PROSPECTUS SUPPLEMENT (Subject to Completion, Issued December 30, 1997)
(To Prospectus dated June 2, 1997)
Morgan Stanley, Dean Witter, Discover & Co.
1,500,000 SEPARABLE UNITS MANDATORILY EXCHANGEABLE
FOR STANDARD & POOR'S DEPOSITARY RECEIPTS
CONSISTING OF
PURCHASE CONTRACTS SETTLING JUNE 30, 2005
PUT WARRANTS SETTLING JUNE 30, 2005
Each Separable Unit Mandatorily Exchangeable for Standard &
Poor's Depositary Receipts ("SPDRS") (a "Unit") consists of (i) a Purchase
Contract Settling June 30, 2005 (a "Purchase Contract") of Morgan Stanley,
Dean Witter, Discover & Co. (the "Company") requiring the Company to deliver
to the holder thereof a number of SPDRS and (ii) one Put Warrant Settling June
30, 2005 (a"Put Warrant") of the Company entitling the holder thereof upon
exercise to sell SPDRS to the Company. Each SPDR represents a proportionate
undivided interest in the portfolio of securities held by the SPDR Trust
Series I (the "SPDR Trust"), consisting of substantially all of the common
stocks of the S&P 500 Composite Stock Price Index (the "S&P 500 Index"). The
SPDR Trust was formed by PDR Services Corporation, a wholly-owned subsidiary
of the American Stock Exchange, Inc. (the "AMEX"). Standard & Poor's
Depositary Receipts and SPDRS are trademarks of McGraw-Hill Companies Inc.
The Units, including the Purchase Contracts and Put Warrants, are further
described below and will be issued in denominations of 1,000 Units, Purchase
Contracts and Put Warrants, respectively, and any integral multiple thereof.
The Units will be issued at an issue price of $ per Unit (the "Unit Issue
Price").
On June 30, 2005 (subject to adjustment in the event of certain
market disruption events, the "Contract Settlement Date"), the Company will be
required to deliver to the holder of each Purchase Contract a number of SPDRS
with a value equal to the Final SPDR Value. The Final SPDR Value will equal
the arithmetic average of the SPDR Closing Values, as determined on each of
June 25, 2003, June 25, 2004 and June 27, 2005, subject to adjustment upon the
occurrence of certain market disruption events (each a "Determination Date")
and will be calculated on the last Determination Date. The number of SPDRS
with a value equal to such Final SPDR Value will be determined at the close of
business on the last Determination Date. The value of the SPDRS received by a
holder of a Purchase Contract on the Contract Settlement Date, determined as
described herein, may be more or less than the Unit Issue Price.
On June 30, 2005 (subject to adjustment in the event of
certain market disruption events, the "Warrant Settlement Date"), the holder
of a Put Warrant will have the right, which may be exercised only in whole
multiples of 1,000 Put Warrants, upon (i) completion by the holder and
delivery to the Warrant Agent of an Official Notice of Exercise prior to 11:00
a.m. New York City time on the Exercise Expiration Date and (ii) delivery of a
number of SPDRS per Put Warrant with a value equal to the Final SPDR Value, as
described in the preceding paragraph, to the Warrant Agent on the Warrant
Settlement Date, to sell such SPDRS to the Company and to receive from the
Company on the Warrant Settlement Date, as the purchase price for such SPDRS,
$ (the "Put Price"). The Exercise Expiration Date for the Put
Warrants will be the same as the last Determination Date under the Purchase
Contracts, and the number of SPDRS with a value equal to the Final SPDR Value
will be determined at the close of business on the last Determination Date.
Prior to April , 1998 (the "Automatic Separation Date"),
the Purchase Contracts and Put Warrants may be purchased and transferred only
as Units and will trade under the CUSIP number for the Units. On the
Automatic Separation Date, the Units will automatically separate into their
constituent Purchase Contracts and Put Warrants (which will thereafter trade
under separate CUSIP numbers), and the Units will cease to exist. The Units
and the constituent Purchase Contracts and Put Warrants will be represented by
global securities registered in the name of a nominee of the Depositary Trust
Company ("DTC"), as Depositary. Beneficial interests in the Units and, after
the Automatic Separation Date, the Purchase Contracts and Put Warrants will be
shown on, and transfers thereof will be effected only through, records
maintained by the Depositary (with respect to participants' interests) and its
participants. Except as described in the accompanying Prospectus, Units,
Purchase Contracts and Put Warrants in certificated form will not be issued in
exchange for the global securities.
The SPDR Closing Values are subject to adjustment. See
"Description of Units -- Antidilution Adjustments" in this Prospectus
Supplement. The Company will cause the Final SPDR Value, the number of SPDRS
with a value equal to the Final SPDR Value and any antidilution adjustments to
be determined by the Calculation Agent for The Chase Manhattan Bank, as
Trustee under the Senior Debt Indenture.
The SPDR Trust is not affiliated with the Company, is not
involved in this offering of Units and will have no obligations with respect
to the Units, the Purchase Contracts or the Put Warrants. The Market Price of
SPDRS on the date of this Prospectus Supplement was $ . See "SPDRS --
Historical Information" in this Prospectus Supplement for information on the
range of Market Prices for SPDRS.
An investment in the Units and the constituent Purchase
Contracts and Put Warrants entails a high degree of risk, as described under
"Risk Factors" on P-7 through P-10 herein.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------
PRICE $ PER UNIT
<TABLE>
<CAPTION>
Underwriting Discounts Proceeds to
Price to Public and Commissions(1) Company(2)
--------------- ---------------------- -----------
<S> <C> <C> <C>
Per Unit ... $ $ $
Total....... $ $ $
</TABLE>
- ------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
(2) Before deduction of expenses payable by the Company estimated at $ .
------------
The Units are offered, subject to prior sale, when, as and if
accepted by the Underwriter and subject to approval of certain legal matters
by Davis Polk & Wardwell, counsel for the Underwriter. It is expected that
delivery of the Units will be made on or about , 1998 through the
book-entry facilities of The Depository Trust Company, against payment
therefor in immediately available funds.
------------
Information contained in this preliminary prospectus supplement is subject to
completion or amendment. These securities may not be sold nor may offers to
buy be accepted without the delivery of a final prospectus supplement and
accompanying prospectus. This prospectus supplement and the accompanying
prospectus 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.
MORGAN STANLEY DEAN WITTER
, 1998
THESE NOTES ARE INCLUDED TO ALERT OPERATORS TO SPECIFIC PROBLEMS WITH THIS
DOCUMENT AND TO PROVIDE BASIC INFORMATION THAT MAY BE USEFUL TO INDIVIDUALS
WORKING ON IT. PLEASE BE SURE TO REMOVE THIS PAGE BEFORE COPYING OR RETURNING
THE DOCUMENT TO THE ATTORNEY. HOWEVER, THIS SHEET SHOULD BE INCLUDED IN THE
COPY FILED IN THE WORD PROCESSING CENTER.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
UNITS, SPDRS OR THE INDIVIDUAL STOCKS UNDERLYING THE S&P 500 INDEX.
SPECIFICALLY, THE UNDERWRITER MAY OVERALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, THE UNITS, SPDRS OR THE INDIVIDUAL STOCKS
UNDERLYING THE S&P 500 INDEX IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE
ACTIVITIES SEE "UNDERWRITER."
CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the consolidated ratio of
earnings to fixed charges for the Company for the periods indicated. The
fiscal year information combines the historical financial information of Dean
Witter, Discover & Co. ("Dean Witter Discover") for the years ended December
31, 1996, 1995, 1994, 1993 and 1992 with the historical financial information
of Morgan Stanley Group Inc. ("Morgan Stanley") for the fiscal years ended
November 30, 1996, 1995, 1994, 1993 and 1992. Subsequent to the merger of
Morgan Stanley with and into Dean Witter Discover on May 31, 1997 (the
"Merger"), the Company adopted a fiscal year end of November 30. The nine
month information reflects the change in fiscal year end and the restatement
of the periods presented as if Dean Witter Discover and Morgan Stanley had
always been combined.
<TABLE>
<CAPTION>
Nine Months
Ended Fiscal Year
-------------------------- --------------------------------------------
August 31, August 31,
1997 1996 1996 1995 1994 1993 1992
---------- ---------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings
to fixed charges...... 1.4 1.3 1.3 1.3 1.3 1.4 1.3
</TABLE>
For the purpose of calculating the ratio of earnings to fixed
charges, earnings consist of income before income taxes and fixed charges, and
fixed charges consist of interest expense, capitalized interest and that
portion of rentals representative of an interest factor. Additionally,
"earnings" in 1992 excludes a nonrecurring gain of $32.1 million from the
initial public offering of 25.7% of SPS Transaction Services, Inc.
DESCRIPTION OF UNITS
The following description of the particular terms of the
Separable Units Mandatorily Exchangeable for Standard & Poor's Depositary
Receipts consisting of Purchase Contracts Settling June 30, 2005 and Put
Warrants Settling June 30, 2005 (the "Units") offered hereby supplements the
description of the general terms and provisions of the Units, Purchase
Contracts and Warrants set forth in the Prospectus, to which description
reference is hereby made. In particular, as used under this caption, the term
"Company" means Morgan Stanley, Dean Witter, Discover & Co. Capitalized terms
not defined herein have the meanings given to such terms in the Glossary
attached as Annex A hereto or in the accompanying Prospectus.
The Units will be issued pursuant to the Unit Agreement dated
as of , 1998 (the "Unit Agreement") among the Company, The Chase
Manhattan Bank, as Unit Agent (the "Unit Agent"), and as Trustee and Paying
Agent under the Senior Debt Indenture and as Warrant Agent under the Warrant
Agreement dated as of , 1998 (the "Warrant Agreement") between the
Company and The Chase Manhattan Bank, as Warrant Agent (the "Warrant Agent").
The Purchase Contracts initially comprised by the Units are pre-paid purchase
contracts that require the holders thereof to satisfy their obligations
thereunder when the Purchase Contracts are issued. The Purchase Contracts
will be issued under the Senior Debt Indenture and the Company's obligation to
settle the Purchase Contracts on the Contract Settlement Date will constitute
Senior Indebtedness of the Company and will rank pari passu with all other
unsecured and unsubordinated debt of the Company. The Put Warrants initially
comprised by the Units will be issued pursuant to the Warrant Agreement and
are unsecured contractual obligations of the Company that rank pari passu with
the Company's other unsecured contractual obligations and with the Company's
unsecured and unsubordinated debt. The following summaries of certain
provisions of the Units, Purchase Contracts and Put Warrants do not purport to
be complete and are subject to, and are qualified in their entirety by
reference to, the detailed provisions of the Unit Agreement, the Senior Debt
Indenture and Warrant Agreement.
General
Each Unit consists of (i) a Purchase Contract of the Company,
requiring the Company to deliver to the holder thereof a number of SPDRS,
representing a proportionate undivided interest in the portfolio of securities
held by the SPDR Trust, consisting of substantially all of the common stocks
of the S&P 500 Index and (ii) a Put Warrant, entitling the holder thereof upon
exercise to sell SPDRS to the Company on the Warrant Settlement Date at the
Put Price, as described below. The number of Units will be limited to
1,500,000 and will be issued in fully registered form only in denominations of
1,000 Units, Purchase Contracts and Put Warrants, respectively, and any
integral multiple thereof. The Units will be issued at an issue price of $
per Unit (the "Unit Issue Price").
Prior to April , 1998 (the "Automatic Separation Date"), the
Purchase Contracts and Put Warrants may be purchased and transferred only as
Units and will trade under the CUSIP number for the Units ( ). On the
Automatic Separation Date, the Units will automatically separate into their
constituent Purchase Contracts and Put Warrants (which will thereafter trade
under their respective CUSIP numbers), and the Units will cease to exist.
Each beneficial owner of a Unit on the Automatic Separation Date will become
the owner of one Purchase Contract (CUSIP ) and one Put Warrant (CUSIP
), which may thereafter be transferred as separate securities. The
Units and the constituent Purchase Contracts and Put Warrants will be
represented by global securities registered in the name of a nominee of the
Depositary Trust Company ("DTC"), as Depositary. Beneficial interests in the
Units and, after the Automatic Separation Date, beneficial interests in the
Purchase Contracts and Put Warrants will be shown on, and transfers thereof
will be effected only through, records maintained by the Depositary (with
respect to participants' interests) and its participants. A further
description of the Depositary's procedures with respect to such global
securities is set forth in the Prospectus under "Global Securities," and,
except as described therein, Units, Purchase Contracts and Put Warrants in
certificated form will not be issued in exchange for such global securities.
The Depositary has advised the Company as follows: The
Depositary is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended. The Depositary holds securities deposited
with it by its participants and facilitates the settlement of transactions
among its participants in such securities through electronic computerized
book-entry changes in accounts of the participants, thereby eliminating the
need for physical movement of securities certificates. The Depositary's
participants include securities brokers and dealers (including the
Underwriter), banks, trust companies, clearing corporations and certain other
organizations, some of whom (and/or their representatives) own the Depositary.
Access to the Depositary book-entry system is also available to others, such
as banks, brokers, dealers and trust companies that clear through or maintain
a custodial relationship with a participant, either directly or indirectly.
The Company has appointed Morgan Stanley & Co. Incorporated
("MS & Co.") as Calculation Agent with respect to the Purchase Contracts and
Put Warrants. All determinations made by the Calculation Agent will be at the
sole discretion of the Calculation Agent and will, in the absence of manifest
error, be conclusive for all purposes and binding on the Company and holders
of the Units, Purchase Contracts and Put Warrants.
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 Units, Purchase Contracts and Put Warrants, including with
respect to certain determinations and judgments that the Calculation Agent
must make in determining the Final SPDR Value, the number of SPDRS with a
value equal to the Final SPDR Value, any antidilution adjustments or whether
a Market Disruption Event has occurred. MS & Co., as a registered
broker-dealer, is required to maintain policies and procedures regarding the
handling and use of confidential proprietary information, and such policies
and procedures will be in effect throughout the term of the Units, Purchase
Contracts and Put Warrants to restrict the use of information relating to the
calculation of the Final SPDR Value prior to the dissemination of such
information. MS & Co. is obligated to carry out its duties and functions as
Calculation Agent in good faith and using its reasonable judgment.
Certain Provisions of the Unit Agreement
Remedies
The Unit Agent will act solely as an agent of the Company in
connection with the Units and will not assume any obligation or relationship
of agency or trust for or with any holders of Units or interests therein. Any
holder of Units or interests therein may, without the consent of the Unit
Agent or any other holder or beneficial owner of Units, enforce by appropriate
legal action, on its own behalf, it rights under the Unit Agreement; provided
that the holders of Units or interests therein may only enforce their rights
under the Purchase Contracts and the Put Warrants issued as parts of such
Units in accordance with the terms of the Senior Debt Indenture and the
Warrant Agreement, respectively.
Modification
The Unit Agreement may be amended by the Company and the Unit
Agent, without the consent of the holders, for the purpose of curing any
ambiguity, or of curing, correcting or supplementing any defective or
inconsistent provision therein or in any other manner which the Company may
deem necessary or desirable and which will not adversely affect the interest
of the affected holders of Units in any material respect.
The Unit Agreement will contain provisions permitting the
Company and the Unit Agent, with the consent of the holders of not less than a
majority of Units at the time outstanding, to modify the rights of the holders
of the Units so affected and the terms of the Unit Agreement, except that no
such modification may, without the consent of the holder of each outstanding
Unit affected thereby, (i) materially adversely affect the holders' rights
under any Unit or (ii) reduce the aforesaid percentage of outstanding Units
issued under the Unit Agreement, the consent of the holders of which is
required for the modification or amendment of the provisions of the Unit
Agreement. Modifications of Purchase Contracts issued as part of Units may
only be made in accordance with the Senior Debt Indenture, as described under
"Description of Debt Securities -- Modification of the Indentures" in the
accompanying Prospectus. Modifications of Put Warrants issued as part of
Units may only be made in accordance with the terms of the Warrant Agreement as
described in the accompanying Prospectus under "Description of Warrants --
Modifications."
Title
The Company, the Unit Agent, the Trustee, the Warrant Agent and
any agent thereof will treat the registered owner of any Unit (and, after the
Automatic Separation Date, of any Purchase Contract or Put Warrant) as the
owner thereof (notwithstanding any notice to the contrary) for all purposes.
Purchase Contracts
The number of Purchase Contracts Settling June 30, 2005 will be
limited to 1,500,000 and will be issued in fully registered form only in
denominations of 1,000 Purchase Contracts and any integral multiple thereof.
On the Contract Settlement Date (including as a result of acceleration or
otherwise), the Company will be required to deliver to the holder of each
Purchase Contract a number of SPDRS with a value equal to the Final SPDR
Value. The Final SPDR Value will equal the arithmetic average of the SPDR
Closing Values as determined on each of the three Determination Dates, and
will be calculated by the Calculation Agent on the last Determination Date.
The number of SPDRS with a value equal to such Final SPDR Value will be
determined at the close of business on the last Determination Date. The
Purchase Contracts are not redeemable by the Company prior to the Contract
Settlement Date; nor do the Purchase Contracts entitle the holder thereof to
receive any SPDRS prior to the Contract Settlement Date. See "Antidilution
Adjustments" below.
The Company will, or will cause the Calculation Agent to, (i)
provide written notice to the Trustee on or prior to 10:30 a.m. on the Trading
Day immediately prior to the Contract Settlement Date of the number of SPDRS
to be delivered in satisfaction of each Purchase Contract and (ii) deliver
such SPDRS (and any cash representing fractional SPDRS) to the Trustee for
delivery to the holders. Upon the settlement of the Purchase Contracts, the
Company will pay cash in lieu of delivering fractional SPDRS in an amount
equal to the corresponding Market Price of such fraction of a SPDR, as
determined by the Calculation Agent as of the second Trading Day immediately
prior to the Contract Settlement Date.
On the Contract Settlement Date, the Purchase Contracts may be
presented for delivery of SPDRS (and any cash representing fractional SPDRS)
at the agency in the Borough of Manhattan, The City of New York, maintained by
the Company for such purpose. On the date hereof, the agent for the payments
due with respect to the Purchase Contracts (the "Paying Agent") is The Chase
Manhattan Bank (formerly known as Chemical Bank), acting through its corporate
trust office at 450 West 33rd Street, New York, New York 10001.
In case of an Event of Default (as defined under the Senior
Debt Indenture) with respect to the Purchase Contracts shall have occurred and
be continuing, the number of SPDRS declared due and payable upon any
acceleration of the Purchase Contracts will be determined by the Calculation
Agent and will be a number of SPDRS with a value on the date of acceleration
equal to the Final SPDR Value, determined as though each Determination Date
scheduled to occur on or after such date of acceleration were the date of
acceleration.
Put Warrants
The Put Warrants are Universal Warrants of the Company, as
further described in the Prospectus under "Description of Warrants." The
number of Put Warrants will be limited to 1,500,000 and will be issued only in
fully registered form in denominations of 1,000 Put Warrants and any integral
multiple thereof. On the Warrant Settlement Date, the holder of a Put Warrant
will have the right, which may be exercised only in whole multiples of 1,000
Put Warrants, upon (i) completion by the holder and delivery to the Warrant
Agent of an Official Notice of Exercise, in the form attached hereto as Annex
B, prior to 11:00 a.m. New York City time on the Exercise Expiration Date and
(ii) the delivery of a number of SPDRS per Put Warrant with a value equal to
the Final SPDR Value, as described under "-- Purchase Contracts" above, to the
Warrant Agent at the Warrant Agent's Window prior to 10:30 a.m. on the Warrant
Settlement Date, to sell such SPDRS to the Company and to receive from the
Company on such Warrant Settlement Date, as the purchase price for such SPDRS,
$ (the "Put Price"). The Company will, or will cause the Calculation
Agent to, notify the holders of the Put Warrants at the close of business on
the Exercise Expiration Date of (i) the Final SPDR Value and (ii) the number
of SPDRS per Put Warrant with a value equal to the Final SPDR Value that may
be sold to the Company for the Put Price. In order to eliminate the risk of
any upward movement in the market price of SPDRS after a holder submits an
Official Notice of Exercise, the exercise of a Put Warrant will be deemed
subject to a limit order so that the Put Warrant will not be exercised if the
Final SPDR Value, as determined on the Exercise Expiration Date, is equal to
or greater than the Put Price. If the Exercise Expiration Date is postponed
as described in the definition thereof, such limit order will apply on the
Exercise Expiration Date as so postponed. None of the Put Warrants is
redeemable by the Company prior to the Warrant Settlement Date; nor does any
Put Warrant entitle the holder thereof to sell any SPDRS to the Company prior
to the Warrant Settlement Date. A holder of a Put Warrant may not sell to the
Company less than the number of SPDRS with a value equal to the Final SPDR
Value upon exercise of such Put Warrant. See "Antidilution Adjustments" below.
So long as the Put Warrants are represented by global
securities, the Depositary's nominee will be the only entity that can exercise
such Put Warrants. In order to ensure that the Depositary's nominee will
timely exercise the rights conferred by the Put Warrants, the beneficial owner
of such Put Warrant must instruct the broker or other direct or indirect
participant through which it holds an interest in such Put Warrant to notify
the Depositary of its desire to exercise such Put Warrant. Different firms
have different deadlines for accepting instructions from their customers and,
accordingly, each beneficial owner should consult the broker or other direct
or indirect participant through which it holds an interest in a Put Warrant in
order to ascertain the deadline for such an instruction in order for timely
notice to be delivered to the Depositary prior to 11:00 a.m. on the Exercise
Expiration Date.
A further description of the Depositary's procedures with
respect to Registered Global Securities (including the registered global
Units, Purchase Contracts and Put Warrants) representing Book-Entry Securities
is set forth in the Prospectus under "Global Securities." The Depositary has
confirmed to the Company, the Unit Agent, the Paying Agent, the Warrant Agent
and the Trustee that it intends to follow such procedures.
The provisions of the Warrant Agreement are described more
fully in the accompanying Prospectus under "Description of Warrants."
Antidilution Adjustments
If SPDRS are subject to a split or reverse split, then once
such split has become effective, the Adjustment Factor (one (1) if not
previously adjusted) used to calculate the SPDR Closing Values will be
adjusted to equal the product of the prior Adjustment Factor and the number of
SPDRS issued in such split or reverse split with respect to one SPDR.
If the SPDR Trust is liquidated or otherwise terminated (a
"Liquidation Event"), (i) the Market Price for SPDRS on any Determination Date
(or Exercise Expiration Date) following such Liquidation Event will be
determined by the Calculation Agent and will be deemed to be a fraction of the
closing value of the S&P 500 Index (or any Successor Index, as described
below) on such Determination Date (or Exercise Expiration Date) (taking into
account any material changes in the method of calculating the S&P 500 Index
following such Liquidation Event) equal to that fraction of the closing value
of the S&P 500 Index represented by the Market Price for SPDRS on the last day
prior to the occurrence of such Liquidation Event on which a Market Price for
SPDRS was available, (ii) at the Contract Settlement Date, the Company will
deliver the Final SPDR Value in cash to the holder of a Purchase Contract in
lieu of delivering SPDRS and (iii) at the Warrant Settlement Date, with
respect to any Put Warrant expiring on or after the occurrence of a
Liquidation Event, the Company will deliver, or cause the Calculation Agent to
deliver, an amount in cash equal to the excess, if any of the Put Price over
the Final SPDR Value, as determined on the Exercise Expiration Date of such Put
Warrant.
If Standard & Poor's ("S&P") discontinues publication of the
S&P 500 Index and S&P or another entity publishes a successor or substitute
index that the Calculation Agent determines, in its sole discretion, to be
comparable to the discontinued S&P 500 Index (such index being referred to
herein as a "Successor Index"), then any subsequent Successor SPDR Closing
Value will be determined by reference to the value of such Successor Index
at the close of trading on the NYSE, the AMEX, NASDAQ NMS or the relevant
exchange or market for the Successor Index on the relevant Determination
Date or Exercise Expiration Date, as the case may be. Upon any selection
by the Calculation Agent of a Successor Index, the Calculation Agent will
cause written notice thereof to be furnished to the Trustee, the Warrant
Agent, the Company and to the holders of the Purchase Contracts and Put
Warrants within three Trading Days of such selection.
If S&P discontinues publication of the S&P 500 Index prior
to, and such discontinuance is continuing on, any Determination Date (or
Exercise Expiration Date) that follows a Liquidation Event and the
Calculation Agent determines that no Successor Index is available at such
time, then on such Determination Date (or Exercise Expiration Date) , the
Calculation Agent will determine the closing value that would be used in
computing the Successor SPDR Closing Value on such Determination Date (or
Exercise Expiration Date). The closing value will be computed by the
Calculation Agent in accordance with the formula for and method of
calculating the S&P 500 Index last in effect prior to such discontinuance,
using the closing price (or, if trading in the relevant securities has been
materially suspended or materially limited, its good faith estimate of the
closing price that would have prevailed but for such suspension or
limitation) on such Determination Date (or Exercise Expiration Date) of
each security most recently comprising the S&P 500 Index. Notwithstanding
these alternative arrangements, a Liquidation Event or the discontinuance
of the publication of the S&P 500 Index may adversely affect the value of
the Purchase Contracts and the Put Warrants.
No adjustments to the Adjustment Factor pursuant to
paragraph 1 above will be required unless such adjustment would require a
change of at least 0.1% in the amount being adjusted as then in effect.
Any number so adjusted will be rounded to the nearest one thousandth with
five ten-thousandths being rounded upward. No adjustments to the terms of
the Put Warrants or Purchase Contracts will be required other than those
specified above. However, the Company may, at its sole discretion, cause
the Calculation Agent to make additional adjustments to the Purchase
Contracts or the Put Warrants to reflect changes in the SPDRS in other
circumstances if the Company determines such adjustments to be appropriate.
The adjustments specified above do not cover all events that could affect
the Market Price of the SPDRS.
The Calculation Agent shall be solely responsible for the
determination and calculation of any of the adjustments specified above and of
any related determinations and calculations with respect to any distributions
in connection with any events described above, and its determinations and
calculations with respect thereto shall be conclusive.
The Calculation Agent will provide information as to any such
adjustments upon written request by any holder of the Units, Purchase
Contracts or Put Warrants.
RISK FACTORS RELATING TO THE UNITS
Comparison to Conventional Debt Security
An investment in the Units entails significant risks not
associated with similar investments in a conventional debt security. The
risks will be increased significantly if, after the Automatic Separation Date,
an investor holds a Purchase Contract without also holding the Put Warrant
(the "Related Put Warrant") originally combined with such Purchase Contract as
a Unit or holds a Put Warrant without also holding the Purchase Contract (the
"Related Purchase Contract") originally combined with such Put Warrant as a
Unit. Risks of an investment in the Units, Purchase Contracts and Put
Warrants include the following:
Risks of Investments in Purchase Contracts
The value of SPDRS that a holder of a Purchase Contract will
receive upon settlement of the Purchase Contracts is not fixed, but is based
on the price of SPDRS on each of the Determination Dates. Because the price
of SPDRS is subject to market fluctuations, the value of the SPDRS received
upon settlement of a Purchase Contract, determined as described herein, may be
more or less than the Unit Issue Price. If the Final SPDR Price is less than
the Unit Issue Price, an investment in the Units may result in a loss at the
Contract Settlement Date if the holder of the settling Purchase Contract has
not held and timely exercised the Related Put Warrant or if the Final SPDR
Price is not sufficiently greater than the Unit Issue Price to compensate the
investor for the time value of money. Investors who hold a Purchase Contract
without also holding the Related Put Warrant will suffer a loss if the Final
SPDR Price is less than the portion of the Unit Issue Price allocated to such
Purchase Contract.
Investment decisions relating to the Purchase Contracts require
the investor to predict the direction of movements in the underlying SPDRS,
and, accordingly, of the S&P 500 Index, as well as the amount and timing of
those movements. Before making any investment in the Purchase Contracts, it is
important that a prospective investor become informed about and understand the
nature of forward contracts in general, the specific terms of the Purchase
Contracts and the nature of SPDRS.
No Ownership Rights of SPDRS Prior to Delivery
Holders of the Purchase Contracts will not be entitled to any
rights with respect to SPDRS (including, without limitation, voting rights and
the rights to receive any dividends or other distributions in respect thereof)
until such time as the Company shall deliver SPDRS to holders upon settlement
of the Purchase Contracts.
Risks of Investments in Put Warrants
At maturity of the Put Warrants, a holder of a Put Warrant has
the right to deliver a number of SPDRS with a value equal to the Final SPDR
Value to the Warrant Agent and to receive in exchange from the Company the Put
Price. If, on the Exercise Expiration Date, the Final SPDR Value is greater
than the Put Price, the holder will not deliver such SPDRS and will forfeit
the price paid for the Put Warrant. Because the Final SPDR Value is based on
the arithmetic average of the SPDR Closing Values on each of three
Determination Dates, an investor may so forfeit the price paid for a Put
Warrant even if the SPDR Closing Values on the first two Determination Dates
were less than the Put Price. In addition, the Put Warrants require physical
settlement: an investor in the Put Warrants will have to own or acquire SPDRS
in the market in order to exercise a Put Warrant and receive the Put Price
from the Company. The Put Warrants are European-style warrants that may be
exercised only at maturity. Therefore, if an investor fails to exercise the
Put Warrants or deliver a SPDR to the Warrant Agent on a timely basis, the
investor will not receive the Put Price.
Investment decisions relating to the Put Warrants require the
investor to predict the direction of movements in the underlying SPDRS, and,
accordingly, of the S&P 500 Index, as well as the amount and timing of those
movements. The Put Warrants may change substantially in value, or lose all of
their value, with relatively small movements in the Market Price of SPDRS.
Moreover, a Put Warrant is a "wasting asset" in that in the absence of
countervailing factors, such as an offsetting movement in the level of the
Market Price of SPDRS, the market value of a Put Warrant will tend to decrease
over time and a Put Warrant will have no market value after the time for
exercise has expired. Accordingly, owning the Put Warrants, especially when
held separately from the Related Purchase Contracts, involves a high degree
of risk and is not appropriate for every investor. As such, investors who are
considering purchasing the Put Warrants and holding them without also holding
the Related Purchase Contracts must be able to understand and bear the risk of
a speculative investment in the Put Warrants and be experienced with respect
to options and option transactions and understand the risks of stock index
transactions. Such investors should reach an investment decision only after
careful consideration, with their advisers, of the suitability of the Put
Warrants in light of their particular financial circumstances and the
information set forth in this Prospectus Supplement and in the Prospectus.
The Put Warrants share many of the risks of standardized
options but, unlike standardized options, they are backed only by the credit
of the Company (not The Options Clearing Corporation).
Before making any investment in the Put Warrants, it is
important that a prospective investor become informed about and understand the
nature of the Warrants in general, as described in the accompanying
Prospectus, the specific terms of the Put Warrants and the nature of SPDRS.
It is especially important for an investor to be familiar with the procedures
governing the exercise of the Put Warrants, since the failure to properly
exercise a Put Warrant on or prior to the Exercise Expiration Date for such
Put Warrant will result in the loss of the opportunity to receive the Put
Price.
Limited Pricing Information; Possible Illiquidity of the
Secondary Market
The Units (and, after the Automatic Separation Date, the
Purchase Contracts and the Put Warrants) 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 Units, Purchase Contracts and Put Warrants
may be difficult to obtain.
There can be no assurance as to how the Units, Purchase
Contracts or Put Warrants will trade in the secondary market or whether such
market will be liquid or illiquid. Securities with characteristics similar to
the Units are novel securities, and there is currently no secondary market for
the Units. The market value for the Units (and, after the Automatic
Separation Date, of the Purchase Contracts and Put Warrants) will be affected
by a number of factors in addition to the creditworthiness of the Company and
the value of SPDRS, including, but not limited to, the volatility of SPDRS,
the dividend rate on SPDRS, the comparative value of the SPDRS and the value
of the S&P 500 Index, market interest and yield rates and the time remaining
to the expiration of the Put Warrants and the settlement of the Purchase
Contracts. In addition, the value of SPDRS depends on a number of
interrelated factors, including economic, financial and political events, that
can affect the capital markets generally. The market value of the Units (and,
after the Automatic Separation Date, of the Purchase Contracts and Put
Warrants) is expected to depend primarily on changes in the Market Price of
SPDRS. The price at which a holder will be able to sell Units (or, after the
Automatic Separation Date, a combination of a Purchase Contract and the
Related Put Warrant) prior to the Contract Settlement Date may be at a
discount, which could be substantial, from the Unit Issue Price, if, at such
time, the Market Price of SPDRS is below, equal to or not sufficiently above
the Unit Issue Price. The historical Market Prices of SPDRS should not be
taken as an indication of the future performance of SPDRS during the term of
any Unit.
Limited Antidilution Adjustments
Although the amount that holders of the Units are entitled to
receive at settlement of the Purchase Contracts and the number of SPDRS
salable under a Put Warrant are each subject to adjustment for certain events,
such required adjustments do not cover all events that could affect the Market
Price of the SPDRS. Although the Company may, at its sole discretion, cause
the Calculation Agent to make additional adjustments to the Purchase Contracts
or Put Warrants to reflect changes in the SPDRS in other circumstances, it is
under no obligation to do so. Such other events may adversely affect the
market value of the Units, Purchase Contracts and Put Warrants.
Variations in Composition of the SPDR Trust and the S&P 500
Index
The performance of the SPDR Trust may not exactly replicate the
performance of the S&P 500 Index because the total return generated by the
securities included in the S&P 500 Index (the "Index Securities") will be
reduced by transaction costs incurred in adjusting the balance of securities
included in the SPDR Trust and other SPDR Trust expenses, whereas such
transaction costs and expenses are not included in the calculation of the S&P
500 Index. It is also possible that the SPDR Trust may not fully replicate
the performance of the S&P 500 Index due to the temporary unavailability of
certain Index Securities in the secondary market or due to other extraordinary
circumstances.
Lack of Affiliation between the Company and the SPDR Trust
The Company is not affiliated with the SPDR Trust and, although
the Company as of the date of this Pricing Supplement does not have any
material non-public information concerning the SPDR Trust, events affecting
the Trust, including those described above under "Antidilution Adjustments,"
are beyond the Company's ability to control and are difficult to predict.
The SPDR Trust is not involved in the offering of the Units and
has no obligations with respect to the Units, Purchase Contracts or Put
Warrants, including any obligation to take the interests of the Company or of
holders of Units, Purchase Contracts or Put Warrants into consideration for
any reason. The SPDR Trust will not receive any of the proceeds of the
offering of the Units made hereby and is not responsible for, and has not
participated in, the determination of the timing of, prices for or quantities
of, the Units offered hereby.
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 Units, Purchase Contracts and Put Warrants, including with
respect to certain antidilution adjustments that may influence the
determination of the amount of SPDRS receivable upon settlement of the
Purchase Contracts or the number of SPDRS that may be sold to the Company for
the Put Price upon exercise of a Put Warrant. See "Antidilution Adjustments"
above and "Market Disruption Event" in the Glossary.
Other Considerations
It is suggested that prospective investors who consider
purchasing the Units should reach an investment decision only after carefully
considering the suitability of the Units in light of their particular
circumstances.
Tax Considerations
INVESTORS SHOULD CONSIDER THE TAX CONSEQUENCES OF INVESTING IN
THE UNITS. DUE TO THE COMPLEXITY OF THE RULES AFFECTING THE FEDERAL INCOME
TAX TREATMENT OF THE UNITS AND THE ABSENCE OF AUTHORITIES THAT DIRECTLY
ADDRESS THE PROPER TREATMENT OF THE UNITS OR THEIR COMPONENTS, PROSPECTIVE
PURCHASERS ARE STRONGLY URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE
FEDERAL INCOME TAX CONSEQUENCES OF AN INVESTMENT IN THE UNITS. SEE "UNITED
STATES FEDERAL INCOME TAXATION" IN THIS PROSPECTUS SUPPLEMENT.
SPDRS; PUBLIC INFORMATION
The SPDR Trust, formed by PDR Services Corporation, a
wholly-owned subsidiary of the AMEX, is a unit investment trust registered
under the Investment Company Act of 1940 (the "'40 Act") that holds a
portfolio of securities consisting of substantially all of the common stocks,
in substantially the same weighting, as the S & P 500 Index. Each unit,
representing a fractional undivided interest in the Trust, is a SPDR. SPDRS
are registered under the Exchange Act. Trusts 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. Information provided to or filed
with the Commission by the Trust pursuant to the '40 Act and the Exchange Act
of 1934 can be located by reference to Commission file number 811-7330. In
addition, information regarding the Trust 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 UNITS OFFERED
HEREBY AND DOES NOT RELATE TO SPDRS. ALL DISCLOSURES CONTAINED IN THIS
PRICING SUPPLEMENT REGARDING THE SPDR TRUST 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 THE SPDR TRUST IN CONNECTION WITH
THE OFFERING OF THE UNITS. NEITHER THE COMPANY NOR THE AGENT MAKES ANY
REPRESENTATION THAT SUCH PUBLICLY AVAILABLE DOCUMENTS OR ANY OTHER PUBLICLY
AVAILABLE INFORMATION REGARDING THE SPDR TRUST 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 SPDRS (AND THEREFORE THE UNIT ISSUE PRICE)
HAVE BEEN PUBLICLY DISCLOSED. SUBSEQUENT DISCLOSURE OF ANY SUCH EVENTS OR THE
DISCLOSURE OF OR FAILURE TO DISCLOSE MATERIAL FUTURE EVENTS CONCERNING THE
SPDR TRUST COULD AFFECT THE VALUE RECEIVED ON THE CONTRACT SETTLEMENT DATE OR
ANY WARRANT SETTLEMENT DATE WITH RESPECT TO THE PURCHASE CONTRACTS OR PUT
WARRANTS, RESPECTIVELY, AND THEREFORE THE TRADING PRICES OF THE UNITS AND,
AFTER THE AUTOMATIC SEPARATION DATE, OF THE PURCHASE CONTRACTS AND THE PUT
WARRANTS.
NEITHER THE COMPANY NOR ANY OF ITS AFFILIATES MAKES ANY
REPRESENTATION TO ANY PURCHASER OF UNITS AS TO THE PERFORMANCE OF SPDRS.
The Company or its affiliates may presently or from time to
time engage in business with the SPDR Trust. In the course of such business,
the Company or its affiliates may acquire non-public information with respect
to the SPDR Trust. The statement in the preceding sentence is not intended to
affect the rights of holders of the Units under the securities laws. Any
prospective purchaser of a Unit should undertake an independent investigation
of the SPDR Trust as in its judgment is appropriate to make an informed
decision with respect to an investment in SPDRS.
HISTORICAL INFORMATION
The following table sets forth the high and low Market Price
for SPDRS during 1993, 1994, 1995, 1996 and during 1997 through December 30,
1997. The Market Price for SPDRS on December 30, 1997 was $97.125. The Market
Prices listed below were obtained from Bloomberg Financial Markets. The
Company believes all such information to be accurate. The historical prices
of SPDRS should not be taken as an indication of future performance, and no
assurance can be given that the price of SPDRS will increase sufficiently to
cause the beneficial owners of the Purchase Contracts to receive an amount in
excess of the Unit Issue Price on the Contract Settlement Date.
Dividends
High Low per Share
SPDRS -------- ------- ---------
1993
First Quarter................. $45.750 $43.406 $0.2132
Second Quarter................ 45.656 43.406 0.3180
Third Quarter................. 47.063 44.219 0.2862
Fourth Quarter................ 47.094 45.844 0.3172
1994
First Quarter................. $48.281 $44.469 $0.2712
Second Quarter................ 46.531 43.906 0.3050
Third Quarter................. 47.781 44.563 0.2882
Fourth Quarter................ 47.640 44.875 0.3627
1995
First Quarter................. 50.422 45.781 0.2682
Second Quarter................ 55.125 50.234 0.3162
Third Quarter................. 58.781 54.609 0.3123
Fourth Quarter................ 62.625 57.750 0.3820
1996
First Quarter................. 66.328 59.969 0.2855
Second Quarter................ 68.188 62.922 0.3509
Third Quarter................. 68.813 62.656 0.3500
Fourth Quarter................ 76.125 69.000 0.3171*
1997
First Quarter................. 81.875 74.031 0.2993
Second Quarter................ 90.234 73.375 0.3500
Third Quarter................. 96.031 89.344 0.3484
Fourth Quarter (through
December 30, 1997)....... 98.938 87.188 0.3795
*The SPDR Trust also made a capital gain distribution of $0.897
per SPDR in the fourth quarter of 1996.
The Company makes no representation as to the amount of
dividends, if any, that will be payable on each SPDR in the future. In any
event, holders of the Units (and, after the Automatic Separation Date, of
Purchase Contracts) will not be entitled to receive dividends, if any, that
may be payable on SPDRS.
UNITED STATES FEDERAL INCOME TAXATION
This summary addresses certain U.S. federal income tax
consequences to holders who are initial holders of the Units, who purchase the
Units at the Unit Issue Price, and who will hold the Units 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, all as currently in effect, any of which may be changed
subsequent to the date of this Prospectus Supplement, thereby potentially
affecting 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 positions (such as SPDRS) other than the Unit or either of the Components
(as defined below) such that the Unit or either of the Components are treated
as a part of a hedging transaction, straddle, conversion or other integrated
transaction); further, it does not address holders who will incur interest or
carrying charges in order to acquire and hold a Unit or the Components. As
the law applicable to the U.S. federal income taxation of instruments such as
the Units 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
Unit that is, for U.S. federal income tax purposes, (i) a citizen or resident
of the U.S., (ii) a corporation 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 Units, the Company and every
Holder of a Unit agree (in the absence of an administrative determination or
judicial ruling to the contrary) to characterize a Unit for all tax purposes
as an investment unit consisting of the following components (the
"Components"): (i) a Purchase Contract and (ii) a Put Warrant. Although no
statutory, judicial or administrative authority directly addresses the
characterization of the Units or instruments similar to the Purchase Contract
for U.S. federal income tax purposes and the matter is not free from doubt,
Davis Polk & Wardwell, special tax counsel to the Company ("Tax Counsel"), is
of the opinion that the characterization of the Units by the Company and the
Holders will be respected as separate components as described above. Based on
the Company's determination of the relative fair market values of the
Components at the time of issuance of the Units, the Company will allocate
% of the Unit Issue Price as premium for the Put Warrant and the remainder of
the Unit Issue Price to the Purchase Contract. The characterization of the
Units by the Company and the Holders and the opinion of Tax Counsel are not
binding on the Internal Revenue Service ("IRS") or the courts and no ruling is
being requested from the IRS with respect to the Units; accordingly, there can
be no assurance that the treatment of the Units described in this summary will
be upheld by a court. Unless otherwise indicated, the following discussion
assumes that the characterization of the Units and the allocation of the Unit
Price as set forth above are respected.
Tax Treatment of the Units
Tax Basis. Based on the Company's determination as set forth
above, the Holder's tax basis in the Purchase Contract and the Put Warrant
will be % and % of the Unit Issue Price, respectively.
Settlement of the Purchase Contract. Upon the final settlement
of the Purchase Contract, a Holder will not recognize any gain or loss with
respect to any SPDRS received thereon. With respect to any cash received upon
settlement in lieu of any fractional shares of SPDRS, a Holder will recognize
gain or loss. The amount of such gain or loss will be determined by the
extent to which the amount of such cash received differs from the pro rata
portion of the Holder's tax basis in the Purchase Contract allocable to the
cash. With respect to any SPDRS received upon settlement, the Holder will
have an adjusted tax basis in such SPDRS equal to the pro rata portion of the
Holder's tax basis in the Purchase Contract allocable thereto. The allocation
of the Holder's tax basis in the Purchase Contract between cash and SPDRS
should be based on the amount of the cash received and the relative fair
market value, as of the second Trading Day prior to the Contract Settlement
Date, of the SPDRS. At the time of issuance of the Units, the Purchase
Contract and the Put Warrant that constitute a Unit will be treated as
offsetting positions constituting a straddle within the meaning of Section
1092 of the Code and corresponding Treasury Regulations (the "Straddle
Rules"). Under the Straddle Rules, the holding period of a position is
suspended during the time such position is part of a straddle. Therefore,
the holding period of the Purchase Contract will not begin until the Holder
has disposed of the Put Warrant, and the holding period of the Put Warrant
will not begin until the Holder has disposed of the Purchase Contract. Thus,
any gain or loss with respect to any cash received upon settlement in lieu of
any fractional share of SPDRS will be short-term capital gain or loss, as the
case may be, unless the Holder has disposed of the Put Warrant more than twelve
months before the final settlement of the Purchase Contract. The Holder's
holding period for any SPDRS received will start on the day after the Contract
Settlement Date.
Expiration of the Put Warrant. Upon the expiration,
unexercised, of the Put Warrant, a Holder will realize loss equal to the
Holder's tax basis in the expired Put Warrant. Under the Straddle Rules, if
the Holder holds SPDRS received on settlement of the Purchase Contract upon
expiration of the Put Warrant, the Holder may be required to defer recognition
of the loss realized on the expiration of such Put Warrant until the taxable
year in which the Holder disposes of its interest in the SPDRS.
Exercise of the Put Warrant. Upon the exercise of the Put
Warrant, a Holder will realize gain or loss to the extent the Put Price
differs from the sum of the Holder's tax basis in the SPDRS sold and the
Holder's tax basis in the exercised Put Warrant. A Holder who exercises the
Put Warrant with SPDRS other than those received on settlement of the Purchase
Contract will be required to defer recognition of any loss attributable to the
exercise of the Put Warrant if it continues to hold SPDRS received on
settlement of the Purchase Contract. By virtue of Section 1233 of the Code
and corresponding Treasury Regulations (the "Short Sale Rules"), any capital
gain realized upon the exercise of the Put Warrant will generally be
short-term capital gain if the holder has acquired any SPDRS within the period
beginning twelve months before the purchase of the Units and ending upon the
exercise of the Put Warrant.
Sale or Exchange of the Components. Upon a sale or exchange of
a Holder's separate interest in the Purchase Contract or the Put Warrant prior
to the relevant settlement date, the Holder will recognize capital gain, if
any, equal to the difference between the amount realized and the Holder's tax
basis in the Component so sold or exchanged. Under the Straddle Rules, if the
Holder realizes a capital loss on such sale or exchange, measured by the
difference between the Holder's basis in the Component so sold or exchanged
and the amount realized, the Holder may have to defer recognition of the loss
until or unless the Holder has (i) in the case of a sale or exchange of the
Purchase Contract, disposed of the Put Warrant; and (ii) in the case of a sale
or exchange of a Put Warrant, disposed of the Purchase Contract. Under the
Straddle Rules, any recognized gain will be short-term capital gain unless the
Holder has (i) in the case of a sale or exchange of the Purchase Contract,
disposed of the Put Warrant more than twelve months prior to such sale or
exchange; and (ii) in the case of a sale or exchange of the Put Warrant,
disposed of the Purchase Contract more than twelve months prior to such sale
or exchange.
Possible Alternative Tax Treatments of an Investment in the
Units
Due to the absence of authorities that directly address the
proper treatment of the Units or the Components, it is possible that the IRS
could seek to analyze the U.S. federal income tax consequences of owning a
Unit or either of the Components thereof under Treasury Regulations governing
contingent payment debt instruments (the "Contingent Payment Regulations").
Based on the advice of Tax Counsel, the Company will take the
position that neither a Unit nor either of the Components is a debt instrument
for tax purposes, and, therefore, the Contingent Payment Regulations do not
apply to the Units or either of the Components. If the IRS were successful in
asserting that the Contingent Payment Regulations applied to the Units or
either of the Components, the timing and character of income thereon would be
significantly affected. Among other consequences, a Holder would be required
to accrue as original issue discount income at a "comparable yield" on the
issue price of the deemed debt instrument, regardless of the Holder's usual
method of accounting for federal income tax purposes. In addition, gain or
loss would be recognized with respect to the receipt of SPDRS on final
settlement of the Purchase Contract. Further, any gain realized with respect
to such a deemed debt instrument would generally be characterized as ordinary
income rather than capital gain.
Even if the Contingent Payment Regulations do not apply to the
Units or Components, other alternative U.S. federal income characterizations
or treatments of the Units or Components are also possible, which may affect
the timing and the character of the income or loss with respect to the Units
or Components.
Backup Withholding and Information Reporting
A Holder of a Unit or a Component 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.
DUE TO THE COMPLEXITY OF THE STRADDLE RULES AND THE SHORT SALE
RULES AND THE ABSENCE OF AUTHORITIES THAT DIRECTLY ADDRESS THE PROPER
TREATMENT OF THE UNITS OR THE COMPONENTS, PROSPECTIVE PURCHASERS ARE STRONGLY
URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE FEDERAL INCOME TAX
CONSEQUENCES OF AN INVESTMENT IN THE UNITS, INCLUDING, IN PARTICULAR, THE
EXTENT TO WHICH THEIR INDIVIDUAL CIRCUMSTANCES MAY AFFECT THE GENERAL RESULTS
OUTLINED ABOVE.
UNDERWRITER
Under the terms and subject to the conditions contained in an
Underwriting Agreement dated the date hereof, Morgan Stanley & Co.,
Incorporated, (the "Underwriter") has agreed to purchase, and the Company has
agreed to sell to the Underwriter 1,500,000 Units.
The Underwriting Agreement provides that the obligations of the
Underwriter to pay for and accept delivery of the Units are subject to the
approval of certain legal matters by their counsel and to certain other
conditions. The Underwriter is committed to take and pay for all of the Units
if any are taken.
The Underwriter initially proposes to offer part of the Units
directly to the public at the public offering price set forth on the cover
page hereof. After the initial offering of the Units, the offering price and
other selling terms may from time to time be varied by the Underwriter.
The Company has agreed to indemnify the Underwriter against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended, or to contribute to payments the Underwriter may be required to
make in respect thereof.
The Company does not intend to apply for listing of the Units
or for the Purchase Contracts or Put Warrants on a national securities
exchange, but has been advised by the Underwriter that it presently intends to
make a market in the Units and, following the Automatic Separation Date, in
the Purchase Contracts and the Put Warrants as permitted by applicable laws
and regulations. The Underwriter is not obligated, however, to make a market
in the Units, Purchase Contracts or Put Warrants and any such market-making
may be discontinued at any time by the Underwriter at its sole discretion.
Accordingly, no assurance can be given as to the liquidity of, or trading
market for, the Units, Purchase Contracts or Put Warrants.
This Prospectus Supplement and the accompanying Prospectus may
be used by the Underwriter and other affiliates of the Company in connection
with offers and sales of the Units, Purchase Contracts or Put Warrants in
market-making transactions at negotiated prices related to prevailing market
prices at the time of sale or otherwise. The Underwriter and such other
affiliates of the Company may act as principal or agent in such transactions.
The Underwriter is a wholly-owned subsidiary of the Company.
The Underwriter's participation in the offering of the Units will be conducted
in compliance with Rule 2720 of the Conduct Rules of the National Association
of Securities Dealers, Inc.
The Underwriter does not intend to confirm sales to accounts
over which it exercises discretionary authority.
In order to facilitate the offering of the Units, the
Underwriter may engage in transactions that stabilize, maintain or otherwise
affect the price of the Units, SPDRS or the individual stocks underlying the
S&P 500 Index. Specifically, the Underwriter may overallot in connection with
the offering of the Units, creating a short position in the Units for its own
account. In addition, to cover overallotments or to stabilize the price of
the Units, the Underwriter may bid for, and purchase, the Units in the open
market. Any of these activities may stabilize or maintain the market price of
the Units above independent market levels. The Underwriter is not required to
engage in these activities and may end any of these activities at any time.
On or prior to the date of this Prospectus Supplement, the
Company, through its subsidiaries and others, may hedge some or all of its
anticipated exposure in connection with the Units by the purchase and sale of
SPDRS, exchange traded and over the counter options on the S&P 500 Index,
individual stocks included in the S&P 500 Index, futures contracts on the S&P
500 Index and options on such futures contracts or by taking positions in any
other instruments that it may wish to use in connection with such hedging.
The Company, through its subsidiaries, is likely to modify its hedge position
throughout the life of the Purchase Contracts and Put Warrants, including on
each Determination Date and Exercise Expiration Date, by purchasing and
selling the securities and instruments listed above and other available
securities and instruments. Although the Company has no reason to believe
that its hedging activity will have a material impact on the price of such
SPDRS, options, stocks, futures contracts, and options on futures contracts or
on the value of the S&P 500 Index, there can be no assurance that the Company
will not affect such prices as a result of its hedging activities. See also
"Use of Proceeds" in the accompanying Prospectus.
ANNEX A
GLOSSARY
Adjustment Factor................ 1 (one), subject to adjustment as
described under "Description of Units --
Antidilution Adjustments."
Automatic Separation Date........ April , 1998
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 ("MS &
Co.")
Contract Settlement Date......... The third Trading Day following the last
Determination Date (expected to be June
30, 2005).
Determination Dates.............. June 25, 2003, June 25, 2004 and June 27,
2005, or, if any such day is not a Trading
Day, the next succeeding Trading Day,
unless there is a Market Disruption Event
on any such Trading Day. If a Market
Disruption Event occurs on any such Trading
Day, such Determination Date will be the
immediately succeeding Trading Day during
which no Market Disruption Event occurs;
provided that if a Market Disruption Event
has occurred on each of the five Trading
Days immediately succeeding June 25, 2003,
June 25, 2004 or June 27, 2005, then such
fifth succeeding Trading Day will be
deemed to be the relevant Determination
Date, notwithstanding the occurrence of
a Market Disruption Event on such day.
DTC.............................. The Depositary Trust Company
Exercise Expiration Date ........ June 27, 2005, or if such day is not a
Trading Day, the next succeeding Trading
Day, unless there is a Market Disruption
Event on such Trading Day. If a Market
Disruption Event occurs on any such
Trading Day, the Exercise Expiration Date
will be the immediately succeeding Trading
Day during which no Market Disruption
Event occurs; provided that if a Market
Disruption Event has occurred on each of
the five Trading Days immediately
succeeding June 27, 2005, then such fifth
succeeding Trading Day will be deemed to
be the Exercise Expiration Date,
notwithstanding the occurrence of a Market
Disruption Event on such day.
Final SPDR Value................. The average of the SPDR Closing Values, as
determined on each of the three
Determination Dates.
Market Disruption Event.......... With respect to the SPDRS:
(i) a suspension, absence or material
limitation of trading of 100 or more of
the securities included in the S&P 500
Index on the primary market for such
securities for more than two hours of
trading or during the one-half hour period
preceding the close of trading in such
market; or the suspension, absence or
material limitation of trading on the
primary market for trading in futures or
options contracts related to the S&P 500
Index during the one-half hour period
preceding the close of trading in the
applicable market, in each case as
determined by the Calculation Agent in its
sole discretion; and
(ii) a determination by the Calculation
Agent in its sole discretion that the
event described in clause (i) above
materially interfered with the ability of
the Company or any of its affiliates to
unwind all or a material portion of the
hedge with respect to the Notes.
For purposes of determining whether a
Market Disruption Event has occurred: (1)
a limitation on the hours or number of
days of trading will not constitute a
Market Disruption Event if it results from
an announced change in the regular
business hours of the relevant exchange or
market, (2) a decision to permanently
discontinue trading in the relevant
futures or options contract will not
constitute a Market Disruption Event, (3)
limitations pursuant to New York Stock
Exchange Rule 80A (or any applicable rule
or regulation enacted or promulgated by the
NYSE, any other self-regulatory
organization or the Securities and
Exchange Commission of similar scope as
determined by the Calculation Agent) on
trading during significant market
fluctuations will constitute a suspension,
absence or material limitation of trading,
(4) a suspension of trading in a futures or
options contract on the S&P 500 Index by
the primary securities market related to
such contract by reason of (a) a price
change exceeding limits set by such
exchange or market, (b) an imbalance of
orders relating to such contracts or (c) a
disparity in bid and ask quotes relating
to such contracts will constitute a
suspension, absence or material limitation
of trading in futures or options contracts
related to the S&P 500 Index and (5) a
suspension, absence or material limitation
of trading on the primary market on which
futures or options contracts related to
the S&P 500 Index are traded will not
include any time when such market is
itself closed for trading under ordinary
circumstances.
Market Price..................... If SPDRS (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 one
SPDR (or one unit of any such other
security) on any Trading Day means (i) the
last reported bid price 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 SPDRS (or any
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
bid price on the over-the-counter market
as reported on the NASDAQ NMS or OTC
Bulletin Board on such day. If the last
reported bid 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 SPDRS (or any such
other security) obtained from as many
dealers in SPDRS (or any such other
security), but not exceeding three, as
will make such bid prices available to the
Calculation Agent. The term "NASDAQ NMS
security" shall include a security
included in any successor to such system
and the term "OTC Bulletin Board Service"
shall include any successor service
thereto.
Put Price........................ $
SPDR Closing Value............... The product of the Market Price of SPDRS
and the Adjustment Factor, each as
determined on any Determination 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.
Unit Issue Price................. $
Warrant Agent's Window........... Tender Department, in the Borough of
Manhattan, The City of New York, which is,
on the date hereof, Corporate Trust
Securities Window, 55 Water Street, Room
234, North Building, New York, New York
10041, Attention: Tender Department.
Warrant Settlement Dates......... The third Trading Day following the
Exercise Expiration Date (expected to be
June 30, 2005).
ANNEX B
OFFICIAL NOTICE OF EXERCISE
Morgan Stanley, Dean Witter, Discover & Co.
PUT WARRANTS SETTLING JUNE 30, 2005
ORIGINALLY COMPRISED BY THE
SEPARABLE UNITS MANDATORILY EXCHANGEABLE FOR SPDRS
------------
Dated: [On or prior to the Exercise Expiration Date]
The Chase Manhattan Bank
Corporate Trust Securities Window
55 Water Street, Room 234
North Building
New York, New York 10041
(Attn: Tender Department)
Dear Sirs:
The undersigned is a holder of the Put Warrants Settling June
30, 2005 of Morgan Stanley, Dean Witter, Discover & Co. entitling the holder
thereof to receive from the Company, upon exercise and delivery of a number of
SPDRS with a value equal to the Final SPDR Value per Put Warrant, the Put
Price. The undersigned hereby irrevocably elects to exercise ____ [minimum of
1,000 Put Warrants or any integral multiple thereof] of the Put Warrants, as
of the date hereof, provided that such day is on or prior to the Exercise
Expiration Date, all as described in the Prospectus Supplement dated
, 1998 (the "Prospectus Supplement") to the Prospectus dated June 2, 1997
related to Registration Statement No. 333-27919; provided that this notice is
subject to a limit order so that such Put Warrants will not be exercised if
the Final SPDR Value as determined on the Exercise Expiration Date is equal to
or greater than the Put Price. Capitalized terms not defined herein have the
meanings given to such terms in the Prospectus Supplement. Please date and
acknowledge receipt of this notice in the place provided below on the date of
receipt, and fax a copy to the fax number indicated, whereupon the Company
will pay the Put Price on the Warrant Settlement Date in accordance with the
terms of the Put Warrants, as described in the Prospectus Supplement.
Very truly yours,
------------------------
[Name of Holder]
By:
Title:
-------------------
[Fax No.]
Receipt of the above Official Notice of Exercise is
hereby acknowledged.
THE CHASE MANHATTAN BANK
By:
Title:
Date and time of acknowledgment:
