Subject to Completion, Pricing Supplement dated March 7, 1997
PROSPECTUS Dated January 24, 1997 Pricing Supplement No. 11 to
PROSPECTUS SUPPLEMENT Registration Statement No. 333-18005
Dated January 24, 1997 Dated March , 1997
Rule 424(b)(3)
$10,000,000
Morgan Stanley Group Inc.
MEDIUM-TERM NOTES, SERIES C
EQUITY LINKED NOTES DUE MARCH , 2002
--------------
Supplemental Redemption Amount based on the per
American Depositary Share price of
Telecomunicacoes Brasileiras S.A.--Telebras
--------------
The Equity Linked Notes due March , 2002 (the "Notes") are Medium-Term
Notes, Series C of Morgan Stanley Group Inc. (the "Company"), as further
described herein and in the Prospectus Supplement under "Description of Notes
- - Fixed Rate Notes" and " - Notes Linked to Commodity Prices, Single
Securities, Baskets of Securities or Indices." The Notes are being issued in
minimum denominations of $1,000 and will mature on March , 2002 (the
"Maturity Date"). There will be no periodic payments of interest on the
Notes. The Notes will not be redeemable by the Company in whole or in part
prior to the Maturity Date.
At maturity, the holder of each Note will receive the par amount of such Note
($1,000) ("Par") plus an amount in cash (the "Supplemental Redemption Amount")
based on the percentage increase, if any, in the Final Average Market Price of
the American Depositary Shares ("Telebras American Depositary Shares"), each
representing 1,000 preferred shares, without par value, of Telecomunicacoes
Brasileiras S.A. - Telebras ("Telebras"), over the Initial Market Price of the
Telebras American Depositary Shares, as further described in this Pricing
Supplement. The Supplemental Redemption Amount, if any, payable with respect
to each $1,000 principal amount of a Note at maturity will equal the lesser of
(a) $900 and (b) the product of (i) Par and (ii) a fraction, the numerator of
which will be the Final Average Market Price less the Initial Market Price and
the denominator of which will be the Initial Market Price. The Supplemental
Redemption Amount cannot be less than zero. The Initial Market Price of the
Telebras American Depositary Shares has been set to equal $ . The
Final Average Market Price will equal the arithmetic average of the Market
Price of the Telebras American Depositary Shares for each of the Trading Days
in the period beginning , 2002 and ending on the second scheduled
Trading Day immediately preceding the Maturity Date (the "Calculation
Period"). See "Final Average Market Price" and "Market Disruption Events" in
this Pricing Supplement. The Market Price of Telebras American Depositary
Shares will be subject to adjustment upon the occurrence of certain corporate
events. See "Antidilution Adjustments" in this Pricing Supplement. If the
Final Average Market Price is equal to or less than the Initial Market Price,
the holder of each Note will be repaid the par amount of such Note, but will
not receive any Supplemental Redemption Amount.
For information as to the calculation of the Supplemental Redemption Amount
and certain tax consequences to beneficial owners of the Notes, see
"Supplemental Redemption Amount," "Final Average Market Price" and "United
States Federal Taxation" in this Pricing Supplement.
Telebras is neither affiliated with the Company nor involved in this offering
of the Notes. See "Historical Information" in this Pricing Supplement for
information on the range of Market Prices for Telebras American Depositary
Shares.
The Company will cause the Supplemental Redemption Amount and any adjustments
to the Market Price of the Telebras American Depositary Shares to be
determined by Morgan Stanley & Co. Incorporated (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-11 herein.
MORGAN STANLEY & CO.
Incorporated
INFORMATION CONTAINED IN THIS PRELIMINARY PRICING SUPPLEMENT IS SUBJECT TO
COMPLETION OR AMENDMENT. THESE SECURITIES MAY NOT BE DELIVERED PRIOR TO
THE TIME A FINAL PRICING SUPPLEMENT IS DELIVERED. THIS PRICING SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS AND PROSPECTUS SUPPLEMENT SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
(This page intentionally left blank.)
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES OR THE TELEBRAS
AMERICAN DEPOSITARY SHARES. SPECIFICALLY, THE AGENT MAY OVERALLOT IN
CONNECTION WITH THE OFFERING, AND MAY BID FOR, AND PURCHASE, THE NOTES OR THE
TELEBRAS AMERICAN DEPOSITARY SHARES 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 have the meanings given to such terms in
the accompanying Prospectus Supplement.
Principal Amount................... $10,000,000
Maturity Date...................... March , 2002
Interest Rate...................... 0.00% per annum
Specified Currency................. U.S. Dollars
Issue Price........................ %
Issue Date (Settlement Date)....... March , 1997
Book Entry Note or Certificated
Note............................... Book Entry
Senior Note or Subordinated Note... Senior
Minimum Denominations.............. $1,000
Trustee............................ The Chase Manhattan Bank
Maturity Redemption Amount......... At maturity (including as a result of
acceleration or otherwise), the holder of
each Note will receive the par amount of
such Note ($1,000) ("Par") plus the
Supplemental Redemption Amount, if any.
References herein to "Notes" refer to each
$1,000 principal amount of any Note.
Supplemental Redemption
Amount............................. The Supplemental Redemption Amount,
if any, payable with respect to each
$1,000 principal amount of a Note at
maturity will be an amount in cash equal
to the lesser of (a) $900 and (b) the
product of (i) Par and (ii) a fraction,
the numerator of which will be the Final
Average Market Price less the Initial
Market Price and the denominator of which
will be the Initial Market Price. See
"Antidilution Adjustments" below. The
Supplemental Redemption Amount will not be
less than zero. The Supplemental
Redemption Amount is described by the
following formula:
Par x (Final Average Market Price - Initial Market Price)
---------------------------------------------------
Initial Market Price
The Company shall cause the Calculation
Agent to provide written notice to the
Trustee at its New York office, on which
notice the Trustee may conclusively rely,
of the Supplemental Redemption Amount on
or prior to 11:00 a.m. on the Business Day
preceding the Maturity Date. See "Final
Average Market Price" below.
Initial Market Price............... The Initial Market Price of the
Telebras American Depositary Shares has
been set to equal $ .
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 Telebras American
Depositary Shares for each of the 30
scheduled Trading Days in the Calculation
Period (as defined below) (each a
"Determination Date"); provided that, if
a Market Disruption Event (as defined
below) occurs on any such Determination
Date or if any such Determination Date is
not an actual Trading Day (consequently, a
"Non-Determination Date"), then the
Calculation Agent shall disregard such
Non-Determination Date and shall weight
the Market Price of Telebras American
Depositary Shares for each succeeding
Determination Date during the
Calculation Period to ratably
distribute the intended weight of such
Non-Determination Date across the
remaining Determination Dates.
Accordingly, if there is a Non-
Determination Date during the
Calculation Period, the weightings of
the Market Price of Telebras American
Depositary Shares for the Determination
Dates will be calculated as follows:
(A) each Determination Date preceding
the first Non-Determination Date will
receive a weighting of 1/30 and (B)
each Determination Date following a
Non-Determination 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
Determination Dates and (ii) the
denominator of which will be the number
of scheduled Determination Dates from
and including the first Determination
Date following a Non-Determination Date
to and including the last scheduled
Determination Date in the Calculation
Period. If there is no succeeding
Trading Day in the Calculation Period
on which a Market Disruption Event has
not occurred, the Market Price of
Telebras American Depositary Shares for
each Determination Date occurring after
a Non-Determination 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-
Determination Date, the Market Price of
Telebras American Depositary Shares for
the remaining Determination Dates in
the Calculation Period shall be deemed
to be zero.
All percentages from any calculation on
the Notes will be rounded to the nearest
one hundred-thousandth of a percentage
point, with five one-millionths of a
percentage point rounded upwards (e.g.,
9.876545% (or .09876545) would be rounded
to 9.87655% (or .0987655)), and all dollar
amounts used in or resulting from such
calculation will be rounded to the nearest
cent with one-half cent being rounded
upwards.
Calculation Period................ The period from and including
, 2002 to and including the second
scheduled Trading Day immediately
preceding the Maturity Date.
Trading Day........................ A day 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 and (iii)
on the Chicago Board of Options Exchange,
as determined by the Calculation Agent.
Market Price....................... If Telebras American Depositary
Shares (or any other security for which a
Market Price must be determined) 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 the
Telebras American Depositary Shares (or
any such other security) 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 (the
"Exchange Act"), on which Telebras
American Depositary Shares (or such other
security) 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 shall be the
mean, as determined by the Calculation
Agent, of the bid prices for Telebras
American Depositary Shares (or such other
security) obtained from as many dealers in
such shares (or such other security), 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.
Market Disruption Event............ "Market Disruption Event" means, with
respect to Telebras American Depositary
Shares:
(i) a suspension, absence or material
limitation of trading of Telebras American
Depositary Shares on the primary market for
Telebras American Depositary Shares 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 Telebras American
Depositary Shares, 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 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 Telebras American Depositary
Shares 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
Telebras American Depositary Shares and
(5) a suspension, absence or material
limitation of trading on the primary
securities market on which options
contracts related to Telebras American
Depositary Shares are traded will not
include any time when such securities
market is itself closed for trading under
ordinary circumstances.
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
determining or making adjustments to the
Market Price of Telebras American
Depositary Shares during the Calculation
Period or in determining whether a Market
Disruption Event has occurred. See
"Market Disruption Event" and
"Antidilution Adjustments" 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....................... Comparison to Conventional Debt
Security. An investment in the Notes
entails significant risks not associated
with similar investments in a conventional
debt security.
There will be no periodic payments of
interest on the Notes as there would be on
a conventional fixed-rate debt security
having the same maturity date as the Notes
and issued by the Company on the Issue
Date. Because the Supplemental Redemption
Amount may be equal to zero, the effective
yield to maturity may be less than that
which would be payable on such a
conventional fixed-rate debt security.
The return of only the par amount of a
Note at maturity may not compensate the
holder for any opportunity cost implied by
inflation and other factors relating to
the time value of money.
Possible Illiquidity of the Secondary
Market. 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. The market value for
the Notes will be affected by a number of
factors independent of the
creditworthiness of the Company and the
value of Telebras American Depositary
Shares, including, but not limited to, the
volatility of Telebras American Depositary
Shares, the dividend rate on Telebras
American Depositary Shares, market
interest and yield rates and the time
remaining to the Calculation Period or the
maturity of the Notes. In addition, the
value of Telebras American Depositary
Shares depends on a number of interrelated
factors, including economic, financial and
political events, over which the Company
has no control. The market value of the
Notes is expected to depend primarily on
the extent of the appreciation, if any, of
the Final Average Market Price above the
Initial Market Price. 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 principal
amount thereof, if, at such time, the
Final Average Market Price is below,
equal to or not sufficiently above the
Initial Market Price. The historical
Market Prices of Telebras American
Depositary Shares should not be taken as
an indication of the future performance of
Telebras American Depositary Shares during
the term of any Note. As indicated under
"Historical Information" in this Pricing
Supplement, the price of Telebras American
Depositary Shares has been volatile during
certain recent periods.
Currency Exchange Rates. Fluctuations in
the exchange rate between the Brazilian
real and the U.S. dollar will affect the
U.S. dollar equivalent of the Brazilian
real price of Telebras Preferred Shares
("Preferred Shares") on the Bolsa de
Valores de Sao Paulo (the "Sao Paulo Stock
Exchange"), the principal trading market
for the Preferred Shares, and on the Bolsa
de Valores do Rio de Janeiro (the "Rio
Stock Exchange") and the other Brazilian
stock exchanges and, as a result, will
likely affect the market price of the
Telebras American Depositary Shares, which
may consequently affect the amount payable
at maturity of the Notes.
On August 1, 1993, the cruzeiro real
replaced the cruzeiro as the unit of
Brazilian currency, with each cruzeiro
real being equal to 1,000 cruzeiros.
Beginning in December 1993, the Brazilian
federal government (the "Brazilian Federal
Government") began implementation of the
Real Plan, which was intended to reduce
inflation. On July 1, 1994, the real
replaced the cruzeiro real as the unit of
Brazilian currency, with each real being
equal to 2,750 cruzeiros reals and
initially having an exchange rate of
R$1.00 to US$1.00.
Unless otherwise specified, in this
Prospectus Supplement all references to
(i) "reais," the "real" or "R$" are to
Brazilian reais (plural) or to the
Brazilian real (singular), the legal
currency of Brazil, and (ii) "U.S.
dollars" or "US$" or "$" are to United
States dollars.
According to Brazilian law, the issuance
of reais was initially subject to
quantitative limits backed by a
corresponding amount of U.S. dollars in
reserves, but the Brazilian Federal
Government subsequently expanded those
quantitative limits and allowed the real
to float, with parity between the real and
the U.S. dollar (R$1.00 to US$1.00) as a
ceiling. In March 1995, the Banco Central
do Brasil (the "Brazilian Central Bank")
announced that it would intervene in the
market and buy or sell U.S. dollars, and
established a band within which the
real/U.S. dollar exchange rate could
fluctuate. The Brazilian Central Bank
initially set the band with a floor of
R$0.86 per US$1.00 and a ceiling of R$0.90
per US$1.00 and provided that after May 2,
1995, the band would fluctuate between
R$0.88 and R$0.98 per US$1.00. Shortly
thereafter, the Brazilian Central Bank
reset the band between R$0.88 and R$0.93
per US$1.00 and subsequently reset the
band on June 22, 1995 to between R$0.91
and R$0.99 per US$1.00. On January 30,
1996, the Central Bank reset the band
between R$0.97 and R$1.06 per US$1.00.
There can be no assurance that this
intervention policy will not be altered in
the future. On March 5, 1997, the
commercial buying rate for the purchase of
U.S. dollars (the "Commercial Market
Rate") as reported by Reuters was
R$1.05260 per US$1.00.
The following table sets forth information
on Commercial Market Rates, for the
periods indicated, expressed in reais per
U.S. dollar. Amounts expressed in reais
have been translated from the predecessor
currencies in effect during the relevant
period at the rates of exchange at the
time the successor currency took effect.
Period Period-end High Low
------ ---------- -------- --------
1990(1) 0.000062 0.000062 0.000004
1991 0.000389 0.000389 0.000062
1992 0.004505 0.004505 0.000389
1993 0.118584 0.118584 0.004505
1994 0.846000 1.000000 0.118584
1995(2) 0.966000 0.966000 0.832000
1996 1.032999 1.032999 0.972000
1997(3) 1.052600 1.052600 1.039000
- ------------
(1) Source: Data through 1994 from Brazilian Central Bank
(2) Source: Data from 1995 from Reuters
(3) Through March 5, 1997
The noon buying rate in New York City for
cable transfers in reais as certified by
the Federal Reserve Bank of New York has
not been consistently reported for
Brazilian currency during the periods for
which data are presented in this Pricing
Supplement. No representation is made
that the real or U.S. dollar amounts shown
in this Pricing Supplement could have been
or could be converted into U.S. dollars or
reais, as the case may be, at any
particular rate or at any rate.
The information presented in this Pricing
Supplement relating to the exchange rate
of the U.S. dollar as compared to the
Brazilian real is furnished as a matter of
information only. The Brazilian real has
been subject to large devaluations in the
past and may be subject to significant
fluctuations in the future. The
fluctuations in the Brazilian
currency/U.S. dollar exchange rate that
have occurred in the past are not
necessarily indicative of fluctuations in
that rate that may occur over the term of
the Notes.
The spot exchange rates between the
Brazilian real and U.S. dollar are at any
moment a result of the supply of and demand
for the currencies being compared, and
changes in the exchange rates result over
time from the interaction of many factors
directly or indirectly affecting economic
and political conditions in Brazil and the
United States, including economic and
political developments in other countries.
Of particular importance are rates of
inflation, interest rate levels, the
balance of payments and the extent of
governmental surpluses or deficits in
Brazil and the United States, all of which
are in turn sensitive to the monetary,
fiscal and trade policies pursued by the
governments of Brazil, the United States
and other countries important to
international trade and finance.
Exchange Controls. According to publicly
available documents referred to under
"Telebras American Depositary Shares;
Public Information," the right to convert
dividend payments and proceeds from the
sale of shares into foreign currency and to
remit such amounts outside Brazil is
subject to restrictions under foreign
investment legislation which generally
requires, among other things, that the
relevant investments have been registered
with the Brazilian Central Bank.
Regulations of the Brazilian National
Monetary Council provide for the issuance
of depositary receipts in foreign markets
in respect of shares of Brazilian issuers.
The Telebras American Depositary Shares
have been approved under such regulations
by the Brazilian Central Bank and the
Comissao de Valores Mobiliarios (the
Brazilian securities commission).
Accordingly, the proceeds from the sale of
Telebras American Depositary Shares by
holders outside Brazil are free of
Brazilian foreign investment controls. A
certificate of capital registration has
been issued in the name of the depositary
for the Telebras American Depositary
Shares (the "ADS Depositary") with respect
to the Telebras American Depositary Shares
and is maintained by Banco Itau S.A. (the
"Custodian") on behalf of the ADS
Depositary. Pursuant to the certificate,
the Custodian and the ADS Depositary are
able to convert dividends and other
distributions with respect to the
Preferred Shares represented by Telebras
American Depositary Shares into foreign
currency and remit the proceeds outside
Brazil.
Under current Brazilian legislation, the
Brazilian Federal Government may impose
temporary restrictions on remittances of
foreign capital abroad in the event of a
serious imbalance or an anticipated
serious imbalance of Brazil's balance of
payments. For approximately nine months
in 1989 and early 1990, the Brazilian
Federal Government froze all dividend and
capital repatriations held by the
Brazilian Central Bank that were owed to
foreign equity investors, in order to
conserve Brazil's foreign currency
reserves. These amounts were subsequently
released in accordance with Brazilian
Federal Government directives. There can
be no assurance that the Brazilian Federal
Government will not impose similar or other
restrictions on foreign repatriations in
the future.
The price of Telebras American Depositary
Shares could be adversely affected by
delays in, or refusal to grant, any
required government approval for
conversions of Brazilian currency payments
and remittances abroad with respect to the
Preferred Shares underlying the Telebras
American Depositary Shares.
Lack of Affiliation between the Company
and Telebras. The Company is not
affiliated with Telebras and, although the
Company as of the date of this Pricing
Supplement does not have any material
non-public information concerning Telebras,
corporate events of Telebras (including
those described below in "Antidilution
Adjustments" that may affect the Market
Price of Telebras American Depositary
Shares during the Calculation Period and,
consequently, the Supplemental Redemption
Amount) are beyond the Company's ability
to control and are difficult to predict.
Telebras 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. Telebras
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.
Limited Antidilution Adjustments. The
amount payable at maturity with respect to
the Notes is subject to adjustment for
certain events arising from stock splits
and combinations, stock dividends,
extraordinary cash dividends and certain
other events that affect Telebras' capital
structure and is also subject to
adjustment for certain changes in the
number of Preferred Shares represented by
each Telebras American Depositary Share.
See "Antidilution Provisions" in this
Pricing Supplement. The amount payable at
maturity of the Notes is not adjusted for
other events, such as offerings of Telebras
American Depositary Shares or Preferred
Shares for cash, that may adversely affect
the price of Telebras American Depositary
Shares and, because of the relationship of
such amount to the price of Telebras
American Depositary Shares, may adversely
affect the trading price of Notes. There
can be no assurance that Telebras will not
make offerings of Telebras American
Depositary Shares or Preferred Shares or
other equity securities in the future or
as to the amount of such offerings, if any.
Affiliation between the Calculation Agent
and the Company. 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 adjustments to the
Market Price of Telebras American
Depositary Shares during the Calculation
Period that may influence the
determination of the Supplemental
Redemption Amount. See "Supplemental
Redemption Amount" and "Market Disruption
Event" above, and "Antidilution
Adjustments" below.
Other Considerations. If a bankruptcy
proceeding is commenced in respect of the
Company, the claim of a holder of a Note
may, under Section 502(b)(2) of Title 11
of the United States Code, be limited to
the par amount of such Note.
It is suggested that prospective investors
who consider purchasing the Notes should
reach an investment decision only after
carefully considering the suitability of
the Notes in light of their particular
circumstances.
Investors should also consider the tax
consequences of investing in the Notes.
See "United States Federal Taxation" below.
Antidilution Adjustments........... The Market Price of Telebras American
Depositary Shares used to calculate the
Supplemental Redemption Amount will be
adjusted as described below to the extent
that any of the events requiring such
adjustment occurs during the period
commencing on the pricing date of the
Notes and ending on the second scheduled
Trading Day prior to the Maturity Date:
1. Telebras Stock Dividends, Extraordinary
Cash Dividends and Other Distributions.
In the event that a dividend or other
distribution (A) is declared on any class
of Telebras' capital stock (or on the
capital stock of any Telebras Survivor, as
defined in paragraph 4 below) payable in
Preferred Shares (or the applicable class
of capital stock of any Telebras Survivor)
or (B) is to be paid to holders of
Telebras American Depositary Shares (or
the applicable class of capital stock of
any Telebras Survivor) in U.S. dollars
(the U.S. dollar amount of such payment to
be determined, if necessary, using the
Commercial Market Rate on the Distribution
Record Date (as defined below)) in an
amount greater than 10% of the Market
Price of the Telebras American Depositary
Shares (or the applicable class of capital
stock of any Telebras Survivor) on the
Distribution Record Date (an
"Extraordinary Cash Dividend"), any Market
Price of Telebras American Depositary
Shares (or the applicable class of capital
stock of any Telebras Survivor) used to
calculate the amount payable at maturity
of the Notes on any Trading Day that
follows the date (the "Distribution Record
Date") fixed for the determination of the
shareholders of Preferred Shares (or of
shares of the applicable class of capital
stock of any Telebras Survivor), or in the
case of an Extraordinary Cash Dividend,
the holders of the Telebras American
Depositary Shares (or the applicable class
of capital stock of any Telebras Survivor)
entitled to receive such distribution,
shall be increased by multiplying such
Market Price by the Dividend Adjustment
Factor. The "Dividend Adjustment Factor"
with respect to any Market Price will be a
fraction (A) the numerator of which shall
be the number of Telebras American
Depositary Shares (or the number of shares
of the applicable class of capital stock
of any Telebras Survivor) outstanding on
the Distribution Record Date plus (x) the
number of Telebras American Depositary
Shares (or the number of shares of the
applicable class of capital stock of any
Telebras Survivor) to be issued as a
result of such distribution or (y) in the
case of an Extraordinary Cash Dividend,
the number of Telebras American Depositary
Shares (or number of shares of the
applicable class of capital stock of any
Telebras Survivor) that could be purchased
with the amount of the applicable
Extraordinary Cash Dividend (determined as
described above) at the Market Price of
such securities on the Trading Day
immediately subsequent to such
Distribution Record Date and (B) the
denominator of which shall be the number
of Telebras American Depositary Shares (or
the number of shares of the applicable
class of capital stock of any Telebras
Survivor) outstanding on the Distribution
Record Date; provided, however, that, in
the case of a stock dividend, if Telebras
(or any Telebras Survivor) and the
depositary for its American depositary
shares shall have adjusted the number of
shares of capital stock represented by
each American depositary share so that the
price of such American depositary shares
would not be affected by such stock
dividend, no adjustment of any such Market
Price shall be made.
2. Subdivisions and Combinations of
Telebras Preferred Shares. In the event
that the outstanding Preferred Shares (or
the applicable class of capital stock of
any Telebras Survivor) are subdivided into
a greater number of shares, the Market
Price of Telebras American Depositary
Shares (or the applicable class of capital
stock of any Telebras Survivor) used to
calculate the amount payable at maturity
of the Notes on any Trading Day that
follows the date on which such subdivision
becomes effective will be proportionately
decreased, and, conversely, in the event
that the outstanding Preferred Shares (or
the applicable class of capital stock of
any Telebras Survivor) are combined into a
smaller number of shares, such Market
Price will be proportionately increased;
provided, however, that if Telebras (or
any Telebras Survivor) and the depositary
for its American depositary shares shall
have adjusted the number of shares of
capital stock represented by each American
depositary share so that the price of such
American depositary shares would not be
affected by such subdivision or
combination, no adjustment of such Market
Price shall be made.
3. Change in Number of Telebras Preferred
Shares Represented by Telebras American
Depositary Shares. In the event that
Telebras (or any Telebras Survivor) and
the depositary for its American depositary
shares elect, in the absence of any of the
events described in clause (i) or (ii)
above, to change the number of shares of
capital stock that are represented by each
American depositary share, the Market
Price of such American depositary shares
used to calculate the amount payable at
maturity of the Notes on any Trading Day
after the change becomes effective will be
proportionately adjusted.
4. Dissolution of Telebras; Mergers,
Consolidations or Sales of Assets in Which
Telebras Is Not the Surviving Entity;
Spin-offs. In the event of any (A)
consolidation or merger of Telebras, or
any surviving entity or subsequent
surviving entity of Telebras (a "Telebras
Survivor") with or into another entity
(other than a consolidation or merger in
which Telebras is the surviving entity),
(B) sale, transfer, lease or conveyance of
all or substantially all of the assets of
Telebras or any Telebras Survivor, (C)
liquidation, dissolution or winding up of
Telebras or any Telebras Survivor or (D)
any declaration of a distribution on
Preferred Shares of the common stock of
any subsidiary of Telebras (a "Telebras
Spin-Off") (any of the events described in
(A), (B), (C) or (D), being a
"Reorganization Event"), for purposes of
determining the amount payable at maturity
with respect to each Note, the Market
Price of Telebras American Depositary
Shares on any Trading Day subsequent to the
effective time of any Reorganization Event
will be deemed to be the amount equal to
(a) the value of the cash and other
property (including securities) received
by a holder of a Telebras American
Depositary Share (or the applicable class
of capital stock of any Telebras Survivor)
in any such Reorganization Event (plus, in
the case of a Telebras Spin-Off, the value
of a Telebras American Depositary Share
(or one share of the applicable class of
capital stock of any Telebras Survivor)),
and (b) to the extent that such holder
obtains securities in any Reorganization
Event, the value of the cash and other
property received by the holder of such
securities in any subsequent
Reorganization Event; provided, however,
that in the case of a Reorganization Event
described in clause (A) above, no
adjustment in the method of determining
the Market Price of the American
depositary shares of Telebras (or of any
Telebras Survivor) shall be made, if the
depositary for such American depositary
shares shall have adjusted such American
depositary shares so that each such
American depositary share represents the
securities and any other consideration
received with respect to the Preferred
Shares (or the applicable capital stock of
any Telebras Survivor) in such
Reorganization Event. For purposes of
determining any such Market Prices, the
value of (1) any cash and other property
(other than securities) received in any
such Reorganization Event will be an
amount equal to the value of such cash and
other property at the effective time of
such Reorganization Event and (2) any
property consisting of securities received
in any such Reorganization Event will be an
amount equal to the Market Prices of such
securities on each applicable
Determination Date. The depositary for
the Telebras American Depositary Shares
(or the American depositary shares of any
Telebras Survivor) may sell securities
distributed to the depositary (as a holder
of shares of the underlying capital stock)
as a result of the events described in (A)
through (D) above and distribute the net
cash proceeds of such sales to the holders
of Telebras American Depositary Shares (or
the American depositary shares of any
Telebras Survivor). In such event, the
cash received by the holders of such
American depositary shares, rather than
the Market Prices of the securities
distributed to holders of the underlying
shares of capital stock, shall be used in
any determination of the Market Price of
such American depositary shares.
5. Reclassification of Telebras Preferred
Shares. In the event that Preferred
Shares are changed into the same or a
different number of shares of any class or
classes of stock, whether by capital
reorganization, reclassification or
otherwise (except to the extent otherwise
provided in clause (i), (ii) or (iv)
above), no adjustment shall be made to the
Market Prices of Telebras American
Depositary Shares used to calculate the
amount payable at maturity of the Notes;
provided, however, that if as a result of
or in connection with such an event,
Telebras and the depositary for Telebras
American Depositary Shares change the
number of Preferred Shares that are
represented by a Telebras American
Depositary Share, such Market Prices will
be proportionately adjusted with respect
to any Trading Day that follows the
effectiveness of such change. (No such
adjustment to Market Prices is necessary
(except in the circumstances described in
the proviso above) because Telebras
American Depositary Shares provide that
they will, upon such a reorganization,
reclassification or other event,
automatically represent appropriate
numbers of shares of any such different
class or classes of capital stock into
which Preferred Shares have been changed.)
In the event that shares of the applicable
class of capital stock of any Telebras
Survivor are changed into the same or a
different number of shares of any class or
classes of capital stock, whether by
capital reorganization, reclassification
or otherwise (except to the extent
otherwise provided in clause (i), (ii) or
(iv) above), the amount payable at
maturity of the Notes shall be calculated
by using Market Prices of the shares of
capital stock into which a share of the
applicable class of capital stock of the
Telebras Survivor was changed on any
Trading Day that follows the effectiveness
of such change, except that no such
adjustment shall be made if the American
depositary shares of such Telebras
Survivor provide that they will, upon such
a reorganization, reclassification or
other event, automatically represent
appropriate numbers of shares of any such
different class or classes of capital
stock into which the applicable class of
stock of any Telebras Survivor has been
changed.
6. De Minimis Adjustments. No adjustments
to the Market Price of Telebras American
Depositary Shares will be required unless
such adjustment would require an increase
or decrease of at least one percent (1%)
in the Market Price of Telebras American
Depositary Shares. All calculations will
be rounded to the nearest one-thousandth
with five ten-thousandths being rounded
upwards.
No adjustments to the Market Price of
Telebras American Depositary Shares will
be required other than those specified
above. The adjustments specified above do
not cover all events that could affect the
Market Price of the Market Price of
Telebras American Depositary Shares.
The Calculation Agent shall be solely
responsible for the determination and
calculation of any adjustments to the
Market Price of Telebras American
Depositary Shares and of any related
determinations and calculations with
respect to any valuations of stock, other
securities or other property or assets
(including cash) in connection with any
corporate event described in paragraph 4
above, and its determinations and
calculations with respect thereto shall be
conclusive.
The Calculation Agent will provide
information as to any adjustments to the
Market Price of Telebras American
Depositary Shares upon written request by
any holder of the Notes.
Telebras American Depositary
Shares; Public Information......... According to publicly available
documents, Telebras, a corporation
organized under the laws of The Federal
Republic of Brazil ("Brazil"), is engaged,
through its subsidiaries, in providing
local and long distance telephone service
in Brazil. Telebras is subject to the
information requirements of the Securities
Exchange Act of 1934, as amended (the
"Exchange Act"). Accordingly, Telebras
files reports and other information with
the Securities and Exchange Commission (the
"Commission"). Copies of such reports and
other information may be inspected and
copied at certain offices of the
Commission and at the offices of the NYSE
at the addresses listed under "Available
Information" in the accompanying
Prospectus.
THIS PRICING SUPPLEMENT RELATES ONLY TO
THE NOTES OFFERED HEREBY AND DOES NOT
RELATE TO TELEBRAS AMERICAN DEPOSITARY
SHARES, TELEBRAS PREFERRED SHARES OR OTHER
SECURITIES OF TELEBRAS. ALL DISCLOSURES
CONTAINED IN THIS PRICING SUPPLEMENT
REGARDING TELEBRAS ARE DERIVED FROM THE
PUBLICLY AVAILABLE 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
TELEBRAS. NEITHER THE COMPANY NOR THE
AGENT MAKES ANY REPRESENTATION THAT SUCH
PUBLICLY AVAILABLE DOCUMENTS OR ANY OTHER
PUBLICLY AVAILABLE INFORMATION REGARDING
TELEBRAS 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
PUBLICLY AVAILABLE DOCUMENTS DESCRIBED IN
THE PRECEDING PARAGRAPH) THAT WOULD AFFECT
THE TRADING PRICE OF TELEBRAS AMERICAN
DEPOSITARY SHARES (AND THEREFORE THE
SUPPLEMENTAL REDEMPTION AMOUNT) HAVE BEEN
PUBLICLY DISCLOSED. SUBSEQUENT DISCLOSURE
OF ANY SUCH EVENTS OR THE DISCLOSURE OF OR
FAILURE TO DISCLOSE MATERIAL FUTURE EVENTS
CONCERNING TELEBRAS COULD AFFECT THE VALUE
RECEIVED AT MATURITY 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 TELEBRAS, TELEBRAS AMERICAN DEPOSITARY
SHARES, TELEBRAS PREFERRED SHARES OR OTHER
SECURITIES OF TELEBRAS.
The Company or its affiliates may
presently or from time to time engage in
business with Telebras including extending
loans to, or making equity investments in,
Telebras or providing advisory services to
Telebras, 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 Telebras and, in addition, one
or more affiliates of the Company may
publish research reports with respect to
Telebras. The Company does not make any
representation to any purchaser of Notes
with respect to any matters whatsoever
relating to Telebras. Any prospective
purchaser of a Note should undertake an
independent investigation of Telebras as
in its judgment is appropriate to make an
informed decision with respect to an
investment in Telebras American Depositary
Shares.
Historical Information............. The principal trading market for the
Preferred Shares is the Sao Paulo Stock
Exchange. The Preferred Shares are also
traded on the Rio Stock Exchange and the
seven other Brazilian stock exchanges.
Telebras American Depositary Shares,
issued by The Bank of New York, as
Depositary, each representing 1,000
Preferred Shares, have traded on the NYSE
since November 1, 1995 and previously were
traded in the U.S. over-the-counter
market, where dealers' prices for the
Telebras American Depositary Shares were
quoted in the "pink sheets" published by
the National Quotations Bureau, Inc.
The table below sets forth the high and
low closing sales prices for the Preferred
Shares on the Sao Paulo Stock Exchange for
the periods indicated. Such high and low
closing sales prices have been restated in
reais of constant purchasing power of
December 31, 1995. The table also sets
forth such sales prices translated into
U.S. dollars at the Commercial Market Rate
for each of the respective dates of such
quotations. See "Risk Factors" for
information with respect to exchange rates
applicable during the periods set forth
below.
Closing sales prices
--------------------------------------------------
Nominal reais U.S. Dollars
per 1,000 per 1,000
Preferred Shares Preferred Shares
------------------- --------------------
High Low High Low
----- ----- ----- -----
1994:
First quarter(1). 31.80 28.50 49.84 44.67
Second quarter... 38.00 36.10 19.90 18.38
Third quarter.... 52.40 46.40 57.90 51.27
Fourth quarter... 53.00 37.00 61.39 42.85
1995:
First quarter.... 33.80 23.00 36.34 24.73
Second quarter .. 36.00 30.75 37.20 31.19
Third quarter.... 47.30 30.00 48.58 33.03
Fourth quarter .. 47.60 35.75 49.28 37.54
1996:
First quarter(2). 56.70 47.90 57.46 48.72
Second quarter... 72.40 48.29 72.11 48.93
Third quarter.... 83.19 70.19 82.78 69.50
Fourth quarter... 82.69 73.80 80.80 71.72
1997:
First quarter
(through March 5,
1997)............ 106.90 78.50 101.62 75.55
- ------------
(1) Source: Data through December 31, 1995 from publicly available
documents referred to under "Telebras American Depositary
Shares; Public Information."
(2) Source: Data from January 1, 1996 from Reuters.
The table below sets forth, for the
periods indicated, the high and low
closing sales prices for the Telebras
American Depositary Shares in the U.S.
over-the-counter market as reported on the
OTC Bulletin Board during the period from
July 1, 1994 through October 31, 1995 and
on the New York Stock Exchange Composite
Tape from November 1, 1995 through March
5, 1997. Such high and low closing sales
prices are stated in U.S. dollars.
<TABLE>
<CAPTION>
New York
--------
OTC Bulletin Board Stock Exchange
-------------------------- --------------------------
U.S. Dollars per U.S. Dollars per Telebras
Telebras American American Depositary
Depositary Share Share
-------------------------- --------------------------
High Low High Low
------- ------ ------- ------
<S> <C> <C> <C> <C>
1994:
Third Quarter(1)........ 62.000 38.375 -- --
Fourth Quarter.......... 62.500 41.625 -- --
1995:
First Quarter........... 42.500 20.125 -- --
Second Quarter.......... 40.250 26.049 -- --
Third Quarter........... 49.000 33.125 -- --
Fourth Quarter
(through October
31, 1995)............... 47.584 40.000 -- --
Fourth Quarter(2)
(from November 1,
1995)................... -- -- 48.625 37.750
1996:
First Quarter........... -- -- 57.125 47.375
Second Quarter.......... -- -- 71.500 49.125
Third Quarter........... -- -- 82.500 69.375
Fourth Quarter.......... -- -- 80.875 70.500
1997:
First Quarter
(through March 5,
1997)................... -- -- 101.625 75.125
<FN>
- ------------
(1) Source: Data through October 31, 1995 from OTC Bulletin Board.
(2) Source: Data from November 1, 1995 from Reuters.
</TABLE>
On March 5, 1997, the closing price of
the Telebras Preferred Shares as
reported on the Sao Paulo Stock
Exchange was R$106.90 and the closing
price of the Telebras American
Depositary Shares as reported on the
NYSE Composite Tape was $101.625.
The information presented in this Pricing
Supplement relating to sales prices on the
Sao Paulo Stock Exchange for Preferred
Shares and sales prices in the U.S.
over-the-counter market and on the NYSE
for Telebras American Depositary Shares is
furnished as a matter of information only.
Fluctuations in or levels of sales prices
that have occurred in the past are not
necessarily indicative of fluctuations in
or levels of the sales prices of Telebras
American Depositary Shares or Preferred
Shares that may occur over the term of
the Notes.
Each Telebras American Depository Share
represents 1,000 Preferred Shares. For
the years 1994, 1995 and 1996 holders of
Telebras American Depository Shares
received cash dividends of $0.3082,
$0.3239 and $1.609, respectively, per
Telebras American Depository Share.
(Source: Bloomberg Financial Markets).
The Company makes no representation as to
the amount of dividends, if any, that
Telebras will pay in the future or the
currency exchange rate that will be
available in the future. In any event,
holders of Notes will not be entitled to
receive any dividends that may be payable
on Preferred Shares or Telebras American
Depository Shares.
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 and others, may hedge its
anticipated exposure in connection with
the Notes by taking positions in the
Telebras American Depositary Shares, in
options contracts on the Telebras American
Depository Shares 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 Telebras
American Depositary Shares and therefore
effectively have increased the level to
which Telebras American Depositary Shares
must rise before a holder of a Note will
receive at maturity an amount that is
greater 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
Telebras American Depositary Shares or
such options, 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 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 or
the Telebras American Depositary Shares.
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
overallotments or to stabilize the price
of the Notes, the Agent may bid for, and
purchase, the Notes or the Telebras
American Depositary Shares in the open
market. See "Use of Proceeds and Hedging"
above.
United States Federal Taxation..... United States Holders. Investors who
are United States persons should refer to
the discussion under "United States
Federal Taxation--Notes--Notes Linked
to Commodity Prices, Single Securities,
Baskets of Securities or Indices" and
"--Optionally Exchangeable Notes" in
the accompanying Prospectus Supplement.
In connection with the discussion
thereunder, the Company has determined
that the "comparable yield" is an
annual rate of %, compounded semi-
annually. Based on the Company's
determination of the comparable yield,
the "projected payment schedule" for a
Note (assuming a par amount of $1,000
or with respect to each integral
multiple thereof) consists of a
projected amount due at maturity, equal
to $ (the "projected amount").
THE COMPARABLE YIELD, THE PROJECTED
PAYMENT SCHEDULE AND THE PROJECTED AMOUNT
ARE NOT PROVIDED FOR ANY PURPOSE OTHER
THAN THE DETERMINATION OF UNITED STATES
HOLDERS' INTEREST ACCRUALS AND ADJUSTMENTS
IN RESPECT OF THE NOTES, AND THE COMPANY
MAKES NO REPRESENTATION REGARDING THE
ACTUAL AMOUNT OF THE PAYMENT AT MATURITY.
United States Alien Holders. The
following discussion is based on the
opinion of Davis Polk & Wardwell, special
tax counsel to the Company. As used
herein, the term "United States Alien
Holder" means an owner of a Note that is,
for United States federal income tax
purposes, (i) a nonresident alien
individual, (ii) a foreign corporation,
(iii) a nonresident alien fiduciary of a
foreign trust or estate or (iv) a foreign
partnership one or more of the members of
which is, for United States federal income
tax purposes, a nonresident alien
individual, a foreign corporation or a
nonresident alien fiduciary of a foreign
trust or estate. The following summary
does not deal with persons subject to
special rules, such as nonresident alien
individuals that have lost United States
citizenship or that have ceased to be
taxed as resident aliens, corporations
that are treated as foreign or domestic
personal holding companies, controlled
foreign corporations, passive foreign
investment companies or certain other
United States Alien Holders that are owned
or controlled by persons subject to United
States federal income tax. Persons
considering the purchase of the Notes
should consult their tax advisors with
regard to the application of the United
States federal income tax laws to their
particular situations as well as any tax
consequences arising under the laws of any
state, local or foreign taxing
jurisdiction. This discussion is based on
the Code, and administrative
interpretations as of the date hereof, all
of which are subject to change, including
changes with retroactive effect.
Capitalized terms appearing herein and not
defined have the meanings assigned to such
terms in the Prospectus Supplement.
Subject to the discussion below concerning
backup withholding, payment of principal
and the Supplemental Redemption Amount, if
any, at maturity of a Note by the Company
or any paying agent to any United States
Alien Holder, and gain realized on the
sale, exchange or other disposition of
such Note, will not be subject to United
States federal income or withholding tax,
provided that: (i) such Holder does not
own, actually or constructively, 10
percent or more of the total combined
voting power of all classes of stock of
the Company entitled to vote, is not a
controlled foreign corporation related,
directly or indirectly, to the Company
through stock ownership, and is not a bank
receiving interest described in Section
881(c)(3)(A) of the Code; (ii) the
statement required by Section 871(h) or
Section 881(c) of the Code has been
provided with respect to the beneficial
owner, as discussed below; (iii) such
Holder is not an individual who is present
in the United States for 183 days or more
in the taxable year of disposition, or such
individual does not have a "tax home" (as
defined in Section 911(d)(3) of the Code)
or an office or other fixed place of
business in the United States; and (iv)
such payment and gain are not effectively
connected with the conduct by such Holder
of a trade or business in the United
States.
Sections 871(h) and 881(c) of the Code
require that, in order to obtain the
portfolio interest exemption from
withholding tax, either the beneficial
owner of the Note, or a securities clearing
organization, bank or other financial
institution that holds customers'
securities in the ordinary course of its
trade or business (a "Financial
Institution") and that is holding the Note
on behalf of such beneficial owner, file a
statement with the withholding agent to
the effect that the beneficial owner of the
Note is not a United States person. Under
temporary United States Treasury
Regulations, such requirement will be
fulfilled if the beneficial owner of a
Note certifies on Internal Revenue Service
Form W-8, under penalties of perjury, that
it is not a United States person and
provides its name and address, and any
Financial Institution holding the Note on
behalf of the beneficial owner files a
statement with the withholding agent to
the effect that it has received such a
statement from the Holder (and furnishes
the withholding agent with a copy thereof).
If a United States Alien Holder of a Note
is engaged in a trade or business in the
United States, and if interest and gain on
the Note (including the Supplemental
Redemption Amount, if any) is effectively
connected with the conduct of such trade or
business, the United States Alien Holder,
although exempt from withholding tax, will
generally be subject to regular United
States income tax on interest and on any
gain realized on the sale, exchange or
other disposition of a Note in the same
manner as if it were a United States
person. In lieu of the certificate
described in the preceding paragraph, such
a Holder will be required to provide to
the withholding agent a properly executed
Internal Revenue Service Form 4224, or a
successor form, in order to claim an
exemption from withholding tax. In
addition, if such United States Alien
Holder is a foreign corporation, it may be
subject to a branch profits tax equal to
30% (or such lower rate as may be provided
by an applicable treaty) of its
effectively connected earnings and profits
for the taxable year, subject to certain
adjustments. For purposes of the branch
profits tax, interest (including the
Supplemental Redemption Amount, if any) on
and any gain recognized on the sale,
exchange or other disposition of a Note
will be included in the effectively
connected earnings and profits of such
United States Alien Holder if such
interest or gain, as the case may be, is
effectively connected with the conduct by
the United States Alien Holder of a trade
or business in the United States.
Under Section 2105(b) of the Code, a Note
held by an individual who is not a citizen
or resident of the United States at the
time of his death will not be subject to
United States federal estate tax as a
result of such individual's death,
provided that the individual does not own,
actually or constructively, 10 percent or
more of the total combined voting power of
all classes of stock of the Company
entitled to vote and, at the time of such
individual's death, payments with respect
to such Note would not have been
effectively connected to the conduct by
such individual of a trade or business in
the United States.
Under current Treasury Regulations, backup
withholding at 31% will not apply to
payments by the Company made on a Note if
the certifications required by Sections
871(h) and 881(c) are received, provided
in each case that the Company or such
paying agent, as the case may be, does not
have actual knowledge that the payee is a
United States person.
Under current Treasury Regulations,
payments on the sale, exchange or other
disposition of a Note made to or through a
foreign office of a broker generally will
not be subject to backup withholding.
However, if such broker is a United States
person, a controlled foreign corporation
for United States tax purposes or a
foreign person 50 percent or more of whose
gross income is effectively connected with
a United States trade or business for a
specified three-year period, information
reporting will be required unless the
broker has in its records documentary
evidence that the beneficial owner is not
a United States person and certain other
conditions are met or the beneficial owner
otherwise establishes an exemption. Under
proposed Treasury Regulations, backup
withholding may apply to any payment which
such broker is required to report if such
broker has actual knowledge that the payee
is a United States person. Payments to or
through the United States office of a
broker will be subject to backup
withholding and information reporting
unless the Holder certifies, under
penalties of perjury, that it is not a
United States person or otherwise
establishes an exemption.
United States Alien Holders of Notes
should consult their tax advisors
regarding the application of information
reporting and backup withholding in their
particular situations, the availability
of an exemption therefrom, and the
procedure for obtaining such an exemption,
if available. Any amounts withheld from a
payment to a United States Alien Holder
under the backup withholding rules will be
allowed as a credit against such Holder's
United States federal income tax liability
and may entitle such Holder to a refund,
provided that the required information is
furnished to the Internal Revenue Service.
