Index
-------------- ---------- ------------
CHINA FREE 26 0.59%
HONG KONG 38 27.59%
INDONESIA 39 6.41%
KOREA @50% 117 6.81%
MALAYSIA 76 20.29%
PHILIPPINES FREE 30 4.64%
SINGAPORE FREE 38 14.29%
TAIWAN @50% 78 11.18%
THAILAND 76 8.19%
--- -----
518 99.99%(1)
------------
(1) Deviation from 100% due to rounding.
Each component national index of the Index is
designed to reflect the performance of a
national market by capturing approximately
60% of the market capitalization of each
industry group within that market. A
uniform methodology is applied to
calculate and adjust each component
national index. The designation "Free"
indicates that the Index tracks
investments generally available to non-
domestic investors in each market. Some
of the markets in the Index significantly
limit investments by foreigners in various
ways. See "The MSCI AC Far East Free ex
Japan Index as a 'Free' Index" below.
The Component National Indices
The selection of the stocks represented in
the component national indices comprising the
Index is based on the following guidelines:
(i) Define the "Market"
(ii) Capture approximately 60% of the
market capitalization of the country
across all industry groups
(iii) Select the most liquid securities
within each industry
(iv) Select stocks with sufficient public
float
(v) Avoid cross-ownership
(vi) Apply full market capitalization
weights
These overall guidelines have governed the
compilation of the Index since its inception.
However, the policies set forth below
implementing the guidelines and the
guidelines themselves are the responsibility
of, and, ultimately, subject to adjustment
by, MSCI.
(i) The initial research for each component
national index includes tracking both listed
and unlisted shares of domestically listed
companies domiciled in Hong Kong, Indonesia,
Korea, Malaysia, the Philippines, Singapore,
Taiwan and Thailand and of companies
domiciled in China whose shares are available
only to foreign investors and determining the
total market capitalization for each country.
(ii) Once the total market capitalization for
each country is analyzed, approximately 60%
of the capitalization of each industry group
and thus 60% of the entire market is targeted
for each component national index. In this
way each component national index reflects
the industry characteristics of the overall
market and permits the construction of
comparable national indices. With the
uniform application of a 60% coverage target
in each country market, each country carries
its proportional weight in the Index.
Securities are selected to represent an
industry based on size and the portion of
earnings and revenues attributable to that
industry group. Within an industry, the goal
of the Index is to represent the diversity of
business segments to the extent possible. In
some instances, an industry representation
may exceed the 60% target because one or two
large companies dominate an industry.
Similarly, an industry may fall below the 60%
target because its companies lack good
liquidity and float, or because of extensive
cross-ownership.
(iii) When constructing each
MSCI([Registered]) component national index,
the most liquid stocks within each industry
group are selected, all other things being
equal. Liquidity is monitored by tracking
monthly average trading value over time in
order to determine normal levels of volume,
excluding temporary peaks and troughs. A
stock's liquidity is accessed not only in
absolute terms, but also relative to its
market capitalization and to average
liquidity for the country as a whole.
Liquidity is not used as an absolute measure
to select constituents because (a) an
absolute minimum level of liquidity would be
arbitrary and would have different meanings
in different markets and (b) liquidity is
partly a function of the cyclicality of
markets and industries.
(iv) Float is monitored for every security in
each country market, and low float (a small
percentage of shares freely tradeable) may
exclude a stock from consideration in any of
the component national indices comprising the
Index. However, sufficient float is an
important consideration, not an inflexible
rule. A stock with lower float may be
included in a component national index because
the company has an important role in the
local economy, high visibility or broad
impact on financial markets or because a
stock with limited float may still be
actively traded.
(v) Cross-ownership occurs when one company
has a significant ownership in another
company in the same country. In situations
where cross-ownership is substantial, it can
skew industry weights, distort country-level
valuations and overstate a country's true
market size. The Index seeks to identify
cross-ownerships in order to avoid or
minimize them.
(vi) Generally, each component national index
comprising the Index weights each company by
its full market capitalization (both listed
and unlisted shares).
However, as of March 1996, the policies
currently governing the Index were amended to
allow weighing at less than full market
capitalization where very sizeable companies
have been, or are expected to be, brought to
market with modest initial tranches being
made publicly available. Currently, Singapore
Telecommunications Limited, weighted at 40%
of its full market capitalization, is the
only company included in the Index pursuant
to this amendment.
The MSCI AC Far East Free ex Japan Index as a
"Free" Index
In order to address the issue of restrictions
on foreign ownership, the Index is calculated
to exclude companies and share classes that
may not be purchased by foreigners and to
take into account, in some instances, the
differences between the prices paid by foreign
and domestic investors. Foreign ownership
restrictions include such things as (a)
foreign ownership limits across all
securities in that market; (b) foreign
ownership limits on specific stocks or
classes of shares; (c) restrictions on an
investor's ability to withdraw funds; and (d)
investor qualification requirements. In the
case of the Philippines and Singapore, CIPSA
currently calculates both a "Free" and
"non-Free" MSCI([Registered]) index. For
China, only a "Free" index is currently
calculated. These "Free" indices are included
in the Index.
The "Free" indices may have higher or lower
aggregate market capitalization than an index
that includes securities available to both
foreign and domestic investors. For example,
currently the market capitalization of the
Philippines "Free" Index is based exclusively
on securities available to foreign investors
and therefore has a lower market
capitalization than the "non-Free"
Philippines index. The Singapore "Free"
index, on the other hand, has a higher market
capitalization that its "non-Free"
counterpart, due to the different nature of
the restrictions on foreign ownership. In
Singapore, foreign ownership is currently
limited in the case of certain securities to
a certain percentage of total capitalization.
When foreign ownership reaches the permitted
level, the available foreign shares trade
separately, typically at a premium. The
Singapore "Free" Index, unlike its "non-Free"
counterpart, uses the "foreign" price, rather
than the domestic market price, to determine
aggregate market capitalization.
Because restrictions in Korea and Taiwan are
generally tighter for the securities of all
companies than in other markets in the Index,
companies domiciled in those countries are
weighted at 50% of their total market
capitalization in the Index, but there is
currently no separate "Free" index for those
countries.
As restrictions on foreign investment change
and the markets included in the Index
develop, additional "Free" indices may be
included in the Index, either by substitution
or addition, and the method of calculating
particular "Free" indices may have to be
adjusted. Any such change may alter the
relative Index weightings accorded to the
national component indices and increase the
volatility of the particular national
component index affected by the change. See
"Maintenance of the MSCI AC Far East Free ex
Japan Index as a Regional Index" below.
Index Calculation
The Index is calculated daily using the
Laspeyres' concept of a weighted
arithmetic average together with the
concept of "chain-linking," a classical
method of calculating stock market
indices. Under this method of
calculation, the value of the Index on
each Index Valuation Day will equal the
product of (i) the value of the Index on
the immediately preceding Index Valuation
Day and (ii) a fraction, the numerator of
which will be the full market
capitalization of the Index on the
relevant Index Valuation Day and the
denominator of which will be the full
market capitalization of the Index on the
immediately preceding Index Valuation Day.
Share prices used to calculate full market
capitalization are "swept clean" daily and
adjusted for any rights issues, stock
dividends, splits or other such corporate
actions.
Prices used to calculate the component
national indices comprising the Index are the
official exchange closing prices or prices
accepted as such. In general, all prices are
taken from the main stock exchange in each
market except for companies where the trading
volume is more significant on the secondary
exchange.
In countries where there are foreign
ownership limits (Indonesia, Korea, Malaysia,
Taiwan and Thailand), the price quoted on the
official exchange is used in the Index
regardless of whether the limit has been
reached so that in practice foreign investors
might have to pay a premium for such shares
over the official exchange price.
Once prices for the securities comprising
each component national index are determined,
CIPSA, under its contractual arrangement with
MSCI, determines the foreign exchange rates
to be used to convert the prices into U.S.
Dollars. See "--Foreign Exchange Rates"
below. CIPSA then assigns a specific weight
to each security based on its market
capitalization.
Foreign Exchange Rates
To calculate the value of the Index, the
share prices underlying each component
national index are converted into U.S.
Dollars. The WM /Reuters Closing Spot Rates
currently used for such conversions were
established by a committee of investment
managers and data providers, including MSCI,
whose object was to standardize exchange
rates used by the investment community.
Exchange rates used for the conversion of the
component stocks are currently taken daily in
the afternoon London time by the WM Company
and are sourced whenever possible from
multi-contributor quotes on Reuters.
Representative rates are selected by
CIPSA, under its contractual arrangement
with MSCI, for each currency based on a
number of "snapshots" of the latest
contributed quotations taken from the
Reuters service at short intervals around
an appointed time in the afternoon.
WM/Reuters publishes closing bid and offer
rates. These rates are used to calculate
the mid-point exchange rate. Other
sources of exchange rates may be used for
purposes of such conversions in the
future.
Exchange rates are monitored independently
and, under exceptional circumstances (such as
a significant devaluation of a currency after
the daily posting of the WM/Reuters Closing
Spot Rates (or the rates of any successor
source) but prior to the close of the
relevant market) an alternative exchange rate
may be used if the WM/Reuters rate (or the
rate of any successor source) is believed to
be unrepresentative for a given currency on a
particular day. See "--Affiliation of MSCI
and the Company" and "Historical Information
on Foreign Exchange Rates" below.
Maintenance of the MSCI AC Far East Free ex
Japan Index as a Regional Index
The objective of the Index is to represent
the investment opportunities available to
foreign equity investors in the Far East
region excluding Japan as those opportunities
evolve over time. MSCI causes CIPSA to
monitor evolving markets to assess the level
of investment by non-domestic investors and
the degree of government regulation of such
foreign investment. In order to maintain the
representativeness of the Index as a regional
index, structural changes to the Index as a
whole may be made on the basis of such
monitoring by adding or deleting national
component indices from the Index or by
increasing or decreasing the weight given to
the aggregate market capitalization of a
national component index. Currently, such
changes in the Index may only be made on four
dates throughout the year: the last Index
Valuation Day of February, May, August and
November.
At the base date of the Index, only five
component national indices comprised the
Index. Indonesia was added in September 1989
and Korea, at 20% of its aggregate market
capitalization, in July 1992, as these
markets opened and liberalized their
restrictions on foreign equity investments.
In September 1996, the Index was enlarged by
the addition of the China Free index, the
Taiwan index (at 50% of its aggregate market
capitalization) and by the increased weight
accorded Korea's aggregate market
capitalization, which was raised from 20% to
50%. Additional component national indices
may be added to the Index prior to the
maturity of the Notes. Any such adjustments
are made to the Index so that the value of the
Index at the effectiveness of such change is
the same as it was immediately prior to such
change. See "--The MSCI AC Far East Free ex
Japan Index as a 'Free' Index" above.
Maintenance of the National Component Indices
To achieve the six objectives stated above
under "--The Component National Indices,"
CIPSA, under its contractual arrangement with
MSCI, may from time to time, in its sole
discretion, add companies to, or delete
companies from, the component national
indices comprising the Index. There are two
broad categories of changes to the component
national indices comprising the Index. The
first consists of market-driven changes such
as mergers, acquisitions, bankruptcies, etc.
These are announced and implemented as they
occur. The second category consists of
structural changes to reflect the evolution
of a market, for example due to changes in
industry composition or regulations within
any country represented in the Index.
Currently, structural changes in the
component national indices comprising the
Index may only be made on four dates
throughout the year: the last Index
Valuation Day of February, May, August and
November.
Additions. Restructuring any component
national index involves a balancing of
additions and deletions. To maintain
continuity and minimize turnover, MSCI is
reluctant to have index constituents deleted,
and its approach to additions is
correspondingly stringent. As markets grow
because of privatizations, investor interest,
or the relaxation of regulations, index
additions (with or without corresponding
deletions) may be needed to bring industry
representations up to the 60% target.
Companies are considered not only with
respect to their broad industry, but also
with respect to their sub-sector, in order to
achieve, if possible, a broader coverage of
economic activity. Beyond industry
representativeness, new constituents are
selected based on the criteria discussed
above, i.e., float, liquidity,
cross-ownership, etc.
New Issues. In general, new issues are not
eligible for immediate inclusion in the
component national indices comprising the
Index because their liquidity remains
unproven. Usually, new issues undergo a
"seasoning" period of one year to eighteen
months between index restructurings until a
trading pattern and volume are established.
After that time, they are eligible for
inclusion, subject to the criteria discussed
above (industry representation, float,
cross-ownership, etc.).
In the emerging markets, however, it is not
uncommon that a large new issue, usually a
privatization, comes to market and
substantially changes the country's industry
profile. In exceptional circumstances, where
the issue's size, visibility and investor
interest assure high liquidity, and where
excluding it would distort the
characteristics of the market, MSCI may
decide to include it immediately in an index.
Deletions. The primary principle governing
deletions is the continuity of the Index. Of
secondary concern are the turnover costs
associated with deletions. The Index must
represent the full investment cycle,
including bear as well as bull markets.
Out-of-favor stocks may exhibit declining
price, market capitalization or liquidity,
and yet continue to be good
representatives of their industry.
Companies may be deleted because they have
diversified away from their industry
classification, because the industry has
evolved in a different direction from the
company's thrust, or because a better
industry representative exists (either a new
issue or an existing company). In addition,
in order not to exceed the 60% target
coverage of industries and countries, adding
new Index companies may entail corresponding
deletions. Usually such deletions take place
within the same industry, but there are
occasional exceptions.
Adjustments of the underlying stocks in the
national component indices are made so that
the value of the affected component national
index at the effectiveness of such change is
the same as it was immediately prior to such
change.
Index maintenance also includes monitoring
and completing the adjustments for share
changes, stock splits, stock dividends, and
stock price adjustments due to company
restructurings or spinoffs.
A large part of Index maintenance involves
tracking the changes in the number of shares
outstanding of each of the securities
comprising each component national index. In
some cases where a company has multiple
classes of shares, only one (or a few) of
which are liquid, market capitalization is
determined for purposes of the Index by an
assimilation process that applies the share
price of the most liquid class of shares to
the total number outstanding for all classes.
Assimilation is designed to reflect
accurately the approximate weight of
companies in each country.
Affiliation of MSCI and the Company
In 1986, MS & Co. acquired the rights to the
indices and data bases developed by Capital
International Perspective, S.A. ("CIPSA"), a
corporation organized under Swiss law and
based in Geneva, that became the basis of the
Index and other MSCI([Registered]) indices.
MSCI([Registered]) is a registered trademark
and service mark of the Company. MSCI is
also a unit of MS & Co. MSCI and,
ultimately, the Company are responsible for
the Index and the guidelines and policies
governing its composition and calculation.
Currently, MSCI has retained CIPSA to
maintain the Index and make decisions
regarding the calculation of the Index,
including constituent additions and
deletions, adjustments to the component
stocks and other methodological modifications
to the Index. Nevertheless, there can be no
assurance that MSCI will continue to contract
out such maintenance work to CIPSA in the
future.
BECAUSE MSCI IS A UNIT OF MS & CO., A
SUBSIDIARY OF THE COMPANY, POTENTIAL
CONFLICTS OF INTEREST MAY EXIST BETWEEN MSCI
AND THE HOLDERS OF THE NOTES, INCLUDING WITH
RESPECT TO CERTAIN DETERMINATIONS AND
JUDGMENTS MADE IN DETERMINING THE INDEX. THE
POLICIES AND JUDGMENTS FOR WHICH MSCI IS
RESPONSIBLE CONCERNING ADDITIONS, DELETIONS
AND SUBSTITUTIONS OF THE COMPONENT NATIONAL
INDICES COMPRISING THE INDEX AND OF THE STOCKS
UNDERLYING THOSE COMPONENT NATIONAL INDICES
AND THE MANNER IN WHICH CERTAIN CHANGES
AFFECTING SUCH UNDERLYING STOCKS ARE TAKEN
INTO ACCOUNT MAY AFFECT THE VALUE OF THE
INDEX. FURTHERMORE, THE POLICIES AND
JUDGMENTS FOR WHICH MSCI IS RESPONSIBLE WITH
RESPECT TO THE CALCULATION OF THE INDEX,
INCLUDING, WITHOUT LIMITATION, THE SELECTION
OF THE FOREIGN EXCHANGE RATES USED FOR THE
PURPOSE OF ESTABLISHING THE DAILY PRICES OF
THE STOCKS UNDERLYING THE COMPONENT NATIONAL
INDICES, COULD ALSO AFFECT THE LEVEL OF THE
INDEX. IT IS ALSO POSSIBLE THAT MSCI MAY
DISCONTINUE OR SUSPEND CALCULATION OR
DISSEMINATION OF THE INDEX AND THAT,
CONSEQUENTLY, MS & CO., AS CALCULATION AGENT,
ALSO AN AFFILIATE OF THE COMPANY, WOULD HAVE
TO SELECT A SUCCESSOR OR SUBSTITUTE INDEX
FROM WHICH TO CALCULATE THE FINAL INDEX VALUE
AND THE SUPPLEMENTAL REDEMPTION AMOUNT, IF
ANY. ANY SUCH ACTIONS OR JUDGMENTS COULD
ADVERSELY AFFECT THE VALUE OF THE NOTES.
MSCI, as a unit of MS & Co., a registered
broker-dealer, is required to maintain
policies and procedures regarding the handling
and use of confidential proprietary
information, and such policies and procedures
will be in effect throughout the term of the
Notes to restrict the use of information
relating to the calculation of the Index
prior to its dissemination. MSCI is
obligated to carry out its duties and
functions in connection with its
determination of the Index in good faith and
using its reasonable judgment.
Hypothetical Supplemental
Redemption Amount............. The following table illustrates, for a range
of hypothetical Final Index Values, the
Supplemental Redemption Amount for each
$10,000 par amount of Notes based on a
hypothetical Initial Index Value of 394.018.
Hypothetical Hypothetical
Final Average Supplemental Redemption
Index Value Amount
------------- -----------------------
100.000 $10,000.00
200.000 $10,000.00
300.000 $10,000.00
394.018 $10,000.00
500.000 $12,689.78
600.000 $15,227.73
700.000 $17,765.69
800.000 $20,303.64
The above figures are for purposes of
illustration only. The actual Supplemental
Redemption Amount, if any, will depend
entirely on the actual Initial Index Value
and Final Index Value. See "Final Index
Value" and "Supplemental Redemption Amount"
above.
Discontinuance of the MSCI AC
Far East Free ex Japan Index;
Alteration of Method of
Calculation................... If MSCI discontinues publication of the
Index and MSCI or another entity publishes a
successor or substitute index that MS & Co.,
as Calculation Agent, determines, in its sole
discretion, to be comparable to the
discontinued Index (such index being referred
to herein as a "Successor Index"), then the
relevant Index Closing Value shall be
determined by reference to the value of such
Successor Index at the appropriate time of
publication, as determined by MS & Co. on the
Determination Date.
Upon any selection by MS & Co. of a Successor
Index, MS & Co. shall cause written notice
thereof to be furnished to the Trustee, to
the Company and to the holders of the Notes
within three Business Days of such selection.
If MSCI discontinues publication of the Index
prior to, and such discontinuance is
continuing on, the Determination Date and MS
& Co., as Calculation Agent, determines that
no Successor Index is available at such time,
then on such Determination Date, MS & Co.
shall determine the Index Closing Value to be
used in computing the Supplemental Redemption
Amount on such Determination Date using the
following procedure. The Index Closing Value
shall be computed by MS & Co. in accordance
with the formula for and method of
calculating the Index last in effect prior to
such discontinuance, using the closing price
(or, if trading in the relevant securities
has been materially suspended or materially
limited, its good faith estimate of the
closing price that would have prevailed but
for such suspension or limitation) on the
Determination Date of each security most
recently comprising the Index.
Notwithstanding these alternative
arrangements, discontinuance of the
publication of the Index may adversely affect
the value of the Notes.
If at any time the method of calculating the
Index or a Successor Index, or the value
thereof, is changed in a material respect
other than as decribed above under "MSCI AC
Far East Free ex Japan Index," or if the
Index or a Successor Index is in any other way
modified so that such index does not, in the
opinion of MS & Co., as Calculation Agent,
fairly represent the value of the Index or
such Successor Index had such changes or
modifications not been made, then, from and
after such time, MS & Co. shall, at the close
of business in New York City on the
Determination Date, make such calculations
and adjustments as, in the good faith
judgment of MS & Co., may be necessary in
order to arrive at a value of a stock index
comparable to the Index or such Successor
Index, as the case may be, as if such changes
or modifications had not been made, and
calculate the Supplemental Redemption Amount
with reference to the Index or such Successor
Index, as adjusted. Accordingly, if the
method of calculating the Index or a
Successor Index is modified so that the value
of such index is a fraction of what it would
have been if it had not been modified (e.g.,
due to a split in the index), then MS & Co.
shall adjust such index in order to arrive
at a value of the Index or such Successor
Index as if it had not been modified (e.g.,
as if such split had not occurred).
Alternate Determination
Date in case of an Event of
Default...................... In case an Event of Default with respect
to the Notes shall have occurred and be
continuing, the amount declared due and
payable upon any acceleration of the Notes
will be determined by MS & Co, as Calculation
Agent, and will be equal to the par amount of
the Notes plus the Supplemental Redemption
Amount determined as though the Determination
Date were the date of acceleration, plus any
accrued interest to, but not including, the
date of acceleration.
Historical Information
on the Index.................. The following table sets forth the high and
low daily closing values, as well as
end-of-quarter closing values, of the Index
for each quarter in the period from January
1, 1991 through September 25, 1996. CIPSA,
under its contractual arrangement with MSCI,
obtains information for inclusion in or for
use in the calculation of the Index from
sources that it considers reliable. If an
error in such information or in the
calculation of the Index generally for any day
is discovered subsequent to the publication
of the value of the Index and such error
would affect the aggregate market
capitalization used to calculate the Index
for that day by more than 0.5%, then the
value of the Index for that day is
recalculated and the corrected value is
adopted and published. The historical values
of the Index should not be taken as an
indication of future performance, and no
assurance can be given that the Index will
increase sufficiently to cause the holders of
the Notes to receive any Supplemental
Redemption Amount.
Daily Index Closing Values
-------------------------------------
Period
High Low End
------- ------- -------
1991
1st Quarter................. 180.944 139.774 179.033
2nd Quarter................. 182.349 172.483 173.389
3rd Quarter................. 179.828 161.567 168.907
4th Quarter................. 184.445 167.547 184.445
1992
1st Quarter................. 205.734 183.913 201.430
2nd Quarter................. 226.459 194.664 225.783
3rd Quarter................. 226.614 202.580 215.564
4th Quarter................. 239.948 210.285 218.483
1993
1st Quarter................. 239.423 216.295 237.368
2nd Quarter................. 273.454 237.368 264.651
3rd Quarter................. 298.129 259.732 298.129
4th Quarter................. 434.341 299.099 434.341
1994
1st Quarter................. 449.037 328.350 338.337
2nd Quarter................. 369.234 333.978 351.122
3rd Quarter................. 407.514 342.642 392.655
4th Quarter................. 399.837 329.301 351.775
1995
1st Quarter................. 351.871 300.159 345.545
2nd Quarter................. 392.069 337.833 376.384
3rd Quarter................. 393.502 359.157 368.787
4th Quarter................. 375.729 341.547 375.729
1996
1st Quarter................. 420.700 375.729 410.176
2nd Quarter................. 420.916 403.108 407.157
3rd Quarter
(through September 25,
1996)..................... 408.252 374.174 394.018
Historical Information on
Foreign Exchange Rates........ The following chart describes the historical
exposure of the Index to fluctuations in the
value of the U.S. Dollar against the net value
of the component currencies in the Index, as
determined by giving effect to the weightings
of the national component indices in the
Index. The chart compares the historical
level of the Index as calculated in U.S.
Dollars, indicated by the dotted line, to the
level of the Index as it would have been
calculated without exposure to exchange rate
fluctuations between local currencies and the
U.S. Dollar (i.e., by using constant exchange
rates based on the exchange rate first used
for each currency in the calculation of the
Index), indicated by the solid line.
The following is a description of a graphic chart which illustrates six month
periods beginning with December 1987 and ending with June 1996. The ranges
are 100 to 450:
MSCI AC Far East Free ex Japan Index
DATE in US$ in Local
---- ------ --------
Dec-87 100 100
Jan-88 104.964 105.693
Feb-88 105.719 107.062
Mar-88 111.196 112.284
Apr-88 115.877 117.243
May-88 114.918 116.58
Jun-88 124.809 127.181
Jul-88 127.023 129.63
Aug-88 116.102 118.913
Sep-88 116.601 119.473
Oct-88 122.248 124.544
Nov-88 123.616 125.139
Dec-88 125.844 127.742
Jan-89 140.637 142.691
Feb-89 139.497 141.563
Mar-89 141.885 144.558
Apr-89 150.758 152.739
May-89 143.78 146.258
Jun-89 133.152 135.432
Jul-89 144.719 146.453
Aug-89 141.955 144.5
Sep-89 151.023 153.43
Oct-89 148.167 150.682
Nov-89 154.084 156.758
Dec-89 161.086 162.892
Jan-90 160.572 161.757
Feb-90 166.625 168.025
Mar-90 167.037 169.366
Apr-90 159.666 161.532
May-90 175.043 176.235
Jun-90 178.792 179.92
Jul-90 189.255 189.293
Aug-90 161.669 180.917
Sep-90 136.531 135.88
Oct-90 144.822 143.299
Nov-90 139.158 138.199
Dec-90 145.503 144.884
Jan-91 153.079 153.122
Feb-91 171.604 170.825
Mar-91 179.033 180.762
Apr-91 176.584 177.733
May-91 178.636 179.159
Jun-91 173.389 174.695
Jul-91 178.807 179.599
Aug-91 174.227 174.399
Sep-91 168.907 187.571
Oct-91 171.045 170.285
Nov-91 176.083 174.634
Dec-91 184.445 181.64
Jan-92 197.051 193.087
Feb-92 203.598 199.113
Mar-92 201.43 196.933
Apr-92 208.239 203.338
May-92 222.082 215.93
Jun-92 225.783 218.784
Jul-92 219.426 212.376
Aug-92 211.73 203.827
Sep-92 215.564 207.8
Oct-92 234.484 227.069
Nov-92 225.58 219.695
Dec-92 218.483 214.268
Jan-93 225.019 220.979
Feb-93 237.865 233.875
Mar-93 237.368 232.3
Apr-93 257.741 251.297
May-93 272.184 264.983
Jun-93 264.651 258.775
Jul-93 265.8 260.135
Aug-93 287.582 280.68
Sep-93 298.129 290.415
Oct-93 352.642 344.072
Nov-93 349.753 341.508
Dec-93 434.341 430.33
Jan-94 404.28 402.169
Feb-94 380.62 377.17
Mar-94 338.337 333.687
Apr-94 353.451 347.837
May-94 368.099 358.147
Jun-94 351.122 341.957
Jul-94 370.226 359.365
Aug-94 399.772 386.558
Sep-94 392.655 378.956
Oct-94 399.8371 384.442
Nov-94 361.197 347.033
Dec-94 351.775 338.158
Jan-95 313.633 301.817
Feb-95 344.902 331.839
Mar-95 345.545 329.86
Apr-95 341.572 323.234
May-95 382.626 361.763
Jun-95 376.384 354.948
Jul-95 381.723 360.748
Aug-95 362.973 346.787
Sep-95 368.787 352.728
Oct-95 362.889 347.793
Nov-95 358.386 343.7
Dec-95 375.729 380.765
Jan-96 409.658 394.847
Feb-96 407.665 392.21
Mar-96 410.176 394.037
Apr-96 420.916 402.846
May-96 416.105 399
Jun-96 407.157 390.958
Jul-96 377.114 362.153
Aug-96 390.025 374.276
Use of Proceeds and Hedging... The net proceeds to be received by the
Company from the sale of the Notes will be
used for general corporate purposes and, in
part, by the Company or one or more of its
affiliates in connection with hedging the
Company's obligations under the Notes,
including hedging market risks associated
with the Supplemental Redemption Amount.
Such hedging may involve the purchase or sale
of exchange traded or over the counter
options on the Index, national component
indices or individual stocks included in the
national component indices, futures contracts
on the Index or national component indices
and options on such futures contracts. It may
also involve the purchase of individual
stocks included in the component national
indices or positions in any other instruments
that the Company and its affiliates may wish
to use in connection with such hedging. The
Company, through its subsidiaries, is likely
to modify its hedge position throughout the
life of the Notes by purchasing and selling
such stocks, options, futures contracts,
options on futures contracts and other
instruments. Although the Company has no
reason to believe that its hedging activity
will have a material impact on the price of
such stocks, options, futures contracts,
options on futures contracts and other
instruments, there can be no assurance that
the Company will not affect such prices as a
result of its hedging activities. See also
"Use of Proceeds" in the accompanying
Prospectus.
United States Federal Taxation The following discussion is based on the
opinion of Davis Polk & Wardwell, special tax
counsel to the Company. This discussion
supplements the "United States Federal
Taxation" section in the accompanying
Prospectus Supplement and should be read in
conjunction therewith. Any limitations on
disclosure and any defined terms contained in
the Prospectus Supplement are equally
applicable to the summary below.
For U.S. federal income tax purposes, the
Notes will be treated as debt obligations
subject to final Treasury Regulations
published on June 14, 1996, relating to
contingent debt obligations (the
"Regulations").
All prospective purchasers are urged to
consult their tax advisors regarding the
consequences of holding the Notes in their
particular circumstances. This general
discussion addresses only initial holders who
purchase the Notes at the "Issue Price," that
is, the first price to the public (not
including bond houses, brokers or similar
persons or organizations acting in the
capacity of underwriters, placement agents or
wholesalers) at which a substantial amount of
the Notes is sold for money. Other
prospective purchasers, including purchasers
of Notes in the secondary market, should also
consult their tax advisers regarding special
rules applicable to them, because the
Regulations generally replace or modify,
among others, the rules on market discount,
acquisition premium, and amortizable bond
premium described in the accompanying
Prospectus Supplement.
United States Holders. Under the Regulations,
for each accrual period, the amount of
interest that accrues on the Note for federal
income tax purposes equals the product of (i)
the "Adjusted Issue Price" (as of the
beginning of the accrual period) and (ii) the
"Comparable Yield" (adjusted for the length
of the accrual period). This amount is
ratably allocated to each day in the accrual
period and is includible in income by a
United States Holder for each day in the
accrual period on which the United States
Holder holds the Note. The Adjusted Issue
Price is the Issue Price of the Note,
increased by any interest previously accrued,
and decreased by any coupon interest
previously paid, on the Note. The Comparable
Yield is the annual yield the Company would
pay, as of the issue date, on a fixed rate
note with no contingent payment but with
terms and conditions otherwise comparable to
those of the Note. Amounts treated as
interest under the Regulations are treated as
OID for all purposes of the Code.
The Company has determined that the
Comparable Yield is %, compounded annually.
Under the Regulations, the Company is
required, solely for tax purposes, to provide
a schedule of the projected amounts of
payments on a Note (the "Schedule"). Based
on the Company's determination of the
Comparable Yield, the Schedule for a Note
with a par amount of $10,000 consists of (i)
the annual coupon interest payments
(including the coupon interest payment due at
maturity) of $ and (ii) a projected
amount due at maturity, equal to $
(the "Projected Amount"). For U.S. federal
income tax purposes, a United States Holder
is required to use the Comparable Yield and
the Schedule in determining its interest
accruals and adjustments in respect of the
Note, unless such United States Holder timely
discloses and justifies the use of other
estimates to the Internal Revenue Service.
THE COMPARABLE YIELD, THE SCHEDULE AND THE
PROJECTED AMOUNT ARE NOT PROVIDED FOR ANY
PURPOSE OTHER THAN THE DETERMINATION OF
UNITED STATES HOLDERS' INTEREST ACCRUALS AND
ADJUSTMENTS IN RESPECT OF THE NOTES, AND THE
COMPANY MAKES NO REPRESENTATION REGARDING THE
ACTUAL AMOUNT OF THE SUPPLEMENTAL REDEMPTION
AMOUNT, WHICH MAY BE ZERO.
At maturity, if the amount received (other
than the coupon interest payment received at
maturity) is more than the Projected Amount,
the difference will produce a "Net Positive
Adjustment" under the Regulations, which will
be treated as additional interest for the
taxable year. If the amount received is less
than the Projected Amount, the difference
will produce a "Net Negative Adjustment"
under the Regulations, which will be treated
as a reduction of interest, for the taxable
year, that the United States Holder would
otherwise have accounted for on the Note. If
the Net Negative Adjustment exceeds such
interest, the excess will be treated as
ordinary loss. The Regulations provide that
a Net Negative Adjustment is not subject to
the two percent floor limitation imposed on
miscellaneous deductions under Section 67 of
the Code.
Upon the sale or exchange of a Note, the
United States Holder will recognize gain or
loss equal to the difference between the
United States Holder's "Adjusted Basis" and
the amount realized. The Adjusted Basis will
be the United States Holder's original basis
in the Note, increased by the interest
previously accrued by the United States
Holder on the Note and decreased by the
amount of all coupon interest payments made
on the Note to the United States Holder. Any
gain upon sale or exchange of a Note will be
additional interest income; any loss will be
ordinary loss to the extent of the interest
previously included as income by the United
States Holder on the Note, and thereafter,
capital loss. The Regulations do not
explicitly exempt loss treated as ordinary
loss upon the sale or exchange of a Note from
the two percent floor limitation imposed on
miscellaneous deductions under Section 67 of
the Code.
The distinction between capital loss and
ordinary loss is potentially significant in
several respects. For example, limitations
apply to a United States Holder's ability to
offset capital losses against ordinary income.
See also "United States Federal Taxation" in
the accompanying Prospectus Supplement.
United States Alien Holders. As used herein,
the term "United States Alien Holder" means
an owner of a Note that is, for United States
federal income tax purposes, (i) a
nonresident alien individual, (ii) a foreign
corporation, (iii) a nonresident alien
fiduciary of a foreign trust or estate or
(iv) a foreign partnership one or more of the
members of which is, for United States federal
income tax purposes, a nonresident alien
individual, a foreign corporation or a
nonresident alien fiduciary of a foreign
trust or estate. The following summary does
not deal with persons subject to special
rules, such as nonresident alien individuals
that have lost United States citizenship or
that have ceased to be treated as resident
aliens, corporations that are treated as
foreign or domestic personal holding
companies, controlled foreign corporations,
passive foreign investment companies or
certain other United States Alien Holders
that are owned or controlled by persons
subject to United States federal income tax.
Under present United States federal law, and
subject to the discussion below concerning
backup withholding, payments of principal,
interest and premium (including payment of the
Supplemental Redemption Amount, if any, at
maturity) on the Notes by the Company or any
paying agent to any United States Alien
Holder, and gain realized on the sale,
exchange or other disposition of such Note,
will not be subject to United States federal
income or withholding tax, provided that: (i)
such Holder does not own, actually or
constructively, 10 percent or more of the
total combined voting power of all classes of
stock of the Company entitled to vote, is not
a controlled foreign corporation related,
directly or indirectly, to the Company
through stock ownership, and is not a bank
receiving interest described in Section
881(c)(3)(A) of the Code; (ii) the statement
requirement set forth in Section 871(h) or
Section 881(c) of the Code has been fulfilled
with respect to the beneficial owner, as
discussed below; (iii) such Holder is not an
individual who is present in the United
States for 183 days or more in the taxable
year of disposition, or such individual does
not have a "tax home" (as defined in Section
911(d)(3) of the Code) or an office or other
fixed place of business in the United States;
and (iv) such payments and gain are not
effectively connected with the conduct by
such Holder of a trade or business in the
United States.
Sections 871(h) and 881(c) of the Code
require that, in order to obtain the
portfolio interest exemption from the
withholding tax described in the paragraph
above, either the beneficial owner of the
Note, or a securities clearing organization,
bank or other financial institution that
holds customers' securities in the ordinary
course of its trade or business (a "Financial
Institution") and that is holding the Note on
behalf of such beneficial owner, file a
statement with the withholding agent to the
effect that the beneficial owner of the Note
is not a United States Holder. Under
temporary United States Treasury Regulations,
such requirement will be fulfilled if the
beneficial owner of a Note certifies on
Internal Revenue Service Form W-8, under
penalties of perjury, that it is not a United
States Holder and provides its name and
address, and any Financial Institution
holding the Note on behalf of the beneficial
owner files a statement with the withholding
agent to the effect that it has received such
a statement from the Holder (and furnishes the
withholding agent with a copy thereof).
If a United States Alien Holder of a Note is
engaged in a trade or business in the United
States, and if interest on the Note (including
the Supplemental Redemption Amount, if any)
is effectively connected with the conduct of
such trade or business, the United States
Alien Holder, although exempt from the
withholding tax discussed in the preceding
paragraphs, will generally be subject to
regular United States income tax on interest
and on any gain realized on the sale,
exchange or other disposition of a Note in the
same manner as if it were a United States
Holder. In lieu of the certificate described
in the preceding paragraph, such a Holder will
be required to provide to the withholding
agent a properly executed Internal Revenue
Service Form 4224, or a successor form, in
order to claim an exemption from withholding
tax. In addition, if such United States
Alien Holder is a foreign corporation, it may
be subject to a branch profits tax equal to
30% (or such lower rate provided by an
applicable treaty) of its effectively
connected earnings and profits for the
taxable year, subject to certain adjustments.
For purposes of the branch profits tax,
interest (including the Supplemental
Redemption Amount, if any) on and any gain
recognized on the sale, exchange or other
disposition of a Note will be included in the
effectively connected earnings and profits of
such United States Alien Holder if such
interest or gain, as the case may be, is
effectively connected with the conduct by the
United States Alien Holder of a trade or
business in the United States.
Under Section 2105(b) of the Code, a Note
held by an individual who is not a citizen or
resident of the United States at the time of
his death will not be subject to United
States federal estate tax as a result of such
individual's death, provided that the
individual does not own, actually or
constructively, 10 percent or more of the
total combined voting power of all classes of
stock of the Company entitled to vote and, at
the time of such individual's death, payments
with respect to such Note would not have been
effectively connected to the conduct by such
individual of a trade or business in the
United States.
Under current Treasury Regulations, backup
withholding (31%) will not apply to payments
by the Company made on a Note if the
certifications required by Sections 871(h)
and 881(c) are received, provided in each
case that the Company or such paying agent, as
the case may be, does not have actual
knowledge that the payee is a United States
person.
Under current Treasury Regulations, payments
on the sale, exchange or other disposition of
a Note made to or through a foreign office of
a broker generally will not be subject to
backup withholding. However, if such broker
is a United States person, a controlled
foreign corporation for United States tax
purposes or a foreign person 50 percent or
more of whose gross income is effectively
connected with a United States trade or
business for a specified three-year period,
information reporting will be required unless
the broker has in its records documentary
evidence that the beneficial owner is not a
United States person and certain other
conditions are met or the beneficial owner
otherwise establishes an exemption. Under
proposed Treasury Regulations, backup
withholding may apply to any payment which
such broker is required to report if such
broker has actual knowledge that the payee is
a United States person. Payments to or
through the United States office of a broker
will be subject to backup withholding and
information reporting unless the Holder
certifies, under penalties of perjury, that
it is not a United States person or otherwise
establishes an exemption.
United States Alien Holders of Notes should
consult their tax advisers regarding the
application of information reporting and
backup withholding in their particular
situations, the availability of an exemption
therefrom, and the procedure for obtaining
such an exemption, if available. Any amounts
withheld from a payment to a United States
Alien Holder under the backup withholding
rules will be allowed as a credit against
such Holder's United States federal income
tax liability and may entitle such Holder to a
refund, provided that the required
information is furnished to the Internal
Revenue Service.
