Subject to Completion, Pricing Supplement dated April 28, 1997
PROSPECTUS Dated January 24, 1997 Pricing Supplement No. 38 to
PROSPECTUS SUPPLEMENT Registration Statement No. 333-18005
Dated January 24, 1997 Dated April , 1997
Rule 424(b)(3)
$
Morgan Stanley Group Inc.
MEDIUM-TERM NOTES, SERIES C
Senior Fixed Rate Notes
5.75% MANDATORILY EXCHANGEABLE NOTES DUE JUNE 1, 1999
Mandatorily Exchangeable For 5 3/4% Convertible Subordinated Debentures Due
2002 of
COSTCO COMPANIES, INC.
The Mandatorily Exchangeable Notes due June 1, 1999 (the
"Notes") are Medium-Term Notes, Series C (Senior Fixed Rate Notes) of Morgan
Stanley Group Inc. (the "Company"), as further described below and in the
Prospectus Supplement under "Description of Notes - Exchangeable Notes." The
Notes are mandatorily exchangeable for the 5 3/4% Convertible Subordinated
Debentures Due 2002 (the "Costco Bonds," and each $1,000 principal amount
thereof, a "Costco Bond") of Costco Companies, Inc. (successor to the
obligations of Costco Wholesale Corporation with respect to the Costco Bonds)
("Costco"). The Costco Bonds are convertible into the common stock, par value
$.01 per share, of Costco (the "Costco Stock") pursuant to the terms and
conditions set forth therein.
The Notes will be offered in par amounts of $1,000 per Note
(each such amount, a "Par Amount") and will mature on June 1, 1999. Interest
on the Notes will accrue at a rate of 5.75% of the Par Amount thereof and will
be payable on each June 1 and December 1, commencing December 1, 1997, subject
to a default by Costco in the payment of interest on the Costco Bonds or to
the payment of an Early Payment, each as further described below. In order to
match the accrual periods of the Costco Bonds, interest on the Notes will
accrue from and including each May 15 and November 15 (or in the case of the
first interest period, from and including the Issue Date) to but excluding
each following November 15 and May 15, as applicable.
At maturity or earlier redemption of the Notes, the Par Amount
of each Note will be mandatorily exchanged by the Company into one Costco
Bond. At maturity or earlier redemption of the Notes, a holder of Notes will
also receive an amount per Par Amount of such Notes (the "Supplemental
Amount") based on the increase, if any, in the Final Average Market Price of
Costco Stock over $ (the "Benchmark Price"). The Supplemental Amount, if
any, will be calculated on the second scheduled Trading Day immediately
preceding the Maturity Date or the Note Redemption Date, as the case may be
(the "Determination Date"), and will equal the product of (i) (the
"Multiplier") and (ii) the difference between the Final Average Market Price
of the Costco Stock and the Benchmark Price, provided that the Supplemental
Amount will not be less than zero. The Final Average Market Price will equal
the arithmetic average of the Market Price of Costco Stock for each of the
Trading Days in the period beginning on the tenth scheduled Trading Day
preceding the Determination Date and ending on and including the Determination
Date. See "Final Average Market Price" and "Market Disruption Event" in this
Pricing Supplement.
If Morgan Stanley & Co. Incorporated, as Calculation Agent for
the Notes, determines that an Event of Default, as defined in the Costco
Indenture, has occurred with respect to the Costco Bonds, the Notes may be
redeemed at the option of the Company on the Note Redemption Date, upon not
less than 30 nor more than 60 days' notice, for one Costco Bond per Par Amount
of Notes upon delivery of the Notes to the Trustee. At such Note Redemption
Date, the holder of each Note will also receive the Supplemental Amount, if
any, as determined on the applicable Determination Date.
If the Costco Bonds are called or otherwise redeemed by Costco
prior to the Maturity Date, the Company will pay to holders of the Notes, on
the Early Payment Date, an amount per Par Amount (the "Early Payment") equal
to the total proceeds paid per Costco Bond to the holders of the Costco Bonds,
including any accrued and unpaid interest; provided that if Parity for a Costco
Bond on the Trading Day immediately preceding the last available conversion
date for such Costco Bond (the "Deemed Conversion Date") exceeds such amount,
the Early Payment will consist of the number of shares of Costco Stock payable
to the holder of each Costco Bond upon conversion of such Costco Bond into
Costco Stock. If the Early Payment consists of shares of Costco Stock,
holders of the Notes will not be entitled to receive any accrued and unpaid
interest on the Notes if the conversion of Costco Bonds to Costco Stock on the
Deemed Conversion Date by a holder of Costco Bonds would result in a
forfeiture of any accrued and unpaid interest on such Costco Bonds. Upon
payment of the Early Payment by the Company, no further payment of interest on
the Notes will be made, except that the Supplemental Amount, if any, will be
paid at the maturity of the Notes.
If there is a default by Costco with respect to the payment of
interest on the Costco Bonds, payments of interest on the Notes will be
discontinued and, unless the Notes have been previously redeemed, will resume
if, when and to the extent such default is cured by Costco. See
"Discontinuance of Interest Payments" in this Pricing Supplement.
Costco is not affiliated with the Company, is not involved in
this offering of Notes and will have no obligations with respect to the Notes.
See "Historical Information" in this Prospectus Supplement for information on
the range of Market Prices for Costco Bonds and Costco Stock. The value of
the Costco Bonds or Costco Stock, as the case may be, received by a holder of
the Notes upon maturity or upon redemption, determined as described herein,
may be more or less than the Par Amount of the Notes.
Solely for purposes of adjustment upon the occurrence of
certain corporate events, the Benchmark Price and the Multiplier are each
subject to certain antidilution adjustments. See "Antidilution Adjustments"
in this Pricing Supplement. The Company will cause the Supplemental Amount,
the Final Average Market Price, any Market Price and any antidilution
adjustments to be determined by the 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, as described under "Risk
Factors" on PS-6 through PS-8 herein.
------------------------
PRICE $ Per Note Plus Accrued Interest
------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Price to Public(1) Agent's Commissions(2) Proceeds to Company(1)
------------------ ---------------------- ----------------------
Per Note............. $ $ $
Total................ $ $ $
<FN>
- -----------------
(1) Plus accrued interest, if any, from , 1997.
(2) The Company has agreed to indemnify the Agent against certain liabilities,
including liabilities under the Securities Act of 1933.
</FN>
</TABLE>
MORGAN STANLEY & CO.
Incorporated
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES, THE COSTCO
BONDS OR THE COSTCO STOCK. SPECIFICALLY, THE AGENT MAY OVERALLOT IN
CONNECTION WITH THE OFFERING, AND MAY BID FOR, AND PURCHASE, THE NOTES, THE
COSTCO BONDS OR THE COSTCO STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "SUPPLEMENTAL INFORMATION CONCERNING PLAN OF
DISTRIBUTION" AND "USE OF PROCEEDS AND HEDGING."
Capitalized terms not defined herein or in the Glossary attached as Annex A
hereto have the meanings given to such terms in the accompanying Prospectus
Supplement.
Principal Amount.............. $
Maturity Date................. June 1, 1999
Interest Rate................. 5.75% of the Par Amount, subject to a
default by Costco in the payment of
interest on the Costco Bonds or to the
payment of an Early Payment. See "Early
Payment" and "Discontinuance of Interest
Payments" below.
Interest Accrual Periods...... In order to match the accrual periods of
the Costco Bonds, interest on the Notes
will accrue from and including each May 15
and November 15 (or in the case of the
first interest period, from and including
the Issue Date) to but excluding each
following November 15 and May 15, as
applicable, and will be payable on the
following December 1 and June 1, as
applicable.
Interest Payment Dates....... Each June 1 and December 1, commencing
December 1, 1997, subject to a default by
Costco in the payment of interest on the
Costco Bonds or to the payment of an Early
Payment. See "Early Payment" and
"Discontinuance of Interest Payments" below.
Specified Currency............ U.S. Dollars
Issue Price................... $ per Note ( % of the Par Amount)
Par Amount.................... $1,000
Original Issue Date
(Settlement Date)............. , 1997
CUSIP.........................
Book Entry Note or
Certificated Note............. Book Entry
Senior Note or Subordinated
Note ........................ Senior
Denominations................. $1,000 and integral multiples thereof
Trustee....................... The Chase Manhattan Bank
Exchange at Maturity.......... At maturity (including as a result of
acceleration, redemption or otherwise),
the Par Amount of each Note will be
mandatorily exchanged by the Company into
one Costco Bond, except as described below
under "Early Payment."
On the Maturity Date, the Company will, or
will cause the Calculation Agent to,
deliver the Costco Bonds (and cash in
respect of any accrued and unpaid interest
due) to the Trustee for delivery to the
holders. References to payment "per Note"
refer to each Par Amount of Notes, and
references to payment "per Costco Bond"
refer to each $1,000 principal amount of
any Costco Bond.
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
related to payments at maturity or upon
redemption resulting from such calculation
will be rounded to the nearest cent with
one-half cent being rounded upwards.
Supplemental Amount........... At maturity (including as a result of
acceleration, redemption or otherwise) a
holder of Notes will receive an amount per
Note (the "Supplemental Amount") based on
the increase, if any, in the Final Average
Market Price of Costco Stock over the
Benchmark Price. The Supplemental Amount,
if any, will be calculated on the
Determination Date and will equal the
product of the (i) the Multiplier and (ii)
the difference between the Final Average
Market Price of the Costco Stock and the
Benchmark Price, provided that the
Supplemental Amount will not be less than
zero. The Supplemental Amount is
described by the following formula:
Multiplier x (Final Average Market Price of
Costco Stock - Benchmark Price)
; provided that the Supplemental Amount
will not be less than zero. The
Multiplier and the Benchmark Price are
subject to adjustment upon the occurrence
of certain corporate events. See
"Antidilution Adjustments" below.
The Company will, or will cause the
Calculation Agent to, (i) provide written
notice to the Trustee at its New York
office, on which notice the Trustee can
conclusively rely, and to the holder on or
prior to 10:30 a.m. on the Business Day
immediately preceding the Maturity Date or
the Note Redemption Date, as the case may
be, of the Supplemental Amount to be
delivered per Note and (ii) deliver such
Supplemental Amount to the Trustee for
delivery to the holders.
Final Average Market Price.... The Final Average Market Price will be
determined by the Calculation Agent and will
equal the arithmetic average of the Market
Price of Costco Stock for each of the 10
scheduled Trading Days in the Calculation
Period (each a "Calculation Date"); provided
that, if a Market Disruption Event occurs on
any such Calculation Date or if any such
Calculation Date is not an actual Trading Day
(consequently, a "Non-Calculation Date"),
then the Calculation Agent shall disregard
such Non-Calculation Date and shall weight
the Market Price of Costco Stock for each
succeeding Calculation Date during the
Calculation Period to ratably distribute the
intended weight of such Non-Calculation Date
across the remaining Calculation Dates.
Accordingly, if there is a Non-Calculation
Date during the Calculation Period, the
weightings of the Market Price of Costco
Stock for the Calculation Dates will be
calculated as follows: (A) each Calculation
Date preceding the first Non-Calculation Date
will receive a weighting of 1/10 and (B) each
Calculation Date following a Non-Calculation
Date will receive a weighting that equals a
fraction (i) the numerator of which will be
the fraction that equals 1 minus the sum of
the weights of all preceding Calculation
Dates and (ii) the denominator of which will
be the number of scheduled Calculation Dates
from and including the first Calculation Date
following a Non-Calculation Date to and
including the last scheduled Calculation Date
in the Calculation Period. If there is no
succeeding Trading Day in the Calculation
Period on which a Market Disruption Event
does not occur, the Market Price of Costco
Stock for each Calculation Date occurring
after a Non-Calculation Date shall be
determined on the last Trading Day in the
Calculation Period, notwithstanding the
occurrence of a Market Disruption Event on
such Trading Day. If there is no actual
Trading Day during the Calculation Period
following a Non-Calculation Date, the
Calculation Agent will determine the Market
Price of Costco Stock for the remaining
Calculation Dates in the Calculation Period
using its good faith estimate of the closing
price that would have prevailed if such
Calculation Dates were Trading Days.
Early Payment................. If the Costco Bonds are called or otherwise
redeemed on a date prior to the Maturity
Date, the Company will (i) deliver to the
holders of the Notes notice of such
redemption and (ii) pay to holders on the
Early Payment Date an amount per Note (the
"Early Payment") equal to the total
proceeds paid per Costco Bond to the
holders of the Costco Bonds, including any
accrued and unpaid interest on such Costco
Bonds; provided that if Parity for the
Costco Bonds, as determined by the
Calculation Agent, on the Trading Day
prior to last available conversion date
for the Costco Bonds (the "Deemed
Conversion Date") exceeds the amount
described above, then the Early Payment
will consist of the number of shares of
Costco Stock payable to the holder of a
Costco Bond upon conversion of such Costco
Bond into Costco Stock on the Deemed
Conversion Date. Upon payment of the
Early Payment by the Company, no further
interest payments on the Notes will be
made, except that the Supplemental Amount,
if any, will be paid at the maturity of
the Notes.
If the Early Payment consists of shares of
Costco Stock, holders of the Notes will
not be entitled to receive any accrued and
unpaid interest on the Notes if the
conversion of Costco Bonds to Costco Stock
on the Deemed Conversion Date by a holder
of Costco Bonds would result in a
forfeiture of any accrued and unpaid
interest on such Costco Bonds.
The Company will, or will cause the
Calculation Agent to, (i) provide written
notice to the Trustee at its New York
office, on which notice the Trustee can
conclusively rely, and to the holder on or
prior to 10:30 a.m. on the Business Day
immediately preceding the Early Payment
Date (A) whether the Early Payment will be
in cash or Costco Stock (and cash in
respect of any fractional share of Costco
Stock), (B) of the amount of cash or
Costco Stock to be delivered per Note and
(C) that such payment is pursuant to a
redemption of the Costco Bonds and (ii)
deliver on the Early Payment Date such
cash or Costco Stock (and cash in respect
of any fractional shares of Costco Stock)
to the Trustee for delivery to the
holders.
Optional Redemption........... If the Calculation Agent determines that an
Event of Default, as defined in the Costco
Indenture, has occurred with respect to
the Costco Bonds, the Notes may be
redeemed at the option of the Company on
the Note Redemption Date, upon not less
than 30 nor more than 60 days' notice, for
one Costco Bond per Note upon delivery of
such Note to the Trustee. On such Note
Redemption Date, the holder of each Note
will also receive the Supplemental Amount,
if any, as determined on the Determination
Date, and, if Costco has paid interest on
the Costco Bonds since the Interest
Payment Date immediately preceding the
Note Redemption Date, the Company will pay
to the holder of each Note the amount of
such interest that pertains to one Costco
Bond.
The Company will, or will cause the
Calculation Agent to, (i) provide written
notice to the Trustee at its New York
office, on which notice the Trustee can
conclusively rely, and to the holder on or
prior to 10:30 a.m. on the Business Day
immediately preceding the Note Redemption
Date (A) of the Supplemental Amount, if
any, to be delivered per Note and (B) of
the amount of accrued and unpaid interest,
if any, to be delivered per Note and (ii)
deliver on the Note Redemption Date such
Supplemental Amount, any accrued and
unpaid interest and one Costco Bond per
Note to the Trustee for delivery to the
holders.
Discontinuance of Interest
Payment....................... Payments of interest on the Notes will be
discontinued if there is a default by
Costco with respect to the payment of
interest on the Costco Bonds and, unless
the Notes have been previously redeemed,
will resume if, when and to the extent
that such default is cured by Costco.
Upon a cure by Costco of any such default,
the Company will promptly, but in no event
later that two Business Days following the
date on which holders of the Costco Bonds
receive a payment of interest with respect
to such Costco Bonds, pay to each holder
an amount per Note equal to the amount of
interest paid by Costco to the holders of
a Costco Bond. Payment of interest on the
Notes will thereafter be paid on the next
succeeding Interest Payment Date, subject
to the conditions set forth in this
paragraph.
A discontinuance of interest payments
pursuant to the immediately preceding
paragraph will not constitute a default under
the Senior Debt Indenture.
The Company will, or will cause the
Calculation Agent to, provide written notice
to the Trustee at its New York office, on
which notice the Trustee can conclusively
rely, and to the holder (i) no later than
10:00 a.m. on the Business Day next
succeeding any Interest Payment Date on which
a default by Costco with respect to the
payment of interest on the Costco Bonds has
occurred of such default and (ii) no later
than 10:00 a.m. on the Business Day next
succeeding any payment of interest on the
Costco Bonds by Costco to cure any such
default of the amount of interest to be
delivered per Note.
Calculation Agent............. Morgan Stanley & Co. Incorporated and its
successors ("MS & Co.")
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 Notes, including with respect to
certain determinations and judgments that
the Calculation Agent must make in
adjusting the Multiplier or the Benchmark
Price or in making other antidilution
adjustments or determining any Market
Price or whether a Market Disruption Event
has occurred. See "Antidilution
Adjustments" and "Market Disruption Event"
below. 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 Notes entails
significant risks not associated with similar
investments in a conventional debt security,
including the following:
The Notes combine features of equity and
debt instruments. Because the prices of
the Costco Bonds and the Costco Stock are
each subject to market fluctuations, the
value of the Costco Bonds or Costco Stock,
as the case may be, received by a holder
of Notes upon exchange at maturity, as an
Early Payment or upon an optional
redemption, determined as described
herein, together with the value of the
Supplemental Amount, if any, due at such
time, may be less than the Issue Price of
the Notes. An investment in the Notes may
result in an investment loss if the sum of
(i) the total interest payments on a Note,
(ii) the value of a Costco Bond delivered
with respect to a Note and (iii) the
Supplemental Amount is less than the Issue
Price of the Notes.
Because the payment of interest on the
Notes is contingent on the payment of
interest by Costco on the Costco Bonds,
holders of the Notes will take credit risk
with respect to Costco on interest
payments, as well as on the Costco Bonds
or Costco Stock that they may receive upon
exchange at maturity, as an Early Payment
or upon optional redemption of the Notes.
Although the Benchmark Price and the
Multiplier are each subject to adjustment
for certain corporate events, such
adjustments do not cover all events that
could affect the amount that holders of
the Notes are entitled to receive at
maturity or upon an optional redemption of
the Notes, including, without limitation,
the occurrence of a partial tender or
exchange offer for the Costco Stock by
Costco or any third party. Such other
events may adversely affect the market
value of the Notes.
There can be no assurance as to how the
Notes will trade in the secondary market
or whether such market will be liquid or
illiquid. Securities with characteristics
similar to the Notes are novel securities,
and there is currently no secondary market
for the Notes. The market value for the
Notes will be affected by a number of
factors in addition to the
creditworthiness of the Company and the
value of the Costco Bonds and of the
Costco Stock, including, but not limited
to, the volatility of Costco Stock, the
dividend rate on Costco Stock, market
interest and yield rates and the time
remaining to the maturity of the Notes.
In addition, the value of Costco Bonds and
of Costco Stock depends on a number of
interrelated factors, including the
creditworthiness of Costco, and other
economic, financial and political events,
that can affect the debt and equity
markets generally and the market segment
of which Costco is a part and over which
the Company has no control. The market
value of the Notes is expected to depend
primarily on changes in the
creditworthiness of Costco and the Market
Price of Costco Stock and of Costco Bonds.
The price at which a holder will be able
to sell Notes prior to maturity may be at
a discount, which could be substantial,
from the Issue Price thereof, if, at such
time, the Market Price of the Costco Bonds
or of the Costco Stock is below, equal to
or not sufficiently above the Issue Price.
The historical Market Prices of Costco
Bonds and of the Costco Stock should not
be taken as an indication of the future
performance of Costco Bonds or of the
Costco Stock during the term of any Note.
The Notes will not be listed on any
national securities exchange or accepted
for quotation on a trading market and, as
a result, pricing information for the
Notes may be difficult to obtain.
The Company is not affiliated with Costco
and, although the Company as of the date
of this Pricing Supplement does not have
any material non-public information
concerning Costco, corporate events of
Costco, including those described below in
"Antidilution Adjustments," are beyond the
Company's ability to control and are
difficult to predict.
Costco is not involved in the offering of
the Notes and has no obligations with
respect to the Notes, including any
obligation to take the interests of the
Company or of holders of Notes into
consideration for any reason. Costco will
not receive any of the proceeds of the
offering of the Notes made hereby and is
not responsible for, and has not
participated in, the determination of the
timing of, prices for or quantities of,
the Notes offered hereby.
Holders of the Notes will not be entitled
to any rights with respect to the Costco
Bonds or the Costco Stock (including,
without limitation, voting rights, the
rights to receive any dividends or other
distributions in respect thereof (other
than interest on the Costco Bonds, to the
extent described herein) and the right to
tender or exchange Costco Stock or Costco
Bonds in any partial tender or exchange
offer by Costco or any third party) until
such time as the Company delivers Costco
Bonds or shares of Costco Stock, as
applicable, to holders of the Notes on the
Maturity Date, the Early Payment Date or
the Note Redemption Date, as applicable.
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 Notes, including with respect to the
determination of the Supplemental Amount,
whether any Market Disruption Event has
occurred, any Market Price, the Final
Average Market Price and certain
antidilution adjustments that may
influence the determination of the amount
of Costco Stock or other property
receivable at the maturity of the Notes,
as an Early Payment or upon optional
redemption. See "Antidilution
Adjustments."
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.
Under the characterization of the Notes
agreed to by the Company and the holders,
the amount of original issue discount
recognized by a holder of a Note will be
more than the stated interest paid on such
Note. No statutory, judicial or
administrative authority definitively
addresses the characterization for U.S.
federal income tax purposes of the Notes
or instruments similar to the Notes. As a
result, significant aspects of the U.S.
federal income tax treatment of an
investment in the Notes are uncertain. No
ruling has been or will be requested from
the Internal Revenue Service ("IRS") with
respect to the Notes and no assurance can
be given that the IRS or a court will
agree with the analysis set forth herein.
See "United States Federal Income
Taxation" below.
Antidilution Adjustments...... The Multiplier and the Benchmark Price will
be adjusted as follows:
1. If Costco Stock is subject to a stock
split or reverse stock split, then once
such split has become effective, the
Multiplier will be adjusted to equal the
product of the prior Multiplier and the
number of shares issued in such stock
split or reverse stock split with respect
to one share of Costco Stock.
2. If Costco Stock is subject to a stock
dividend (issuance of additional shares of
Costco Stock) that is given ratably to all
holders of shares of Costco Stock, then
once the dividend has become effective and
Costco Stock is trading ex-dividend, the
Multiplier will be adjusted so that the
new Multiplier will equal the prior
Multiplier plus the product of (i) the
number of shares issued with respect to
one share of Costco Stock and (ii) the
prior Multiplier.
3. There will be no adjustments to the
Multiplier to reflect cash dividends or
other distributions paid with respect to
Costco Stock other than distributions
described in Extraordinary Dividends as
described below. A cash dividend or other
distribution with respect to Costco Stock
will be deemed to be an "Extraordinary
Dividend" if such dividend or other
distribution exceeds the immediately
preceding non-Extraordinary Dividend for
Costco Stock by an amount equal to at
least 10% of the Market Price of Costco
Stock on the Trading Day preceding the ex-
dividend date for the payment of such
Extraordinary Dividend (the "ex-dividend
date"). If an Extraordinary Dividend
occurs with respect to Costco Stock, the
Multiplier with respect to Costco Stock
will be adjusted on the ex-dividend date
with respect to such Extraordinary
Dividend so that the new Multiplier will
equal the product of (i) the then current
Multiplier and (ii) a fraction, the
numerator of which is the Market Price on
the Trading Day preceding the ex-dividend
date, and the denominator of which is the
amount by which the Market Price on the
Trading Day preceding the ex-dividend date
exceeds the Extraordinary Dividend Amount.
The "Extraordinary Dividend Amount" with
respect to an Extraordinary Dividend for
Costco Stock will equal (i) in the case of
cash dividends or other distributions that
constitute quarterly dividends, the amount
per share of such Extraordinary Dividend
minus the amount per share of the
immediately preceding non-Extraordinary
Dividend for Costco Stock or (ii) in the
case of cash dividends or other
distributions that do not constitute
quarterly dividends, the amount per share
of such Extraordinary Dividend. To the
extent an Extraordinary Dividend is not
paid in cash, the value of the non-cash
component will be determined by the
Calculation Agent, whose determination
will be conclusive.
4. If Costco issues rights or warrants to
all holders of Costco Stock to subscribe
for or purchase Costco Stock at an
exercise price per share less than the
Market Price of the Costco Stock on (i)
the date the exercise price of such rights
or warrants is determined and (ii) the
expiration date of such rights or
warrants, and if the expiration date of
such rights or warrants precedes the
maturity of the Notes or the Note
Redemption Date, as applicable, then the
Multiplier will be adjusted to equal the
product of the prior Multiplier and a
fraction, the numerator of which will be
the number of shares of Costco Stock
outstanding immediately prior to the
issuance of such rights or warrants plus
the number of additional shares of Costco
Stock offered for subscription or purchase
pursuant to such rights or warrants and
the denominator of which will be the
number of shares of Costco Stock
outstanding immediately prior to the
issuance of such rights or warrants plus
the number of additional shares of Costco
Stock which the aggregate offering price
of the total number of shares of Costco
Stock so offered for subscription or
purchase pursuant to such rights or
warrants would purchase at the Market
Price on the expiration date of such
rights or warrants, which will be
determined by multiplying such total
number of shares offered by the exercise
price of such rights or warrants and
dividing the product so obtained by such
Market Price.
5. If (i) there occurs any
reclassification of Costco Stock, (ii)
Costco, or any surviving entity or
subsequent surviving entity of Costco (a
"Costco Successor") has been subject to a
merger, combination or consolidation and
is not the surviving entity, (iii) any
statutory exchange of securities of Costco
or any Costco Successor with another
corporation occurs (other than pursuant to
clause (ii) above), (iv) Costco is
liquidated, (v) Costco issues to all of
its shareholders equity securities of an
issuer other than Costco (other than in a
transaction described in clauses (ii),
(iii) or (iv) above) (a "Spin-off Event")
or (vi) a tender or exchange offer is
consummated for all the outstanding shares
of Costco Stock (any such event in clauses
(i) through (vi) a "Reorganization
Event"), the method of determining the
Supplemental Amount shall be adjusted so
that the Transaction Value, as defined
below, of the securities, cash or any
other assets distributed in any such
Reorganization Event, including, in the
case of a Spin-off Event, the share of
Costco Stock with respect to which the
spun-off security was issued
(collectively, the "Exchange Property")
will be used in lieu of the Market Price
of the Costco Stock on the Determination
Date for purposes of determining the
Supplemental Amount. "Transaction Value"
means the sum of (i) for any cash received
in any such Reorganization Event, the
amount of cash received per share of
Costco Stock, (ii) for any property other
than cash or securities received in any
such Reorganization Event, the market
value of such Exchange Property received
for each share of Costco Stock at the date
of the receipt of such Exchange Property,
as determined by the Calculation Agent and
(iii) for any security received in any
such Reorganization Event, an amount equal
to the Market Price per share of such
security as of the second scheduled
Trading Day immediately prior to the
Determination Date multiplied by the
quantity of such security received for
each share of Costco Stock.
6. Whenever the Multiplier is adjusted,
as provided in paragraphs 1 through 4
above, the Benchmark Price shall be
adjusted (calculated to the nearest $.01)
so that it will equal the price determined
by multiplying such Benchmark Price
immediately prior to such adjustment by a
fraction the numerator of which will be
the Multiplier immediately prior to such
adjustment, the denominator of which shall
be the Multiplier immediately thereafter.
No adjustments to the Multiplier will be
required unless such adjustment would
require a change of at least 0.1% in the
Multiplier then in effect. The Multiplier
resulting from any of the adjustments
specified above will be rounded to the
nearest one thousandth with five ten-
thousandths being rounded upward.
No adjustments to the Multiplier or the
Benchmark Price will be made other than
those specified above. The adjustments
specified above do not cover all events
that could affect the Market Price of the
Costco Stock, including, without
limitation, a partial tender or exchange
offer for the Costco Stock.
The Calculation Agent will be solely
responsible for the determination and
calculation of any adjustments to the
Multiplier or the Benchmark Price, and its
determinations and calculations with
respect thereto will be conclusive.
The Calculation Agent will provide
information as to any adjustments to the
Multiplier or the Benchmark Price upon
written request by any holder of the
Notes.
Alternate Exchange Calculation
in case of a Company
Event of Default............... In case an Event of Default with respect
to any Notes shall have occurred and be
continuing, the amount declared due and
payable upon any acceleration of the Notes
will be determined by the Calculation
Agent and will be equal to the portion of
the Issue Price of the Notes attributed to
the Deposit, as described under "United
States Federal Income Taxation" below,
plus any accrued but unpaid interest with
respect to the Deposit, plus an amount
equal to the value of the Supplemental
Amount, all determined as of the date of
such acceleration by a nationally
recognized independent investment banking
firm retained for this purpose by the
Company.
Costco Bonds; Public
Information................... Costco operates a chain of wholesale cash
and carry membership warehouses. Costco
Bonds and Costco Stock are registered
under the Exchange Act. Companies with
securities registered under the Exchange
Act are required to file periodically
certain financial and other information
specified by the Securities and Exchange
Commission (the "Commission").
Information provided to or filed with the
Commission can be inspected and copied at
the public reference facilities maintained
by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549 or at
its Regional Offices located at Suite
1400, Citicorp Center, 500 West Madison
Street, Chicago, Illinois 60661 and at
Seven World Trade Center, 13th Floor, New
York, New York 10048, and copies of such
material can be obtained from the Public
Reference Section of the Commission, 450
Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. In addition,
information provided to or filed with the
Commission electronically can be accessed
through a Website maintained by the
Commission. The address of the
Commission's Website is http:/www.sec.gov.
Specific information regarding the Costco
Bonds can be located by reference to
Registration Statement No. 33-47750 as
filed by Costco on Form S-3 with the
Commission under the Securities Act of
1933. Information provided to or filed
with the Commission by Costco pursuant to
the Exchange Act of 1934 can be located by
reference to Commission file number 0-
20355. Additional information regarding
Costco may be obtained from other sources
including, but not limited to, press
releases, newspaper articles and other
publicly disseminated documents. The
Company makes no representation or
warranty as to the accuracy or
completeness of such reports.
THIS PRICING SUPPLEMENT RELATES ONLY TO
THE NOTES OFFERED HEREBY AND DOES NOT
RELATE TO, COSTCO BONDS, COSTCO STOCK OR
OTHER SECURITIES OF COSTCO. ALL
DISCLOSURES CON TAINED IN THIS PRICING
SUPPLEMENT REGARDING COSTCO ARE DERIVED
FROM THE PUBLICLY AVAIL ABLE DOCUMENTS
DESCRIBED IN THE PRECEDING PARAGRAPH.
NEITHER THE COMPANY NOR THE AGENT HAS
PARTICIPATED IN THE PREPARATION OF SUCH
DOCUMENTS OR MADE ANY DUE DILIGENCE
INQUIRY WITH RESPECT TO COSTCO IN
CONNECTION WITH THE OFFERING OF THE NOTES.
NEITHER THE COMPANY NOR THE AGENT MAKES
ANY REPRESENTA TION THAT SUCH PUBLICLY
AVAILABLE DOCUMENTS OR ANY OTHER PUBLICLY
AVAILABLE INFORMATION REGARDING COSTCO ARE
ACCURATE OR COMPLETE. FURTHERMORE, THERE
CAN BE NO ASSURANCE THAT ALL EVENTS
OCCURRING PRIOR TO THE DATE HEREOF
(INCLUDING EVENTS THAT WOULD AFFECT THE
ACCURACY OR COMPLETENESS OF THE PUBLIC LY
AVAILABLE DOCUMENTS DESCRIBED IN THE
PRECEDING PARAGRAPH) THAT WOULD AFFECT
THE TRADING PRICE OF COSTCO BONDS OR
COSTCO STOCK HAVE BEEN PUBLICLY DISCLOSED.
SUBSE QUENT DISCLOSURE OF ANY SUCH EVENTS
OR THE DISCLOSURE OF OR FAILURE TO
DISCLOSE MATERIAL FUTURE EVENTS CONCERNING
COSTCO COULD AFFECT THE VALUE RECEIVED AT
MATURITY, UPON AN EARLY PAYMENT OR UPON
REDEMPTION WITH RESPECT TO THE NOTES AND
THEREFORE THE TRADING PRICES OF THE NOTES.
NEITHER THE COMPANY NOR ANY OF ITS
AFFILIATES MAKES ANY REPRESENTATION TO ANY
PURCHASER OF NOTES AS TO THE PERFORMANCE
OF COSTCO BONDS OR COSTCO STOCK.
The Company or its affiliates may presently
or from time to time engage in business with
Costco including extending loans to, or
making equity investments in, Costco or
providing advisory services to Costco,
including merger and acquisition advisory
services. In the course of such business,
the Company or its affiliates may acquire
non-public information with respect to Costco
and, in addition, one or more affiliates of
the Company may publish research reports with
respect to Costco. The statement in the
preceding sentence is not intended to affect
the rights of holders of the Notes under the
securities laws. Any prospective purchaser
of a Note should undertake an independent
investigation of Costco as in its judgment
is appropriate to make an informed decision
with respect to an investment in Costco Bonds
and Costco Stock.
Historical Information........ The following tables set forth the high and
low Market Prices of the Costco Bonds and the
Costco Stock during 1994, 1995, 1996 and 1997
through April 28, 1997. The Market Price of
the Costco Bonds on April 28, 1997 was 98.50%
and the Market Price of the Costco Stock on
April 28, 1997 was $29.25. The Market Prices
of the Costco Bonds listed below were
obtained from MS & Co. and the Market Prices
of the Costco Stock listed below was obtained
from Bloomberg Financial Markets. The
Company believes all such information to be
accurate. The historical prices of Costco
Bonds and the Costco Stock should not be
taken as an indication of future performance,
and no assurance can be given that the price
of Costco Bonds or Costco Stock will not
decrease so that the beneficial owners of the
Notes will receive at maturity or upon
redemption Costco Bonds or Costco Stock worth
less than the principal amount of the Notes.
Nor can assurance be given that the price of
Costco Bonds or the price of Costco Stock
will increase so that at maturity or upon
redemption the beneficial owners of the Notes
will receive an amount in excess of the
principal amount of the Notes.
Costco Bonds High Low
------------ ---- ---
(CUSIP # 221607AB0)
1994:
First Quarter.................... 96 % 91 %
Second Quarter................... 92 1/2 83 5/8
Third Quarter.................... 87 83 1/2
Fourth Quarter................... 86 80
1995:
First Quarter.................... 87 1/4 80
Second Quarter................... 94 1/4 85 3/4
Third Quarter.................... 94 90 3/8
Fourth Quarter................... 95 1/8 92 1/2
1996:
First Quarter.................... 98 1/2 93 1/8
Second Quarter................... 95 1/4 90 7/8
Third Quarter.................... 93 1/2 89 5/8
Fourth Quarter................... 97 1/4 93 1/2
1997:
First Quarter.................... 99 1/4 96 3/4
Second Quarter
(through April 28, 1997)......... 98 1/2 97 1/4
Costco Stock High Low
------------ ---- ---
(CUSIP # 22160Q102)
1994:
First Quarter.................... $ 21 1/8 $ 17 1/8
Second Quarter................... 18 13 1/8
Third Quarter.................... 16 1/16 14
Fourth Quarter................... 16 5/8 12 5/8
1995:
First Quarter.................... 15 12 1/4
Second Quarter................... 16 1/4 13 5/16
Third Quarter.................... 18 1/2 16 1/4
Fourth Quarter................... 17 3/4 14 3/8
1996:
First Quarter.................... 19 1/2 14 3/4
Second Quarter................... 21 5/8 17 1/2
Third Quarter.................... 22 1/8 19 3/4
Fourth Quarter................... 25 5/8 19 1/8
1997:
First Quarter.................... 30 24 1/8
Second Quarter
(through April 28, 1997)......... 29 5/8 26 7/8
Costco has not paid cash dividends on the
Costco Stock to date. The Company makes no
representation as to the amount of dividends,
if any, that Costco will pay in the future.
In any event, holders of the Notes will not
be entitled to receive dividends, if any,
that may be payable on Costco Stock.
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. See
also "Use of Proceeds" in the accompanying
Prospectus.
On or prior to the date of this Pricing
Supplement, the Company, through its
subsidiaries or others, may hedge its
anticipated exposure in connection with the
Notes by taking positions in Costco Bonds or
Costco Stock, in options contracts on Costco
Stock listed on major securities markets or
positions in any other instruments that it may
wish to use in connection with such hedging.
In the event that the Company pursues such a
hedging strategy, the price at which the
Company is able to purchase such positions
may be a factor in determining the pricing of
the Notes. Purchase activity could
potentially increase the price of Costco
Bonds or Costco Stock, and therefore
effectively increase the level to which
Costco Bonds or Costco Stock must rise before
a holder of a Note would receive at maturity
an amount of Costco Bonds or Costco Stock, as
the case may be, worth as much as or more
than the principal amount of the Notes.
Although the Company has no reason to believe
that its hedging activity will have a
material impact on the price of Costco Bonds
or Costco Stock, there can be no assurance
that the Company will not affect such price
as a result of its hedging activities. The
Company, through its subsidiaries, is likely
to modify its hedge position throughout the
life of the Notes by purchasing and selling
the securities and instruments listed above
and any other available securities and
instruments.
Supplemental Information
Concerning Plan of
Distribution:................. In order to facilitate the offering of the
Notes, the Agent may engage in transactions
that stabilize, maintain or otherwise affect
the price of the Notes, the Costco Bonds or
the Costco Stock. Specifically, the Agent
may overallot in connection with the
offering, creating a short position in the
Notes for its own account. In addition, to
cover allotments or to stabilize the price of
the Notes, the Agent may bid for, and
purchase, the Costco Bonds or the Costco
Stock in the open market. See "Use of
Proceeds and Hedging" above.
United States Federal
Income Taxation.............. This summary addresses certain U.S.
federal income tax consequences to holders
who are initial holders of the Notes
purchasing the Notes at the Issue Price,
and who will hold the Notes, the Costco
Bond and the Costco Stock as capital
assets within the meaning of Section 1221
of the Internal Revenue Code of 1986, as
amended (the "Code"). This summary is
based on the Code, administrative
pronouncements, judicial decisions and
existing and proposed Treasury
Regulations, changes to any of which
subsequent to the date of this Pricing
Supplement may affect the tax consequences
described herein. This summary does not
address all aspects of the U.S. federal
income taxation that may be relevant to a
particular holder in light of its
individual circumstances or to certain
types of holders subject to special
treatment under the U.S. federal income
tax laws (e.g., certain financial
institutions, insurance companies, tax-
exempt organizations, dealers in options
or securities, or persons who hold a Unit
as a part of a hedging transaction,
straddle, conversion or other integrated
transaction). As the law applicable to
the U.S. federal income taxation of
instruments such as the Notes is technical
and complex, the discussion below
necessarily represents only a general
summary. Moreover, the effect of any
applicable state, local or foreign tax
laws is not discussed.
As used herein, the term "Holder" means a
beneficial owner of a Note that is, for U.S.
federal income tax purposes, (i) a citizen or
resident of the U.S., (ii) a corporation,
partnership or other entity created or
organized under the laws of the U.S. or any
political subdivision thereof, or (iii) an
estate or trust the income of which is
subject to U.S. federal income taxation
regardless of its source.
General
Pursuant to the terms of the Note, the
Company and every Holder of a Note agree
(in the absence of an administrative
determination or judicial ruling to the
contrary) to characterize a Note for all
tax purposes as an investment unit
consisting of the following: (i) a
contract that entitles the Holder of the
Note to receive the Costco Bond at the
maturity (or, alternatively, upon an
earlier redemption of the Note) or Early
Payment (the "Forward Contract") and
obligates the Holder to deposit with the
Company a fixed amount of cash to secure
the Holder's purchase obligation under the
Forward Contract (the "Deposit"), which
Deposit is bearing interest (subject to
certain limitations set forth herein) at a
rate of % per annum; and (ii) the right to
receive the Supplemental Amount ("the
Supplemental Right") that is characterized
as a cash-settlement option to purchase
the Costco Stock (collectively, the
"Components"). Furthermore, based on the
Company's determination of the relative
fair market values of the Components at
the time of the Note's issuance, the
Company will allocate % of the Issue Price
of the Note to the Deposit, and the
remainder to the Supplemental Right. The
Company's allocation of the Issue Price
among the Components will be binding on a
Holder of the Note, unless such Holder
timely and explicitly discloses to the
Internal Revenue Service (the "IRS") that
its allocation is different from the
Company's. The treatment of the Note
described above and the Company's
allocation are not, however, binding on
the IRS or the courts. No statutory,
judicial or administrative authority
directly addresses the characterization of
the Notes or instruments similar to the
Notes for U.S. federal income tax
purposes, and no ruling is being requested
from the IRS with respect to the Notes.
Due to the absence of authorities that
directly address instruments that are
similar to the Notes, Davis Polk &
Wardwell, special tax counsel to the
Company ("Tax Counsel"), is unable to
render an opinion as to the proper U.S.
federal income tax characterization of the
Notes. As a result, significant aspects
of the U.S. federal income tax
consequences of an investment in the Notes
are not certain, and no assurance can be
given that the IRS or the courts will
agree with the characterization described
above. ACCORDINGLY, PROSPECTIVE
PURCHASERS ARE URGED TO CONSULT THEIR TAX
ADVISORS REGARDING THE U.S. FEDERAL
INCOME TAX CONSEQUENCES OF AN INVESTMENT
IN THE NOTES (INCLUDING ALTERNATIVE
CHARACTERIZATIONS OF THE NOTES) AND WITH
RESPECT TO ANY TAX CONSEQUENCES ARISING
UNDER THE LAWS OF ANY STATE, LOCAL OR
FOREIGN TAXING JURISDICTION. UNLESS
OTHERWISE STATED, THE FOLLOWING DISCUSSION
IS BASED ON THE TREATMENT AND THE
ALLOCATION DESCRIBED ABOVE.
Tax Treatment of the Notes
Assuming the characterization of the Notes
and the allocation of the Issue Price as set
forth above, Tax Counsel believes that the
following U.S. federal income tax
consequences should result.
Interest on the Deposit. The Deposit is
likely to be subject to the "original
issue discount" rules. In such case, each
Holder, including a taxpayer who otherwise
uses the cash method of accounting, would
be required to include original issue
discount ("OID") on the Deposit in income
as it accrues, in accordance with a
constant yield method based on a
compounding of interest at % per annum.
Generally, all of a Holder's taxable
interest income with respect to the Note
would be accounted for as OID, and
payments of the Note's stated interest
need not be separately reported as taxable
income. Because the yield on the Deposit
is higher than the stated interest rate,
the amount of OID recognized by the Holder
will generally be more than the stated
interest paid to the Holder.
Tax Basis. Based on the Company's
determination set forth above, the
Holder's tax basis in the Supplement Right
would be % of the Issue Price, and the
Holder's tax basis in the Deposit would
initially be % of the Issue Price. The
Holder's tax basis in the Deposit will be
subsequently increased by OID accrued with
respect thereto and reduced by the amount
of stated interest actually paid to such
Holder.
Settlement of the Forward Contract. Upon
the final settlement of the Forward
Contract, a Holder would, pursuant to the
Forward Contract, be deemed to have
applied the Deposit (including the excess
of OID accrued over the stated interest)
toward the purchase of Costco Bond or the
Early Payment, and a Holder would not
recognize any gain or loss with respect to
any Costco Bond or Costco Stock (the "Non-
Cash Proceeds") received thereon. With
respect to any cash received upon
settlement, a Holder would recognize gain
or loss. The amount of such gain or loss
would be the extent to which the amount of
such cash received differs from the pro
rata portion of the Holder's tax basis in
the Deposit allocable to the cash. Any
such gain or loss would generally be long-
term capital gain or loss, as the case may
be, if at the time the Note has been held
for more than one year. With respect to
any Non-Cash Proceeds received upon
settlement, the Holder would have an
adjusted tax basis in such Non-Cash
Proceeds equal to the pro rata portion of
the Holder's tax basis in the Deposit
allocable thereto. The allocation of the
Holder's tax basis in the Deposit between
cash and Non-Cash Proceeds should be based
on the amount of the cash received and the
relative fair market value, as of the
settlement date, of the Non-Cash Proceeds.
The Holder's holding period of any Non-
Cash Proceeds received would start on the
day after the settlement date.
Holders should note that while the accrued
but unpaid OID on the Deposit would be
taxable as ordinary income, any gain or
loss recognized upon the final settlement
of the Forward Contract or the subsequent
sale or exchange of the Non-Cash Proceeds
would be capital gain or loss. The
distinction between capital gain or loss
and ordinary gain or loss is potentially
significant in several respects. For
example, limitations apply to a Holder's
ability to offset capital losses against
ordinary income, and certain Holders may
be subject to a lower U.S. federal income
tax rate with respect to long-term capital
gain than with respect to ordinary gain.
Settlement of the Supplemental Right. Upon
the final settlement of the Supplemental
Right (i.e., upon the payment of the
Supplemental Amount), a Holder would
recognize gain or loss to the extent the
Supplemental Amount differs from the Holder's
tax basis in the Supplemental Right, and any
such gain or loss would be long-term capital
gain or loss, as the case may be, if at the
time the Note has been held for more than one
year.
Sale or Exchange of the Components. Upon
a sale or exchange of a Note prior to the
maturity of the Note, a Holder would
recognize taxable gain or loss equal to
the difference between the amount realized
on such sale or exchange and such Holder's
tax basis in the Components so sold or
exchanged. Any such gain or loss would
generally be long-term capital gain or
loss, as the case may be, if at the time
the Note has been held for more than one
year. Such Holder's tax basis in the Note
would generally equal the sum of the
Holder's tax bases in the Deposit and the
Supplement Right, or, if the Forward
Contract has been settled prior to such
sale or exchange, the Holder's tax basis
in the Supplemental Right. For these
purposes, the amount realized does not
include any amount attributable to accrued
OID on the Deposit, which would be taxed
as described under "-Interest on the
Deposit" above.
Possible Alternative Tax Treatments of an
Investment in the Note
Due to the absence of authorities that
directly address the proper
characterization of the Note, no assurance
can be given that the IRS will accept, or
that a court will uphold, the
characterization and tax treatment
described above. In particular, the IRS
could seek to analyze the U.S. federal
income tax consequences of owning a Note
under Treasury regulations governing
contingent payment debt instruments (the
"Contingent Payment Regulations").
The Company will take the position that
the Notes are not debt instruments, and
therefore, that the Contingent Payment
Regulations do not apply to the Notes. If
the IRS were successful in asserting that
the Contingent Payment Regulations applied
to the Notes, the timing and character of
income thereon would be significantly
affected. Among other things, a Holder
would be required to accrue as OID,
subject to the adjustments described
below, income at a "comparable yield" on
the Issue Price, which would be higher
than the yield deemed to be paid on the
Deposit. In addition, the Contingent
Payment Regulations require that a
projected payment schedule, which results
in such a "comparable yield," be
determined, and that adjustments to income
accruals be made to account for
differences between actual payments and
projected amounts. Furthermore, any gain
realized with respect to the Note will
generally be treated as ordinary income,
and any loss realized will generally be
treated as ordinary loss to the extent of
the Holder's prior ordinary income
inclusion (which were not previously
reversed) with respect to the Note.
Even if the Contingent Payment Regulations
do not apply to the Note, other
alternative U.S. federal income
characterizations or treatments of the
Notes are also possible, which may also
affect the timing and the character of the
income or loss with respect to the Notes.
It is possible, for example, that a Note
could be treated as including a pre-paid
forward contract and one or more options.
Accordingly, prospective purchasers are
urged to consult their tax advisors
regarding the U.S. federal income tax
consequences of an investment in the
Notes.
Backup Withholding and Information Reporting
A Holder of a Note may be subject to
information reporting and to backup
withholding at a rate of 31 percent of the
amounts paid (or property delivered) to
the Holder, unless such Holder provides
proof of an applicable exemption or a
correct taxpayer identification number,
and otherwise complies with applicable
requirements of the backup withholding
rules. The amounts withheld under the
backup withholding rules are not an
additional tax and may be refunded, or
credited against the Holder's U.S. federal
income tax liability, provided the
required information is furnished to the
IRS.
ANNEX A
GLOSSARY
Benchmark Price............... $ , subject to adjustment upon the
occurrence of certain corporate events.
See "Antidilution Adjustments".
Business Day.................. 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.
Calculation Agent............. Morgan Stanley & Co. Incorporated and its
successors ("MS & Co.")
Calculation Date.............. Each of the 10 scheduled Trading Days in the
Calculation Period.
Calculation Period............ The period beginning on the tenth scheduled
Trading Day preceding the Determination Date
and ending on and including the Determination
Date.
Company....................... Morgan Stanley Group Inc.
Costco........................ Costco Companies, Inc. (successor to the
obligations of Costco Wholesale
Corporation with respect to the Costco
Bonds).
Costco Bond................... Each $1,000 principal amount of the Costco
Bonds.
Costco Bonds.................. 5 3/4% Convertible Subordinated Debentures
Due 2002 of Costco, or any successor security
(CUSIP # 221607AB0).
Costco Indenture.............. The Indenture dated May 15, 1992 between
Costco and the First Trust National
Association, as Trustee.
Costco Stock.................. The common stock, par value $.01 per share,
of Costco (CUSIP # 22160Q102).
Determination Date............ The second scheduled Trading Day preceding
either (i) the Maturity Date or (ii) the
Note Redemption Date.
Early Payment Date............ The third Trading Day succeeding the date
on which the holders of the Costco Bonds
receive payment of any and all amounts due
upon a redemption of the Costco Bonds.
Market Disruption Event....... "Market Disruption Event" means, with respect
to Costco Stock:
(i) a suspension, absence or material
limitation of trading of Costco Stock on
the primary market for Costco Stock 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 or material limitation on the
primary market for trading in options
contracts related to Costco Stock, if
available, 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 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,
(2) a decision to permanently discontinue
trading in the relevant option 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 New York Stock
Exchange, 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 will constitute a suspension,
absence or material limitation of trading,
(4) a suspension of trading in an options
contract on Costco Stock by the primary
securities market trading in such options,
if available, by reason of (x) a price
change exceeding limits set by such
securities 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 options contracts
related to Costco Stock and (5) a
suspension, absence or material limitation
of trading on the primary securities
market on which options contracts related
to Costco Stock are traded will not
include any time when such securities
market is itself closed for trading under
ordinary circumstances.
Market Price.................. With respect to Costco Bonds, the Market
Price on any Trading Day will be the last
reported bid price, regular way on such
day as determined by the Bridge Capital
Markets. If the last reported bid price
is not available pursuant to the preceding
sentence, the Market Price for any Trading
Day will be the mean, as determined by the
Calculation Agent, of the bid prices for
Costco Bonds obtained from as many dealers
in such Costco Bonds, but not exceeding
three, as will make such bid prices
available to the Calculation Agent.
With respect to Costco Stock, if such
Costco Stock is listed on a national
securities exchange, is a security of The
NASDAQ National Market ("NASDAQ NMS") or
is included in the OTC Bulletin Board
Service ("OTC Bulletin Board") operated by
the National Association of Securities
Dealers, Inc. (the "NASD"), the Market
Price for one share of Costco Stock on any
Trading Day means (i) the last reported
sale price, regular way, on such day on
the principal United States securities
exchange registered under the Securities
Exchange Act of 1934, as amended, on which
Costco Stock is listed or admitted to
trading or (ii) if not listed or admitted
to trading on any such securities exchange
or if such last reported sale price is not
obtainable, the last reported sale price
on the over-the-counter market as reported
on the NASDAQ NMS or OTC Bulletin Board on
such day. If the last reported sale price
is not available pursuant to clause (i) or
(ii) of the preceding sentence, the Market
Price for any Trading Day will be the
mean, as determined by the Calculation
Agent, of the bid prices for Costco Stock
obtained from as many dealers in such
stock, but not exceeding three, as will
make such bid prices available to the
Calculation Agent. The term "NASDAQ NMS"
shall include any successor to such system
and the term "OTC Bulletin Board Service"
shall include any successor service
thereto.
Multiplier.................... , subject to adjustment upon the
occurrence of certain corporate events.
See "Antidilution Adjustments."
Note Redemption Date.......... The date, as specified by the Company in
its notice of redemption, not less than 30
nor more than 60 days after the date on
which the Company issues its notice of
redemption, on which the Company, as a
result of such redemption, redeems the
Notes as described under "Optional
Redemption."
Parity........................ With respect to any Trading Day, an amount
equal to the product of (i) the Market Price
of Costco Stock on such Trading Day and (ii)
the then current conversion rate on the
Costco Bonds.
Senior Debt Indenture......... Senior Debt Indenture dated as of April 15,
1989 between the Company and The Chase
Manhattan Bank, as trustee, as supplemented
by a First Supplemental Senior Indenture
dated as of May 15, 1991 and a Second
Supplemental Senior Indenture dated as of
April 15, 1996.
Trading Day................... 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 NMS and (ii) in the
over-the-counter markets for debt and equity
securities in the United States.
