PROSPECTUS Dated May 1, 1996 Amendment No. 1 dated November 12, 1996 to
PROSPECTUS SUPPLEMENT Pricing Supplement No. 43 to
Dated May 1, 1996 Registration Statement No. 333-01655
Dated October 30, 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
November 13, 2001 (the "Maturity Date"). There will be no periodic payments
of interest on the Notes. 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 an amount equal to the greater of (i) 5.12% of the
par amount of such Note (the "Guaranteed Yield") and (ii) an amount (the
"Supplemental Redemption Amount") based on the percentage increase, if any, in
the Final Average 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, (ii) 1.017
and (iii) a fraction, the numerator of which will be the Final Average 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 391.377. The Final
Average Index Value will equal the arithmetic average of the closing values of
the Index on each of April 30, 2001, May 30, 2001, July 2, 2001, July 30,
2001, August 30, 2001, October 1, 2001 and October 30, 2001 (the
"Determination Dates"), except as described herein. See "Determination Dates"
and "Market Disruption Event" in this Pricing Supplement. If the Final
Average Index Value is equal to, less than or not sufficiently greater than
the Initial Index Value, the holder of a Note will be repaid the par amount of
such Note plus the Guaranteed Yield, 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 Average Index Value,"
"Determination Dates" 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-6 through PS-9 herein.
---------------
PRICE 100%
---------------
Price to Public Agent's Commissions(1) Proceeds to Company
Per Note. 100.00% 0.475% 99.525%
Total.... $50,000,000 $237,500 $49,762,500
- ------------
(1) The Company has agreed to indemnify the Agent against certain liabilities,
including liabilities under the Securities Act of 1933.
MORGAN STANLEY & CO.
Incorporated
Capitalized terms not defined herein have the meanings given to such terms in
the accompanying Prospectus Supplement.
Principal Amount.............. $50,000,000
Maturity Date................. November 13, 2001
Interest Rate ................ 0.00%
Specified Currency............ U.S. Dollars
Issue Price................... 100%
Settlement Date (Original
Issue Date)................... November 13, 1996
CUSIP......................... 61745EHU8
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 an amount equal to the greater
of (i) 5.12% of the par amount of such Note
(the "Guaranteed Yield") and (ii) the
Supplemental Redemption Amount, if any.
Supplemental Redemption
Amount ....................... The Supplemental Redemption Amount, if any,
with respect to each Note at maturity will
equal the product of (i) the par amount of
such Note, (ii) 1.017 and (iii) a fraction,
the numerator of which will be the Final
Average 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 1.017 x (Final Average 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
and the Maturity 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 391.377.
Final Average Index Value..... The Final Average Index Value will be the
arithmetic average of the Index Closing
Values (as defined below) on each of the
Determination Dates, as determined by MS &
Co., as Calculation Agent.
Index Closing Value .......... The Index Closing Value, as of any
Determination Date, 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 such 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 Dates........... The Determination Dates will be April 30,
2001, May 30, 2001, July 2, 2001, July 30,
2001, August 30, 2001, October 1, 2001 and
October 30, 2001; provided that if a Market
Disruption Event occurs on any such date,
such 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 any of April 30, 2001, May 30,
2001, July 2, 2001, July 30, 2001, August 30,
2001, October 1, 2001 and October 30, 2001,
as the case may be, then (i) such fifth
succeeding Index Valuation Day will be deemed
to be the relevant 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.
Hypothetical Supplemental
Redemption Amount and
Hypothetical Maturity
Redemption Amount............. The following table illustrates, for a range
of hypothetical Final Average Index Values,
the Supplemental Redemption Amount and the
Maturity Redemption Amount for each $10,000
par amount of Notes based on the Initial
Index Value of 391.377.
Hypothetical Hypothetical
Hypothetical Supplemental Maturity
Final Average Redemption Redemption
Index Value Amount Amount
------------- ------------ -------------
100.000 $0.00 $10,512.00
200.000 $0.00 $10,512.00
300.000 $0.00 $10,512.00
391.377 $0.00 $10,512.00
400.000 $224.07 $10,512.00
500.000 $2,822.59 $12,822.59
600.000 $5,421.11 $15,421.11
700.000 $8,019.62 $18,019.62
800.000 $10,618.14 $20,618.14
The above figures are for purposes of
illustration only. The actual Supplemental
Redemption Amount, if any, and the actual
Maturity Redemption Amount will depend
entirely on the actual Final Average Index
Value. See "Final Average Index Value,"
"Supplemental Redemption Amount" and
"Maturity Redemption Amount" above.
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
Average 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 by exercising the
diligence and reasonableness of a prudent
expert in comparable circumstances.
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."
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 an amount equal to the greater
of (i) the Guaranteed Yield and (ii) the
Supplemental Redemption Amount determined as
though each of the Determination Dates
scheduled to occur on or after the date of
acceleration were the date of acceleration.
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 Average Index Value of the Index
does not sufficiently exceed the Initial
Index Value, the holders of the Notes will
receive only the par amount of each Note plus
the Guaranteed Yield. Because the Final
Average Index Value will be based upon an
average of closing values of the Index on
specified days (the Determination Dates) over
a period of six successive months, a high
value of the Index as measured on any
Determination Date may be substantially or
entirely offset by lower values of the Index
on other Determination Dates.
Because of the formula for determining the
Maturity Redemption Amount, the effective
yield to maturity on the Notes 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 the Guaranteed Yield at maturity is not
likely to compensate the holder fully for any
opportunity cost implied by inflation and
other factors relating to the time value of
money. In addition, the percentage
appreciation of the Index based on the Final
Average 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 Average 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 Dates and
to the maturity of the Notes and market
interest rates. In addition, the Final
Average 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 Average 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 each of the
remaining Determination Dates. 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 Average 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. In
addition, the national component indices
comprising the Index have been adjusted in the
past and are subject to further adjustment
during the term of the Notes.
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 may be 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, or
itself calculate an index value, from which
to calculate the Final Average 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--The
MSCI AC Far East Free ex Japan Index as a
'Free' 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 Average 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 Average 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
by exercising the diligence and
reasonableness of a prudent expert in
comparable circumstances.
Tax Matters
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, with a base date of January 1,
1988, is a stock index currently calculated
for MSCI by CIPSA and published and
disseminated daily by MSCI, a unit of MS &
Co., on Bloomberg Financial Markets and
Reuters Limited. 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 currently in
the Index. See "--Maintenance of the MSCI AC
Far East Free ex Japan Index as a Regional
Index" below. 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 October 30, 1996 are set
forth below.
Weight in
MSCI AC Far
Component Number of East Free ex
National Index Securities Japan Index
- ------------------ ---------- ------------
CHINA FREE 26 0.586%
HONG KONG 39 29.624%
INDONESIA 39 6.537%
KOREA @50% 116 6.694%
MALAYSIA 76 20.795%
PHILIPPINES FREE 30 4.142%
SINGAPORE FREE 38 13.673%
TAIWAN @50% 77 10.984%
THAILAND 76 6.964%
--- ------
517 99.999% (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 than 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. On October 15, 1996, CIPSA
announced that additional "Free" indices
would be calculated for Malaysia, Thailand
and Indonesia commencing during the first
quarter of 1997. The substitution of these
new "Free" indices into the Index will not be
immediate and will be announced at least two
months prior to their inclusion. At the time
of any such substitution or addition, 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 (subject to the recently announced
development of additional "Free" indices for
Indonesia, Malaysia and Thailand) 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, by
substituting "Free" indices for "non-
Free" indices 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 effective date 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, CIPSA, under
its contractual arrangement with 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 effective date 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, OR
ITSELF CALCULATE AN INDEX VALUE, 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
by exercising the diligence and
reasonableness of a prudent expert in
comparable circumstances.
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 will 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 Dates.
Upon any selection by MS & Co. of a Successor
Index, MS & Co. will 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, any of the Determination Dates
and MS & Co., as Calculation Agent,
determines that no Successor Index is
available at such time, then on each
Determination Date, MS & Co. will determine
the Index Closing Value to be used in
computing the Supplemental Redemption Amount
on each Determination Date using the
following procedure. The Index Closing Value
will 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 (exercising
the diligence and reasonableness of a prudent
expert in comparable circumstances) of the
closing price that would have prevailed but
for such suspension or limitation) on such
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, other than as described above
under "MSCI AC Far East Free ex Japan Index,"
the method of calculating the Index or a
Successor Index, or the value thereof, is
changed in a material respect 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. will, at the close
of business in New York City on each
Determination Date, make such calculations
and adjustments as, in the good faith
judgment of MS & Co. (exercising the
diligence and reasonableness of a prudent
expert in comparable circumstances), 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. will 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).
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 October 30, 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
------- ------- -------
[S] [C] [C] [C]
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............... 408.252 374.174 399.380
4th Quarter
(through October 30, 1996) 399.654 387.668 389.735
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.
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.
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-88 114.918 116.56
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-88 122.346 124.544
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-89 144.729 146.453
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-90 161.669 160.917
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-91 153.079 152.122
Feb-91 171.604 170.825
Mar-91 179.033 180.762
Apr-91 176.564 177.733
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-91 168.907 167.571
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-93 225.016 220.979
Feb-93 237.865 233.675
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-94 351.775 338.156
Jan-95 313.633 301.617
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-95 362.973 346.767
Sep-95 368.787 352.728
Oct-95 362.689 347.793
Nov-95 358.386 343.7
Dec-95 375.729 360.765
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
Sep-96 399.380 383.836
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. On
or prior to the date of this Pricing
Supplement, the Company, through its
affiliates, hedged its anticipated exposure in
connection with the Notes by purchasing
individual stocks included in the component
national indices and other stocks in the
component national markets. The Company,
through its subsidiaries, is likely to modify
its hedge position throughout the life of the
Notes by purchasing and selling such stocks
or by purchasing and selling 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 or positions in any
other instruments that the Company and its
affiliates may wish to use in connection with
such hedging. 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 United
States 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 United States Alien Holders and
purchasers of Notes in the secondary market,
if any, should also consult their tax
advisors regarding special rules applicable to
them; in particular, 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.
Under the Regulations, for each accrual
period, the amount of interest that accrues
on a 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 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 original issue discount for all
purposes of the Code.
The Company has determined that the
Comparable Yield is an annual rate of 6.44%,
compounded semi-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 (assuming a par amount of
$10,000 or with respect to each integral
multiple thereof) consists of a projected
amount due at maturity, equal to $13,729 (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 PAYMENT AT MATURITY.
At maturity, if the amount received 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. 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 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.
