PROSPECTUS SUPPLEMENT
(To Prospectus dated May 1, 1996)
$69,550,000
Protected Exchangeable EQuity-linked Securities SM
Morgan Stanley Group Inc.
PEEQS SM DUE MAY 1, 2001
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Exchangeable For an Amount Payable in U.S. Dollars
based on 10% of the level of the
S&P 500 COMPOSITE STOCK PRICE INDEX
------------
The principal amount of each of the Protected Exchangeable EQuity-linked
Securities Due May 1, 2001 ("PEEQS") of Morgan Stanley Group Inc. (the
"Company") will be $69.55 ("Par"), and there will be no periodic payments
of interest. The PEEQS will mature on May 1, 2001 (the "Maturity Date").
At maturity, the holder of a PEEQS will receive, subject to a prior
exercise of the Exchange Right (as described below) with respect to such
PEEQS, the greater of (i) Par and (ii) an amount in dollars equal to 10%
of the Final Index Value (as defined herein) of the S&P 500 Composite Stock
Price Index (the "S&P 500 Index"), published by Standard & Poor's ("S&P"),
a Division of the McGraw-Hill Companies, Inc. The PEEQS will not be
redeemable by the Company in whole or in part prior to the Maturity Date.
On any Exchange Date (as defined below), the holder of a PEEQS will have
the right (the "Exchange Right"), subject to the completion by the holder
and delivery to the Company and the Calculation Agent of an Official Notice
of Exchange prior to 11:00 a.m. New York City time on such date, to
exchange a minimum of 100 PEEQS for an amount in dollars per PEEQS equal to
10% of the applicable Index Value of the S&P 500 Index. An Exchange Date
will be any Trading Day (as defined herein) that falls during the period
beginning November 17, 1997 and ending on April 20, 2001.
For information as to the calculation of Index Values, the Final Index
Value and certain tax consequences to beneficial owners of PEEQS, see
"Description of PEEQS-Exchange Right" and "United States Federal Taxation"
in this Prospectus Supplement. The Company will cause Index Values and the
Final Index Value to be determined by Morgan Stanley & Co. Incorporated
(the "Calculation Agent") for Chemical Bank, as Trustee under the Senior
Debt Indenture. The Index Value (as defined herein) on the date of this
Prospectus Supplement was 665.60.
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An investment in PEEQS entails risks not associated with similar
investments in a conventional debt security, as described under "Risk
Factors" on S-6 through S-8 herein.
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The PEEQS have been approved for listing on the American Stock Exchange,
Inc. (the "AMEX"), subject to official notice of issuance. The AMEX
symbol for the PEEQS is "MPQ."
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"PEEQS" and "Protected Exchangeable EQuity-linked Securities" are service
marks of the Company.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE $69.55 A PEEQS
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Underwriting
Price to Discounts and Proceeds to
Public(1) Commissions(1)(2) Company(3)
----------- ----------------- -----------
Per PEEQS... $69.55 $1.73 $67.82
Total(4).... $69,550,000 $1,730,000 $67,820,000
- ------
(1) The price to public and underwriting discounts and commissions for
investors purchasing 100,000 or more PEEQS in any single transaction
will be $68.50675 per PEEQS and $0.68675 per PEEQS, respectively,
subject to the holding period requirement described under
"Underwriters" herein. Should investors who are subject to the holding
period requirements sell their PEEQS once the holding period
requirement is no longer applicable, the market price of the PEEQS may
be adversely affected. See "Underwriters" herein.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
(3) Before deducting expenses payable by the Company estimated at $42,670.
(4) The Company has granted to the Underwriters an option, exercisable within
30 days of the date of this Prospectus Supplement, to purchase up to an
aggregate of 150,000 additional PEEQS at the price to public less
underwriting discounts and commissions, for the purpose of covering
over-allotments, if any. If the Underwriters exercise such option in full,
the total price to public, underwriting discounts and commissions and
proceeds to Company will, subject to note 1 above, be $79,982,500,
$1,989,500, and $77,993,000, respectively. See "Underwriters."
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The PEEQS are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal
matters by Davis Polk & Wardwell, counsel for the Underwriters. It is
expected that delivery of the PEEQS will be made on or about May 20 1996,
at the office of Morgan Stanley & Co. Incorporated, New York, N.Y.,
against payment therefor in immediately available funds.
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MORGAN STANLEY & CO.
DONALDSON, LUFKIN & JENRETTE
Incorporated
Securities Corporation
May 14, 1996
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE PEEQS
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE OR OTHERWISE.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the consolidated ratio of earnings to
fixed charges for the Company for the periods indicated.
<TABLE>
<CAPTION>
(Unaudited) Fiscal
Three Months Ended Period Ended Fiscal Year Ended Year Ended
February 29 January 31 November 30 January 31 December 31
----------- ---------- ------------ ------------------ ------------
1996 1995 1995 1995 1994 1993 1991
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings
to fixed charges 1.2 1.0 1.2 1.1 1.2 1.2 1.2
</TABLE>
For the purpose of calculating the ratio of earnings to fixed charges,
earnings consist of income before income taxes and fixed charges (exclusive of
preferred stock dividends). Fixed charges for the purpose of calculating the
ratio of earnings to fixed charges include interest expense, capitalized
interest and that portion of rentals representative of an interest factor.
DESCRIPTION OF PEEQS
The following description of the particular terms of the PEEQS offered
hereby (referred to in the Prospectus as the "Offered Debt Securities")
supplements the description of the general terms and provisions of the Debt
Securities set forth in the Prospectus, to which description reference is
hereby made. In particular, as used under this caption, the term "Company"
means Morgan Stanley Group Inc. The following summary of the PEEQS is
qualified in its entirety by reference to the Senior Debt Indenture referred
to in the Prospectus.
The aggregate number of PEEQS to be issued will be 1,000,000, subject to
the over-allotment option granted by the Company to the Underwriters (see
"Underwriters" herein). The PEEQS will mature on May 1, 2001, will constitute
part of the senior debt of the Company and will rank pari passu with all other
unsecured and unsubordinated debt of the Company. There will be no periodic
payments of interest on the PEEQS.
Payment at Maturity
At maturity (including as a result of acceleration or otherwise), the
holder of a PEEQS will receive, subject to a prior exercise of the Exchange
Right with respect to such PEEQS, the greater of (i) Par and (ii) an amount in
dollars, as determined by the Calculation Agent, equal to 10% of the Final
Index Value (as defined herein) of the S&P 500 Index. References to "PEEQS"
refer to each $69.55 principal amount of any PEEQS.
Exchange Right
On any Exchange Date, the holder of a PEEQS will be entitled upon (i)
completion by the holder and delivery to the Company and the Calculation Agent
of an Official Notice of Exchange (in the form of Annex A attached hereto)
prior to 11:00 a.m. New York City time on such date and (ii) delivery on such
date of such PEEQS to the Trustee, to exchange a minimum of 100 PEEQS for an
amount in dollars per PEEQS, as determined by the Calculation Agent, equal to
10% of the Index Value (as defined herein) of the S&P 500 Index on the
applicable Determination Date. Such payment will be made five Business Days
after the Determination Date with respect to any Exchange Date, subject to
delivery of any such PEEQS to the Trustee on the Exchange Date.
Upon an exercise of the Exchange Right or at maturity, the Company shall,
or shall cause the Calculation Agent to, deliver to the Trustee for delivery
to the holders the cash to which the holders are entitled. All dollar amounts
resulting from the calculation of the payment amounts due upon exchange or at
maturity will be rounded to the nearest cent with one-half cent being rounded
upwards.
An "Exchange Date" will be any Trading Day that falls during the period
beginning November 17, 1997 and ending on April 20, 2001. The "Final Index
Value" will be the Index Value on the Determination Date with respect to the
Maturity Date, as determined by the Calculation Agent. The "Index Value", as
of any Determination Date, will equal the closing value of the S&P 500 Index
or any Successor Index (as defined herein) at the regular official weekday
close of trading on such Determination Date. See "S&P 500 Index --
Discontinuance of the S&P 500 Index; Alteration of Method of Calculation"
below. References herein to the S&P 500 Index shall be deemed to include any
Successor Index, unless the context requires otherwise. A "Trading Day" means
a day, as determined by the Calculation Agent, on which trading is generally
conducted (i) on the New York Stock Exchange ("NYSE"), the American Stock
Exchange, Inc. ("AMEX") and the NASDAQ National Market ("NASDAQ NMS"), (ii) on
the Chicago Mercantile Exchange, (iii) on the Chicago Board of Options
Exchange and (iv) in the over-the-counter market for equity securities in the
United States. A "Business Day" means any day, other than a Saturday or
Sunday, that is neither a legal holiday nor a day on which banking
institutions are authorized or required by law or regulation to close in The
City of New York.
The "Determination Date" will be (i) with respect to any Exchange Date,
such Exchange Date and (ii) with respect to the Maturity Date, April 20, 2001,
unless, in either case, there is a Market Disruption Event on such Trading
Day. If a Market Disruption Event occurs on any such Trading Day, the
Determination Date shall be the immediately succeeding Trading Day during
which no Market Disruption Event shall have occurred; provided that if a
Market Disruption Event has occurred on each of the five Trading Days
immediately succeeding (a) such Exchange Date or (b) April 20, 2001, then the
relevant Determination Date will be deemed to be the earlier of (x) such fifth
succeeding Trading Day or (y) April 27, 2001, notwithstanding the occurrence
of a Market Disruption Event on such day (an "Extended Determination Date").
With respect to any such Extended Determination Date on which a Market
Disruption Event occurs, the Calculation Agent will determine the value of the
S&P 500 Index on such Extended Determination Date in accordance with the
formula for and method of calculating the S&P 500 Index last in effect prior
to the commencement of the Market Disruption Event, 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 such Trading Day of
each security most recently comprising the S&P 500 Index. In case an Event of
Default with respect to any PEEQS shall have occurred and be continuing, the
amount declared due and payable upon any acceleration of the PEEQS will be
determined by the Calculation Agent and will be equal to, for each $69.55
principal amount of such PEEQS, the greater of (i) Par and (ii) an amount in
dollars equal to 10% of the Index Value of the S&P 500 Index determined as
though the Determination Date were the date of acceleration.
"Market Disruption Event" means, with respect to the S&P 500 Index:
(i) a suspension, absence or material limitation of trading of 100 or
more of the securities included in the S&P 500 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 S&P 500
Index during the one-half hour period preceding the close of trading in
the applicable market, in each case as determined by the Calculation Agent
in its sole discretion; and
(ii) a determination by the 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 PEEQS.
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 pursuant to New
York Stock Exchange Rule 80A (or any applicable rule or regulation enacted or
promulgated by the NYSE, any other self-regulatory organization or the
Securities and Exchange Commission of similar scope as determined by the
Calculation Agent) on trading during significant market fluctuations shall
constitute a Market Disruption Event, (4) a suspension of trading in a futures
or options contract on the S&P 500 Index by the primary securities market
related to 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 S&P 500 Index and (5) "a suspension, absence
or material limitation of trading" on the primary market on which futures or
options contracts related to the S&P 500 Index are traded will not include any
time when such market is itself closed for trading under ordinary
circumstances.
Redemption; Defeasance
The PEEQS are not subject to redemption prior to maturity and are not
subject to the defeasance provisions described in the accompanying Prospectus
under "Description of Debt Securities -- Discharge, Defeasance and Covenant
Defeasance."
Certificates
The PEEQS initially will be evidenced by certificates in fully registered
form (each, a "Certificate"). Chemical Bank, as trustee (the "Trustee"), will
from time to time register the transfer of any outstanding Certificate upon
surrender thereof at the office of the Trustee, which is currently located at
55 Water Street, 2nd Floor, Room 234, North Building, New York, New York 10041
(the "Trustee's Office"), duly endorsed by, or accompanied by a written
instrument or instruments of transfer in a form satisfactory to the Trustee
duly executed by the holder thereof, a duly appointed legal representative or
a duly authorized attorney. Such signature must be guaranteed by a bank or
trust company having a correspondent office in New York City or by a broker or
dealer that is a member of the National Association of Securities Dealers,
Inc. (the "NASD") or a member of a U.S. national securities exchange. A new
Certificate will be issued to the transferee upon any such registration of
transfer.
At the option of a holder, Certificates may be exchanged for other
Certificates representing a like number of PEEQS, upon surrender to the
Trustee at the Trustee's Office of the Certificates to be exchanged. The
Company will thereupon execute, and the Trustee will authenticate and deliver,
one or more new Certificates representing such like number of PEEQS.
If any Certificate is mutilated, lost, stolen or destroyed, the Company
shall execute, and the Trustee shall authenticate and deliver, in exchange and
substitution for such mutilated Certificate, or in replacement for such lost,
stolen or destroyed Certificate, a new Certificate representing the same
number of PEEQS represented by such Certificate, but only upon receipt of
evidence satisfactory to the Company and to the Trustee of loss, theft or
destruction of such Certificate and security or indemnity, if requested,
satisfactory to them. Holders requesting replacement Certificates must also
comply with such other reasonable regulations as the Company or the Trustee
may prescribe.
No service charge will be made for any registration of transfer or
exchange of Certificates, but the Company may require the payment of a sum
sufficient to cover any tax or government charge that may be imposed in
connection therewith, other than exchanges not involving any transfer. In the
case of the replacement of mutilated, lost, stolen or destroyed Certificates,
the Company may require the payment of a sum sufficient to cover any tax or
other governmental charge that may be imposed in connection therewith and any
other expenses (including the fees and expenses of the Trustee) connected
therewith.
Book-Entry PEEQS
Optional Exchange for Book-Entry PEEQS. Following the issuance of the
PEEQS, the Company may, at its option, elect to make the PEEQS available in
book-entry form ("Book-Entry PEEQS"). If the Company makes such an election,
holders may (but are not required to) exchange Certificates for Book-Entry
PEEQS, which will be represented by a beneficial interest in a Global Security
(as defined herein), by causing the Certificates to be delivered to The
Depository Trust Company (the "Depositary"), in proper form for deposit into
the Depositary's book-entry system, on or after the Initial Exchange Date (as
defined herein). Certificates received by the Depositary for exchange during
the period commencing on a date designated by the Company (the "Initial
Exchange Date") and ending on the 45th day after the Initial Exchange Date
(the "Initial Exchange Period") will be exchanged for Book-Entry PEEQS by the
close of business on the Business Day on which they are received by the
Depositary (if received by the Depositary by its then applicable cut-off time
for same day credit) or on the following Business Day (if received by the
Depositary by its then applicable cut-off time for next-day credit). After the
last day of the Initial Exchange Period, the Depositary will not be required
to accept delivery of Certificates in exchange for Book-Entry PEEQS, but the
Depositary may permit such Certificates to be so exchanged on a case-by-case
basis. It is anticipated that after the Initial Exchange Period, Certificates
delivered to the Depositary in good order and in proper form for deposit will
be accepted by the Depositary for exchange for Book-Entry PEEQS generally
within three to four Business Days after delivery to the Depositary. However,
there can be no assurance that such Certificates will be accepted for exchange
or, if accepted, that such exchange will occur within such time period.
Certificates surrendered at any time for exchange for Book-Entry PEEQS may not
be delivered for settlement or transfer until such exchange has been effected.
Accordingly, persons purchasing PEEQS in secondary market trading after the
Initial Exchange Date may wish to make specific arrangements with brokers or
the Depositary's participants if they wish to purchase only Book-Entry PEEQS
and not Certificates.
In the event that the Company elects to make the PEEQS available in
book-entry form, it will notify the Depositary and the Trustee by facsimile
and first-class mail and each holder of a Certificate by first-class mail.
Exchanges of Certificates for Book-Entry PEEQS will commence on the Initial
Exchange Date, which will be approximately five Business Days after the date
on which the Company notifies the Depositary that it has elected to permit
such exchanges.
In order to be exchanged for Book-Entry PEEQS, a Certificate must be
delivered to the Depositary, in proper form for deposit, by a participant.
Accordingly, holders of PEEQS that are not participants must deliver their
Certificates, in proper form for deposit, to a participant, either directly or
through a brokerage firm that maintains an account with a participant, in
order to have their Certificates exchanged for Book-Entry PEEQS. Holders of
PEEQS that desire to exchange their Certificates for Book-Entry PEEQS should
contact their broker or a participant to ascertain whether the Company has
elected to make Book-Entry PEEQS available, and if the Company has made such
election, to obtain information on procedures for submitting their
Certificates to the Depositary, including the proper form for submission and
(during the Initial Exchange Period) the cut-off times for same-day and
next-day exchange. A Certificate that is held on behalf of a beneficial owner
in nominee or "street name" may be automatically exchanged for Book-Entry
PEEQS by the broker or other entity that is the registered holder of such
PEEQS, without any action of or consent by the beneficial owner of the PEEQS.
Book-Entry System. Any Book-Entry PEEQS will be represented by a single
global security (a "Global Security"), which will be deposited with, or on
behalf of, the Depositary, and registered in the name of a nominee of the
Depositary. Certificates that have been exchanged for Book-Entry PEEQS may not
be reexchanged for Certificates, except under the limited circumstances
described in the accompanying Prospectus under "Description of Debt Securities
- -- Global Securities." Unless and until it is exchanged in whole or in part
for Certificates, the Global Security may not be transferred except as a whole
by the Depositary to a nominee of the Depositary or by a nominee of the
Depositary to the Depositary or another nominee of the Depositary.
The Depositary has advised the Company as follows: The Depositary is a
limited-purpose trust company organized under the New York Banking Law, a
"banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended. The Depositary was created to hold
securities of its participants and to facilitate the clearance and settlement
of transactions among its participants in such securities through electronic
book-entry changes in accounts of the participants, thereby eliminating the
need for physical movement of securities certificates. The Depositary's
participants include securities brokers and dealers (including the
Underwriters), banks, trust companies, clearing corporations and certain other
organizations, some of whom (and/or their representatives) own the Depositary.
Access to the Depositary book-entry system is also available to others, such
as banks, brokers, dealers and trust companies that clear through or maintain
a custodial relationship with a participant, either directly or indirectly.
A further description of the Depositary's procedures with respect to the
Global Notes is set forth in the Prospectus under "Description of Debt
Securities--Global Securities." The Depositary has confirmed to the Company,
the Underwriters and the Trustee that it intends to follow such procedures.
Calculation Agent
The "Calculation Agent" for the PEEQS will be Morgan Stanley & Co.
Incorporated ("MS&Co."). All determinations made by the Calculation Agent
shall be at the sole discretion of the Calculation Agent and shall, in the
absence of manifest error, be conclusive for all purposes and binding on the
Company and holders of the PEEQS. Because the Calculation Agent is an
affiliate of the Company, potential conflicts of interest may exist between
the Calculation Agent and the holders of the PEEQS, including with respect to
certain determinations and judgments that the Calculation Agent must make in
determining the Index Values or whether a Market Disruption Event has
occurred. See "S&P 500 Index -- Discontinuance of the S&P 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.
RISK FACTORS
An investment in the PEEQS entails significant risks not associated with
similar investments in a conventional security, including the following.
Comparison to Other Debt Securities
If an amount in dollars equal to 10% of the Final Index Value of the S&P
500 Index does not exceed Par, the holders of the PEEQS will receive only the
par amount of each PEEQS at maturity. Because the Final Index Value will be
based upon the closing value of the S&P 500 Index on a specified Determination
Date, a significant increase in the S&P 500 Index subsequent to issuance may
be substantially or entirely offset by subsequent decreases in the value of
the S&P 500 Index on or prior to such Determination Date.
The PEEQS do not bear any periodic payment of interest. Because an amount
in dollars equal to 10% of the Final Index Value of the S&P 500 Index may be
less than, equal to or only slightly above Par, the effective yield to
maturity may be less than that which would be payable on a conventional
fixed-rate debt security.
The return of only the par amount of a PEEQS at maturity may not
compensate the holder for any opportunity cost implied by inflation and other
factors relating to the time value of money. Any appreciation of the S&P 500
Index so that 10% of the Final Index Value is greater than Par will not
reflect the payment of dividends on the stocks underlying the S&P 500 Index.
Therefore the yield to maturity based on any appreciation of the Final Index
Value relative to Par 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
There can be no assurance as to whether there will be a secondary market
in the PEEQS 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 PEEQS will be affected by the creditworthiness of the Company and by a
number of factors, including, but not limited to, the volatility of the S&P
500 Index, dividend rates on the stocks underlying the S&P 500 Index, the time
remaining to the maturity of the PEEQS 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 PEEQS prior to maturity is expected to depend
primarily on the extent of the appreciation or depreciation of the S&P 500
Index and market interest rates. The price at which a holder will be able to
sell the PEEQS prior to maturity may be at a discount, which could be
substantial, from the par amount thereof, if, at such time, the S&P 500 Index
is less than, equal to, or not sufficiently above the Index Value on the date
of this Prospectus Supplement.
Relationship of PEEQS and the S&P 500 Index
The historical S&P 500 Index values should not be taken as an indication
of the future performance of the S&P 500 Index during the term of the PEEQS.
While the trading prices of the stocks underlying the S&P 500 Index will
determine the value of the S&P 500 Index, it is impossible to predict whether
the value of the S&P 500 Index will fall or rise. Trading prices of the
stocks underlying the S&P 500 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.
The policies of S&P concerning additions, deletions and substitutions of
the stocks underlying the S&P 500 Index and the manner in which S&P takes
account of certain changes affecting such underlying stocks may affect the
value of the S&P 500 Index. The policies of S&P with respect to the
calculation of the S&P 500 could also affect the value of the S&P 500 Index.
S&P may discontinue or suspend calculation or dissemination of the S&P 500
Index. Any such actions could affect the value of the PEEQS. See "S&P 500
Index" below.
Affiliation of the Company and Calculation Agent
Because the Calculation Agent is an affiliate of the Company, potential
conflicts of interest may exist between the Calculation Agent and the holders
of the PEEQS, including with respect to certain determinations and judgments
that the Calculation Agent must make in determining the Index Values or
whether a Market Disruption Event has occurred. See "S&P 500 Index --
Discontinuance of the S&P Index; Alteration of Method of Calculation" below
and "Market Disruption Event" above. MS&Co., as 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 PEEQS to restrict the use of
information relating to the calculation of the Index Values that the
Calculation Agent may be required to make prior to their dissemination.
MS&Co. is obligated to carry out its duties and functions as Calculation Agent
in good faith and using its reasonable judgment.
Other Considerations
If a bankruptcy proceeding is commenced in respect of the Company, the
claim of a holder of a PEEQS may, under Section 502(b)(2) of Title 11 of the
United States Code, be limited to the par amount of such PEEQS.
It is suggested that prospective investors who consider purchasing the
PEEQS should reach an investment decision only after carefully considering the
suitability of the PEEQS in light of their particular circumstances.
Investors should also consider the tax consequences of investing in the
PEEQS. See "United States Federal Taxation" below.
S&P 500 INDEX
The S&P 500 Index is published by S&P and is intended to provide a
performance benchmark for the U.S. equity markets. The calculation of the
value of the S&P 500 Index (discussed below in further detail) is based on the
relative value of the aggregate Market Value (as defined below) of the common
stocks of 500 companies (the "Component Stocks") as of a particular time as
compared to the aggregate average Market Value of the common stocks of 500
similar companies during the base period of the years 1941 through 1943. The
"Market Value" of any Component Stock is the product of the market price per
share and the number of the then outstanding shares of such Component Stock.
The 500 companies are not the 500 largest companies listed on the NYSE and not
all 500 companies are listed on such exchange. S&P chooses companies for
inclusion in the S&P 500 Index with an aim of achieving a distribution by
broad industry groupings that approximates the distribution of these groupings
in the common stock population of the U.S. equity market. S&P may from time
to time, in its sole discretion, add companies to, or delete companies from,
the S&P 500 Index to achieve the objectives stated above. Relevant criteria
employed by S&P include the viability of the particular company, the extent to
which that company represents the industry group to which it is assigned, the
extent to which the company's common stock is widely held and the Market Value
and trading activity of the common stock of that company.
The S&P 500 Index is calculated using a base-weighted aggregate
methodology: the level of the Index reflects the total Market Value of all 500
Component Stocks relative to the S&P 500 Index's base period of 1941-43 (the
"Base Period"). An indexed number is used to represent the results of this
calculation in order to make the value easier to work with and track over
time.
The actual total Market Value of the Component Stocks during the Base
Period has been set equal to an indexed value of 10. This is often indicated
by the notation 1941-43=10. In practice, the daily calculation of the S&P 500
Index is computed by dividing the total Market Value of the Component Stocks
by a number called the Index Divisor. By itself, the Index Divisor is an
arbitrary number. However, in the context of the calculation of the S&P 500
Index, it is the only link to the original base period value of the Index.
The Index Divisor keeps the Index comparable over time and is the manipulation
point for all adjustments to the S&P 500 Index ("Index Maintenance"). Index
Maintenance includes monitoring and completing the adjustments for company
additions and deletions, share changes, stock splits, stock dividends, and
stock price adjustments due to company restructurings or spinoffs.
To prevent the value of the Index from changing due to corporate actions,
all corporate actions which affect the total Market Value of the Index require
an Index Divisor adjustment. By adjusting the Index Divisor for the change in
total Market Value, the value of the S&P 500 Index remains constant. This
helps maintain the value of the Index as an accurate barometer of stock market
performance and ensures that the movement of the Index does not reflect the
corporate actions of individual companies in the Index. All Index Divisor
adjustments are made after the close of trading and after the calculation of
the closing value of the S&P 500 Index. Some corporate actions, such as stock
splits and stock dividends, require simple changes in the common shares
outstanding and the stock prices of the companies in the Index and do not
require Index Divisor adjustments.
The table below summarizes the types of S&P 500 Index maintenance
adjustments and indicates whether or not an Index Divisor adjustment is
required.
<TABLE>
<CAPTION>
Divisor
Type of Corporate Adjustment
Action Adjustment Factor Required
- ----------------- ----------------- ----------
<S> <C> <C>
Stock split Shares Outstanding multiplied by 2; Stock Price divided by 2 No
(i.e. 2x1)
Share issuance Shares Outstanding plus newly issued Shares Yes
(i.e. Change > 5%)
Share repurchase Shares Outstanding minus Repurchased Shares Yes
(i.e. Change > 5%)
Special cash dividends Share Price minus Special Dividend Yes
Company change Add new company Market Value minus old company Market Value Yes
Rights offering Price of parent company minus Yes
Price of Rights
---------------
Right Ratio
Spin-Offs Price of parent company minus Yes
Price of Spin-Off Co.
---------------------
Share Exchange Ratio
</TABLE>
Stock splits and stock dividends do not affect the Index Divisor of the
S&P 500 Index, because following a split or dividend both the stock price and
number of shares outstanding are adjusted by S&P so that there is no change in
the Market Value of the Component Stock. All stock split and dividend
adjustments are made after the close of trading on the day before the ex-date.
Each of the corporate events exemplified in the table requiring an
adjustment to the Index Divisor has the effect of altering the Market Value of
the Component Stock and consequently of altering the aggregate Market Value of
the Component Stocks (the "Post-Event Aggregate Market Value"). In order that
the level of the Index (the "PreEvent Index Value") not be affected by the
altered Market Value (whether increase or decrease) of the affected Component
Stock, a new Index Divisor ("New Divisor") is derived as follows:
Post-Event Aggregate Market Value = Pre-Event Index Value
---------------------------------
New Divisor
New Divisor = Post-Event Aggregate Market Value
---------------------------------
Pre-Event Index Value
A large part of the S&P 500 Index maintenance process involves tracking
the changes in the number of shares outstanding of each of the S&P 500 Index
companies. Four times a year, on a Friday shortly prior to the end of each
calendar quarter, the share totals of companies in the Index are updated as
required by any changes in the number of shares outstanding. After the totals
are updated, the Index Divisor is adjusted to compensate for the net change in
the total Market Value of the Index. In addition, any changes over 5% in the
current common shares outstanding for the S&P 500 Index companies are
carefully reviewed on a weekly basis, and when appropriate, an immediate
adjustment is made to the Index Divisor.
Discontinuance of the S&P 500 Index; Alteration of Method of Calculation
If S&P discontinues publication of the S&P 500 Index and S&P or another
entity publishes a successor or substitute index that the Calculation Agent
determines, in its sole discretion, to be comparable to the discontinued S&P
500 Index (such index being referred to herein as a "Successor Index"), then
the relevant Index Value shall be determined by reference to the value of such
Successor Index at the close of trading on the NYSE, the AMEX, NASDAQ NMS or
the relevant exchange or market for the Successor Index on the applicable
Determination Date.
Upon any selection by the Calculation Agent of a Successor Index, the
Calculation Agent shall cause written notice thereof to be furnished to the
Trustee, to the Company and to the holders of the PEEQS within three Trading
Days of such selection.
If S&P discontinues publication of the S&P 500 Index prior to, and such
discontinuance is continuing on, any Determination Date and the Calculation
Agent determines that no Successor Index is available at such time, then on
such Determination Date, the Calculation Agent shall determine the Index Value
on such Determination Date. The Index Value shall be computed by the
Calculation Agent in accordance with the formula for and method of calculating
the S&P 500 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 such
Determination Date of each security most recently comprising the S&P 500
Index. Notwithstanding these alternative arrangements, discontinuance of the
publication of the S&P 500 Index may adversely affect the value of the PEEQS.
If at any time the method of calculating the S&P 500 Index or a Successor
Index, or the value thereof, is changed in a material respect, or if the S&P
500 Index or a Successor Index is in any other way modified so that such index
does not, in the opinion of the Calculation Agent, fairly represent the value
of the S&P 500 Index or such Successor Index had such changes or modifications
not been made, then, from and after such time, the Calculation Agent shall, 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 the Calculation
Agent, may be necessary in order to arrive at a value of a stock index
comparable to the S&P 500 Index or such Successor Index, as the case may be,
as if such changes or modifications had not been made, and calculate the Index
Value with reference to the S&P 500 Index or such Successor Index, as
adjusted. Accordingly, if the method of calculating the S&P 500 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 the Calculation Agent shall adjust such index in order to
arrive at a value of the S&P 500 Index or such Successor Index as if it had
not been modified (e.g., as if such split had not occurred).
Public Information
All disclosure contained in this Prospectus Supplement regarding the S&P
500 Index, including, without limitation, its composition, method of
calculation and changes in its components, is derived from publicly available
information prepared by S&P. Neither the Company nor the Underwriters take
any responsibility for the accuracy or completeness of such information.
Historical Information
The following table sets forth the high and low daily closing values, as
well as end-of-quarter closing values, of the S&P 500 Index for each quarter
in the period from January 1, 1991 through May 14, 1996. The historical
values of the S&P 500 Index should not be taken as an indication of future
performance, and no assurance can be given that the S&P 500 Index will
increase so as to cause an amount in dollars equal to 10% of the S&P 500 to be
greater than Par.
Daily Index Values
----------------------------
High Low Period End
------ ------ -----------
1991
1st Quarter .................. 376.72 311.49 375.22
2nd Quarter .................. 390.45 368.57 371.16
3rd Quarter .................. 396.64 373.33 387.86
4th Quarter .................. 417.09 375.22 417.09
1992
1st Quarter .................. 420.77 403.00 403.69
2nd Quarter .................. 418.49 394.50 408.14
3rd Quarter .................. 425.27 409.16 417.80
4th Quarter .................. 441.28 402.66 435.71
1993
1st Quarter .................. 456.34 429.05 451.67
2nd Quarter .................. 453.85 433.54 450.53
3rd Quarter .................. 463.56 441.43 458.93
4th Quarter .................. 470.94 457.48 466.45
1994
1st Quarter .................. 482.00 445.55 445.76
2nd Quarter .................. 462.37 438.92 444.27
3rd Quarter .................. 476.07 446.13 462.71
4th Quarter .................. 473.77 445.45 459.27
1995
1st Quarter .................. 503.90 459.11 500.71
2nd Quarter .................. 551.07 501.85 544.75
3rd Quarter .................. 586.77 547.09 584.41
4th Quarter .................. 621.69 576.72 615.93
1996
1st Quarter .................. 661.45 548.48 645.50
2nd Quarter (through May 14,
1996) ...................... 665.60 631.18 665.60
License Agreement
S&P and MS&Co. have entered into a non-exclusive license agreement
providing for the license to MS&Co., and any of its affiliated or subsidiary
companies, in exchange for a fee, of the right to use the S&P 500 Index, which
is owned and published by S&P, in connection with certain securities,
including the PEEQS.
The license agreement between S&P and MS&Co. provides that the following
language must be set forth in this Prospectus Supplement:
The PEEQS are not sponsored, endorsed, sold or promoted by S&P. S&P
makes no representation or warranty, express or implied, to the holders of
the PEEQS or any member of the public regarding the advisability of
investing in securities generally or in the PEEQS particularly or the
ability of the S&P 500 Index to track general stock market performance.
S&P's only relationship to the Company is the licensing of certain
trademarks and trade names of S&P and of the S&P 500 Index, which is
determined, composed and calculated by S&P without regard to the Company
or the PEEQS. S&P has no obligation to take the needs of the Company or
the holders of the PEEQS into consideration in determining, composing or
calculating the S&P 500 Index. S&P is not responsible for and has not
participated in the determination of the timing of, prices at, or
quantities of the PEEQS to be issued or in the determination or
calculation of the equation by which the PEEQS are to be converted into
cash. S&P has no obligation or liability in connection with the
administration, marketing or trading of the PEEQS.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P
500 INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR
IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE COMPANY, HOLDERS OF THE PEEQS OR
ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P INDEX OR ANY DATA INCLUDED
THEREIN IN CONNECTION WITH THE RIGHTS LICENSED UNDER THE LICENSE AGREEMENT
DESCRIBED HEREIN OR FOR ANY OTHER USE. S&P MAKES NO EXPRESS OR IMPLIED
WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY
OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX
OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO
EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT OR
CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE
POSSIBILITY OF SUCH DAMAGES.
"Standard & Poor's[Registered]", "S&P[Registered]", "S&P
500[Registered]", "Standard & Poor's 500," and "500" are trademarks of
McGraw-Hill, Inc. and have been licensed for use by MS&Co.
USE OF PROCEEDS AND HEDGING
The net proceeds to be received by the Company from the sale of the
PEEQS 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 PEEQS. On or prior to the date of this Prospectus
Supplement, the Company, through its subsidiaries, hedged its anticipated
exposure in connection with the PEEQS by the purchase of individual stocks
included in the S&P 500 Index, futures contracts on the S&P 500 Index, futures
on United States Treasury Bonds and interest rate futures. The Company,
through its subsidiaries, is likely to modify its hedge position throughout
the life of the PEEQS by purchasing and selling such instruments and any other
instruments that it may wish to use in connection with such hedging. Although
the Company has no reason to believe that its hedging activity had or will
have a material impact on the price of such stocks, futures contracts or any
such other instruments or on the value of the S&P 500 Index, there can be no
assurance that the Company has not or will not affect such prices or value as
a result of its hedging activities. See also "Use of Proceeds" in the
accompanying Prospectus.
UNITED STATES FEDERAL TAXATION
In the opinion of Davis Polk & Wardwell, special tax counsel to the
Company, the discussion set forth below is a summary of the material U.S.
federal income tax considerations that are generally relevant to holders of
the PEEQS. The summary is based on tax laws in effect as of the date hereof,
which are subject to change by legislative, judicial or regulatory action that
in some cases may have retroactive effect. This summary does not address all
of the tax considerations that may be relevant to a holder in light of such
holder's particular circumstances. In particular, this summary addresses only
persons who hold PEEQS as capital assets within the meaning of Section 1221 of
the Internal Revenue Code of 1986 (the "Code"), and does not deal with persons
subject to special rules, such as certain financial institutions, insurance
companies, dealers in options or securities or purchasers holding PEEQS as a
part of a hedging transaction or straddle or as part of a "synthetic security"
or other integrated investments. This summary also does not deal with holders
other than initial holders of the PEEQS who purchase PEEQS at Par. Because of
the absence of authority on point, there are substantial uncertainties
regarding the U.S. federal income tax consequences of an investment in the
PEEQS.
As used herein, the term "United States Holder" means a holder of PEEQS
that is (i) a United States citizen or a resident of the United States for
U.S. federal income tax purposes, (ii) a corporation, partnership or other
entity created or organized in or under the laws of the United States or of
any political subdivision thereof, (iii) an estate or trust the income of
which is subject to U.S. federal income taxation regardless of its source or
(iv) a person otherwise subject to U.S. federal income taxation on a net
income basis in respect of such holder's ownership of the PEEQS.
As used herein, the term "United States Alien Holder" means a holder of
PEEQS that is not a United States Holder.
Tax Consequences to United States Holders
The PEEQS will be treated as indebtedness of the Company for United
States Federal income tax purposes. Although proposed Treasury regulations
addressing the treatment of contingent debt instruments were issued on
December 15, 1994, such regulations, which generally would require current
accrual of contingent amounts and would affect the character of gain on the
sale, exchange or retirement of debt, by their terms apply only to debt
instruments issued on or after the 60th day after the regulations are
finalized.
Under general United States federal income tax principles, upon exercise
of the Exchange Right or at maturity, a United States Holder will recognize
gain or loss, if any, equal to the difference between the amount realized and
such Holder's tax basis in the PEEQS. Any loss recognized upon exchange or at
maturity will be capital loss. It is unclear under existing law whether gain
recognized will be treated as ordinary or capital in character. Subject to
further guidance from the Internal Revenue Service, however, the Company
intends to treat such gain as interest income and to report such amounts
accordingly. Prospective investors should consult with their tax advisors
regarding the character of gain recognized upon exchange or at maturity.
United States Holders that have acquired debt instruments similar to the
PEEQS and have accounted for such debt instruments under proposed, but
subsequently withdrawn, Treasury regulation Section 1.1275-4 may be deemed to
have established a method of accounting that must be followed with respect to
the PEEQS, unless consent of the Commissioner of the Internal Revenue Service
is obtained to change such method. Absent such consent, such a Holder would be
required to account for the PEEQS in the manner prescribed in such withdrawn
Treasury regulations. The Internal Revenue Service, however, would not be
required to accept such method as correct.
Any gain or loss recognized on the sale or other taxable disposition of a
PEEQS prior to maturity will be treated as capital in character.
There can be no assurance that the ultimate tax treatment of the PEEQS
would not differ significantly from the description herein. Prospective
investors are urged to consult their tax advisors as to the possible
consequences of holding the PEEQS.
Certain noncorporate United States Holders may be subject to backup
withholding at a rate of 31% on payments of principal, premium and interest
(including original issue discount, if any) on, and the proceeds of
disposition of, a PEEQS. Backup withholding will apply only if the Holder (i)
fails to furnish its Taxpayer Identification Number ("TIN") which, for an
individual, would be his Social Security number, (ii) furnishes an incorrect
TIN, (iii) is notified by the Internal Revenue Service that it has failed to
properly report payments of interest and dividends or (iv) under certain
circumstances, fails to certify, under penalty of perjury, that it has
furnished a correct TIN and has not been notified by the Internal Revenue
Service that it is subject to backup withholding for failure to report
interest and dividend payments. United States Holders should consult their
tax advisors regarding their qualification for exemption from backup
withholding and the procedure for obtaining such an exemption if applicable.
The amount of any backup withholding from a payment to a United States
Holder 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.
Tax Consequences to United States Alien Holders
Under present United States federal law, and subject to the discussion
below concerning backup withholding:
(a) payments of principal and interest (including original issue
discount, if any) and premium on the PEEQS by the Company or any paying
agent to any United States Alien Holder will not be subject to United
States federal withholding tax, provided that, in the case of interest,
(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
and (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; and
(b) a United States Alien Holder of a PEEQS will not be subject to
United States federal income tax on gain realized on the sale, exchange or
other disposition of such PEEQS, unless (i) such Holder is an individual
who is present in the United States for 183 days or more in the taxable
year of disposition, and either (a) such individual has a "tax home" (as
defined in Code Section 911(d)(3)) in the United States (unless such gain
is attributable to a fixed place of business in a foreign country
maintained by such individual and has been subject to foreign tax of at
least 10%) or (b) the gain is attributable to an office or other fixed
place of business maintained by such individual in the United States or
(ii) such gain is 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 withholding tax described in paragraph
(a) above in the case of a PEEQS, either the beneficial owner of the PEEQS, 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 PEEQS on behalf of such
beneficial owner, file a statement with the withholding agent to the effect
that the beneficial owner of the PEEQS is not a United States Holder. Under
temporary United States Treasury Regulations, such requirement will be
fulfilled if the beneficial owner of a PEEQS 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 PEEQS 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 PEEQS is engaged in a trade or
business in the United States, and if interest on the PEEQS is effectively
connected with the conduct of such trade or business, the United States Alien
Holder, even if exempt from the withholding tax discussed in the preceding
paragraph, 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 PEEQS in the same manner as if it were a United States Holder. See "Tax
Consequences to United States Holders" above. In lieu of the certificate
described in the preceding paragraph, such a Holder will be required to
provide to the Company a properly executed Internal Revenue Service Form 4224
or successor thereof in order to claim an exemption from withholding tax.
Proposed Treasury regulations issued in April 1996 (the "Proposed
Regulations") might affect the procedures by which such a Holder claims an
exemption from withholding based on effectively connected income. 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 on and any gain recognized on the sale, exchange or
other disposition of a PEEQS 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 United States federal estate tax law, a
PEEQS 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 PEEQS would not have been effectively connected to the conduct by such
individual of a trade or business in the United States.
Under current United States federal income tax law, a 31% backup
withholding tax and information reporting requirements apply to certain
payments of principal, premium and interest (including original issue
discount) made to, and to the proceeds of sale before maturity by, certain
noncorporate United States persons. Under current Treasury Regulations,
backup withholding will not apply to payments made on the PEEQS 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 PEEQS 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 (collectively, a "United States Related Person"),
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 the broker does not have actual knowledge that the payee is a United
States person) and certain other conditions are met or the beneficial owner
otherwise establishes an exemption. 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. Provisions
relating to information reporting and backup withholding are the subject of
the Proposed Regulations, which would modify, inter alia, the current rules
with respect to certain payments made after December 31, 1997 to or through
the foreign office of a United States Related Person.
United States Alien Holders of PEEQS 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 United States
Internal Revenue Service.
ERISA MATTERS FOR PENSION PLANS AND INSURANCE COMPANIES
The Company and certain affiliates of the Company, including MS&Co., may
each be considered a "party in interest" within the meaning of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or a
"disqualified person" within the meaning of the Code with respect to many
employee benefit plans. Prohibited transactions within the meaning of ERISA
or the Code may arise, for example, if the PEEQS are acquired by or with the
assets of a pension or other employee benefit plan subject to ERISA or the
Code with respect to which MS&Co. or any of its affiliates is a service
provider, unless such PEEQS are acquired pursuant to an exemption for
transactions effected on behalf of such plan by a "qualified professional
asset manager" or pursuant to any other available exemption. The assets of
such pension or other employee benefit plan may include assets held in the
general account of an insurance company that are deemed to be "plan assets"
under ERISA. Any insurance company or pension or employee benefit plan
proposing to invest in the PEEQS should consult with its legal counsel.
UNDERWRITERS
Under the terms and subject to the conditions contained in an
Underwriting Agreement dated the date hereof, the Underwriters have severally
agreed to purchase the respective number of PEEQS set forth opposite their
respective names below:
Number
Name of PEEQS
---- ---------
Morgan Stanley & Co. Incorporated ..................... 266,000
Donaldson, Lufkin & Jenrette Securities Corporation ... 266,000
Alex. Brown & Sons, Inc. .............................. 18,000
A.G. Edwards & Sons Inc. .............................. 18,000
Oppenheimer & Co., Inc. ............................... 18,000
PaineWebber Incorporated .............................. 18,000
Prudential Securities Incorporated .................... 18,000
Advest, Inc ........................................... 9,000
Arnhold and S. Bleichroeder, Inc. ..................... 9,000
Robert W. Baird & Co. Incorporated .................... 9,000
William Blair & Company, L.L.C. ....................... 9,000
J.C. Bradford & Co. ................................... 9,000
Burnham Securities Inc. ............................... 9,000
The Chicago Corporation ............................... 9,000
Cowen & Company ....................................... 9,000
Crowell, Weeden & Co. ................................. 9,000
Dain Bosworth Incorporated Securities, Inc. ........... 9,000
EVEREN Securities, Inc. ............................... 9,000
Fahnestock & Co. Inc .................................. 9,000
First Albany Corporation .............................. 9,000
First of Michigan Corporation ......................... 9,000
Gruntal & Co., Incorporated ........................... 9,000
Interstate/Johnson Lane Corporation ................... 9,000
Janney Montgomery Scott Inc. .......................... 9,000
Edward D. Jones & Co., L.P. ........................... 9,000
Ladenburg, Thalmann & Co. Inc. ........................ 9,000
Laidlaw Equities Inc. ................................. 9,000
Legg Mason Wood Walker, Incorporated .................. 9,000
McDonald & Company Securities, Inc. ................... 9,000
Morgan Keegan & Company, Inc. ......................... 9,000
NatCity Investments, Inc. ............................. 9,000
Needham & Company, Inc. ............................... 9,000
The Ohio Company ...................................... 9,000
Parker/Hunter Incorporated ............................ 9,000
Piper Jaffray Inc ..................................... 9,000
Principal Financial Securities, Inc ................... 9,000
Ragen MacKenzie Incorporated .......................... 9,000
Rauscher Pierce Refsnes, Inc. ......................... 9,000
Raymond James & Associates, Inc. ...................... 9,000
The Robinson-Humphrey Company, Inc. ................... 9,000
Rodman & Renshaw, Inc ................................. 9,000
Scott & Stringfellow, Inc ............................. 9,000
Stephens Inc. ......................................... 9,000
Stifel, Nicolaus & Company Incorporated ............... 9,000
Sutro & Co. Incorporated .............................. 9,000
Tucker Anthony Incorporated ........................... 9,000
Van Kasper & Company .................................. 9,000
Wedbush Morgan Securities ............................. 9,000
Wheat, First Securities, Inc. ......................... 9,000
---------
Total ...........................................1,000,000
=========
The Underwriting Agreement provides that the obligations of the
Underwriters to pay for and accept delivery of the PEEQS are subject to the
approval of certain legal matters by their counsel and to certain other
conditions. The Underwriters are committed to take and pay for all of the
PEEQS if any such PEEQS are taken.
The Underwriters propose initially to offer the PEEQS directly to the
public at the maximum public offering price set forth on the cover page hereof
(except that the price will be $68.50675 per PEEQS for the purchase of 100,000
or more PEEQS in any single transaction, subject to the holding period
requirements described herein) and to certain dealers at a price that
represents a concession not in excess of $1.25 per PEEQS. After the initial
offering of the PEEQS, the offering price and other selling terms may from
time to time be varied by the Underwriters.
Generally, delivery of approximately 98.5% of the PEEQS (the "Delivered
PEEQS") purchased by an investor at the reduced price will be made on the date
of delivery of the PEEQS referred to on the cover of this Prospectus
Supplement. The balance of approximately 1.5% of the PEEQS (the "Escrowed
PEEQS") purchased by each such investor will be held in escrow and delivered
to such investor if the investor and any accounts in which the investor may
have deposited any of its Delivered PEEQS have held all of the Delivered PEEQS
for 45 days following the date of this Prospectus Supplement or any shorter
period deemed appropriate by MS&Co. If an investor or any account in which the
investor has deposited any of its Delivered PEEQS fails to satisfy the holding
period requirement, as determined by MS&Co., all of the investor's Escrowed
PEEQS will be forfeited by the investor and not delivered to it. The Escrowed
PEEQS will instead be delivered to the Underwriters for sale to investors.
This forfeiture will have the effect of increasing the purchase price per
PEEQS for such investors to 100% of the principal amount of the PEEQS. Should
investors who are subject to the holding period requirement sell their PEEQS
once the holding period is no longer applicable, the market price of the PEEQS
may be adversely affected. See also "Plan of Distribution" in the
accompanying Prospectus Supplement.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended, or to contribute to payments the Underwriters may be required to make
in respect thereof.
The Underwriters have agreed that any offers and sales made outside the
United States will be made in compliance with any selling restrictions
applicable in the jurisdictions where such offers and sales are made. With
respect to PEEQS to be offered or sold in the United Kingdom, each
underwriter, for itself and on behalf of its affiliates, has represented and
agreed that: (i) it has not offered or sold and, prior to the expiry of the
period of six months from the date of issue of the PEEQS, will not offer or
sell any such PEEQS to persons in the United Kingdom except to persons whose
ordinary activities involve them in acquiring, holding, managing or disposing
of investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995; (ii) it has complied and will comply
with all applicable provisions of the Financial Services Act 1986 (the "Act")
with respect to anything done by it in relation to such PEEQS in, from or
otherwise involving the United Kingdom; and (iii) it has only issued or passed
on and will only issue or pass on in the United Kingdom any document received
by it connection with the issue of the PEEQS, other than any document which
consists of or any part of listing particulars, supplementary listing
particulars or any other document required or permitted to be published by the
listing rules under Part IV of the Act, to a person who is of a kind described
in article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1995 or is a person to whom such document
may otherwise lawfully be issued or passed on.
This Prospectus Supplement and the accompanying Prospectus may be used by
MS&Co. in connection with offers and sales of the PEEQS in market-making
transactions at negotiated prices related to prevailing market prices at the
time of sale or otherwise. MS&Co. may act as principal or agent in such
transactions.
MS&Co. is a wholly-owned subsidiary of the Company. MS&Co.'s
participation in the offering of the PEEQS and its market-making activities,
if any, with respect to the PEEQS will be conducted in compliance with
Schedule E of the By-Laws of the NASD.
The Underwriters do not intend to confirm sales to accounts over which
they exercise discretionary authority.
ANNEX A
OFFICIAL NOTICE OF EXCHANGE
Dated: [On or after November 17, 1997]
Morgan Stanley Group Inc.
1585 Broadway
New York, New York 10036
Morgan Stanley & Co. Incorporated, as Calculation Agent
1585 Broadway
New York, New York 10036
(Attn: Alan Thomas)
Fax: 212-761-0028
Dear Sirs:
The undersigned holder of the Protected Exchangeable EQuity-linked
Securities Due May 1, 2001 of Morgan Stanley Group Inc. (the "PEEQS") hereby
irrevocably elects to exercise with respect to the number of PEEQS indicated
below, as of the date hereof (or, if this letter is received after 11:00 a.m.
on any Trading Day, as of the next Trading Day, provided that such day is on
or prior to April 20, 2001), the Exchange Right as described in the Prospectus
Supplement dated May 14, 1996 and the Prospectus dated May 1, 1996 related to
Registration Statement No. 333-01655. Capitalized terms not defined herein
have the meanings given to such terms in the Prospectus Supplement. Please
date and acknowledge receipt of this notice in the place provided below on the
date of receipt, and fax a copy to the fax number indicated above. Upon
receipt of this notice, the Company will deliver five Business Days after the
Determination Date with respect to such Exchange Date, an amount in dollars,
as determined by the Calculation Agent, equal to 10% of the Final Index Value
of the S&P 500 Index, in accordance with the terms of the PEEQS, as described
in the Pricing Supplement.
Very truly yours,
__________________________________
[Name of Holder]
By: ______________________________
[Title]
__________________________________
[Fax No.]
__________________________________
Number of PEEQS (minimum of 100)
surrendered for exchange
Receipt of the above Official Notice of Exchange is hereby acknowledged
MORGAN STANLEY GROUP INC., as Issuer
MORGAN STANLEY & CO. INCORPORATED, as Calculation Agent
By MORGAN STANLEY & CO. INCORPORATED, as Calculation Agent
By:___________________________________________________
Title:
Date and time of acknowledgement _____________________
