PROSPECTUS Dated June 2, 1997 Amendment No. 1 Dated December 3, 1997 to
PROSPECTUS SUPPLEMENT Pricing Supplement No. 24 to
Dated June 2, 1997 Registration Statement No. 333-27919
Dated November 21, 1997
Rule 424(b)(3)
$29,000,000
Morgan Stanley, Dean Witter, Discover & Co.
MEDIUM-TERM NOTES, SERIES C
EQUITY LINKED NOTES DUE DECEMBER 4, 2000
--------------
The Equity Linked Notes due December 4, 2000 (the "Notes") are
Medium-Term Notes, Series C of Morgan Stanley, Dean Witter, Discover & Co.
(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 $100,000 and will mature
on December 4, 2000 (the "Initial Maturity Date"), subject to monthly
extension in accordance with the procedures described below, but, in no event,
shall the Notes mature later than December 4, 2027 (the "Final 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
Final Maturity Date.
On the Initial Maturity Date (or, if applicable, the Extended
Maturity Date (as defined below)) , the holder of each Note will receive the
par amount of such Note ($100,000) ("Par") plus an amount (the "Supplemental
Redemption Amount") based on the percentage increase in the Final Index Value
of the Lehman Brothers Corporate Bond Index (the "Lehman Index"), as
calculated by Lehman Brothers Inc. ("Lehman"), over the Initial Index Value,
as further described in this Pricing Supplement. The Supplemental Redemption
Amount payable with respect to each Note at maturity will be calculated on the
Final Determination Date (as defined herein) and will equal the product of (i)
Par and (ii) the sum of 0.002 and a fraction, the numerator of which shall be
the Final Index Value less the Initial Index Value and the denominator of
which shall be the Initial Index Value. The Initial Index Value will equal
928.58. The Final Index Value will equal the Index Closing Value as of the
Final Determination Date. The Final Determination Date will be the last
Business Day in the month immediately preceding the Initial Maturity Date (or,
if applicable, the Extended Maturity Date).
If, on the last Business Day in the month immediately preceding
the Initial Maturity Date, the Index Closing Value is less than the Initial
Index Value, the maturity of the Notes shall be extended to the next
succeeding date (the "Extended Maturity Date") (i) that numerically
corresponds to the Initial Maturity Date and (ii) for which the Index Closing
Value, on the last Business Day in the month immediately preceding such date,
is greater than or equal to the Initial Index Value; provided that if, prior
to the Final Maturity Date, the requirements of clauses (i) and (ii) are not
met, the holder will be repaid the par amount of such Note on the Final
Maturity Date, 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 Index Value," "Final
Determination Date" and "United States Federal Taxation" in this Pricing
Supplement.
The Company will cause the "Supplemental Redemption Amount" to
be determined by Morgan Stanley & Co. Incorporated (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-4 through PS-6 herein.
--------------
PRICE 100%
--------------
Capitalized terms not defined herein have the meanings given to such terms in
the accompanying Prospectus Supplement.
MORGAN STANLEY DEAN WITTER
Principal Amount.............. $29,000,000
Initial Maturity Date......... December 4, 2000 (subject to extension). See
"Maturity Redemption Amount; Extension of
Maturity" below.
Final Maturity Date........... December 4, 2027
Interest Rate................. 0.00%
Specified Currency............ U.S. Dollars
Issue Price................... 100%
Settlement Date (Original
Issue Date)................... December 4, 1997
CUSIP......................... 61745EKZ3
Book Entry Note or
Certificated Note............. Book Entry
Senior Note or Subordinated
Note.......................... Senior
Minimum Denominations......... $100,000 and any integral multiple of $1,000
in excess thereof
Trustee....................... The Chase Manhattan Bank
Agent......................... Morgan Stanley & Co. Incorporated
Maturity Redemption Amount;
Extension of Maturity......... On the Initial Maturity Date (or, if
applicable, the Extended Maturity Date), the
holder of each Note will receive the par
amount of such Note ($100,000) ("Par") plus
the Supplemental Redemption Amount.
If, on the last Business Day in the month
immediately preceding the Initial Maturity
Date, the Index Closing Value is less than
the Initial Index Value, the maturity of the
Notes shall be extended to the next
succeeding date (the "Extended Maturity
Date") (i) that numerically corresponds to
the Initial Maturity Date and (ii) for which
the Index Closing Value, on the last Business
Day in the month immediately preceding such
date, is greater than or equal to the Initial
Index Value; provided that if, prior to the
Final Maturity Date, the requirements of
clauses (i) and (ii) are not met, the holder
will be repaid the par amount of such Note on
the Final Maturity Date, but will not receive
any Supplemental Redemption Amount.
References herein to "Notes" refer to each
$100,000 principal amount of any Note.
If the maturity of the Notes is to be
extended on the Initial Maturity Date, the
Company shall cause the Calculation Agent to
provide written notice of such extension to
the Trustee at its New York office, on which
notice the Trustee may conclusively rely, on
or prior to 11:00 a.m. on the Business Day
preceding the Initial Maturity Date. The
Company shall also cause the Calculation
Agent to provide written notice to the
Trustee at its New York Office, on which
notice the Trustee may conclusively rely, on
or prior to 11:00 a.m. on the Business Day
preceding any Extended Maturity Date.
Supplemental Redemption Amount The Supplemental Redemption Amount, payable
with respect to each Note on the Initial
Maturity Date (or, if applicable, the Extended
Maturity Date) shall be calculated on the
Final Determination Date and shall equal the
product of (i) the par amount of such Note and
(ii) the sum of 0.002 and a fraction, the
numerator of which shall be the Final Index
Value less the Initial Index Value and the
denominator of which shall be the Initial
Index Value. The Supplemental Redemption
Amount is described by the following formula:
( (Final Index Value - Initial Index Value) )
Par x (0.002 + ----------------------------------------- )
( Initial Index Value )
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 Initial Maturity Date (or, if applicable,
the Extended Maturity Date). See
"Discontinuance of the Lehman Index;
Alteration of Method of Calculation" below.
All percentages resulting from any
calculation with respect to the Notes will be
rounded to the nearest one hundred-thousandth
of a percentage point, with five
one-millionths of a percentage point rounded
upwards (e.g., 9.876545% (or .09876545) would
be rounded to 9.87655% (or .0987655)), and
all dollar amounts used in or resulting from
such calculation will be rounded to the
nearest cent with one-half cent being rounded
upwards.
Initial Index Value........... 928.58
Final Index Value............. The Final Index Value shall be the Index
Closing Value on the Final Determination
Date, as determined by the Calculation Agent.
Index Closing Value........... The Index Closing Value, as of any Business
Day, will equal 100 plus the Since Inception
return (the "Since Inception Return") of the
Lehman Index, as published on Bloomberg page
LEHM and accessed under the following
headings: "Aggregate" and "Daily Index
Returns," at the regular official weekday
close of trading on such Business Day;
provided that, if no Since Inception Return is
published on any such Business Day, the Index
Closing Value shall be based on the Since
Inception Return published most recently prior
to such Business Day. See "Discontinuance of
the Lehman Index; Alteration of Method of
Calculation."
References herein to the Lehman Index shall
be deemed to include any Successor Index,
unless the context requires otherwise.
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.
Final Determination Date...... The Final Determination Date shall be the
last Business Day in the month immediately
preceding the Initial Maturity Date (or, if
applicable, the Extended Maturity Date).
Calculation Agent............. Morgan Stanley & Co. Incorporated ("MS & Co.")
All determinations made by the Calculation
Agent shall be at the sole discretion of the
Calculation Agent and shall, in the absence of
manifest error, be conclusive for all
purposes and binding on the Company and
holders of the Notes.
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 the Final Index Value. See
"Discontinuance of the Lehman Index;
Alteration of Method of Calculation" below.
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 Notes to restrict the use of
information relating to the calculation of
the Final Index Value that the Calculation
Agent may be required to make prior to its
dissemination. MS & Co. is obligated to
carry out its duties and functions as
Calculation Agent in good faith and using its
reasonable judgment.
Risk Factors.................. An investment in the Notes entails
significant risks not associated with similar
investments in a conventional security,
including the following.
If the Final Index Value of the Lehman Index
does not exceed the Initial Index Value, the
holders of the Notes will receive only the par
amount of each Note at maturity, which may be
extended until December 1, 2027. Because the
Final Index Value will be based upon the
closing value of the Lehman Index on a
specified day (the Final Determination Date),
a significant increase in the Lehman Index
subsequent to issuance of the Notes may be
substantially or entirely offset by
subsequent decreases in the value of the
Lehman Index on or prior to the Final
Determination Date.
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 Original 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, especially if the
maturity of the Notes is extended. See
"Maturity Redemption Amount; Extension of
Maturity" above.
The return of only the par amount of a Note
at maturity, which may be extended until
December 1, 2027, would not compensate the
holder for any opportunity cost implied by
inflation and other factors relating to the
time value of money.
The Notes will not be listed on any exchange.
There can be no assurance as to whether there
will be a secondary market in the Notes or if
there were to be such a secondary market,
whether such market would be liquid or
illiquid. It is expected that the secondary
market for the Notes will be affected by the
creditworthiness of the Company and by a
number of factors, including, but not limited
to, the volatility of the Lehman Index and
the time remaining to the Final Determination
Date and to the maturity of the Notes. In
addition, the Final Index Value depends on a
number of interrelated factors, including
economic, financial and political events, over
which the Company has no control. The value
of the Notes prior to maturity is expected to
depend primarily on market interest rates (as
market interest rates rise, the value of the
Notes is expected to fall) and the extent of
the appreciation or depreciation of the Lehman
Index from the Initial Index Value through
the Final Determination Date. The price at
which a holder will be able to sell the Notes
prior to maturity may be at a discount, which
could be substantial, from the par amount
thereof, if, at such time, the Index Closing
Value is below, equal to or not sufficiently
above the Initial Index Value.
The historical Lehman Index values should not
be taken as an indication of the future
performance of the Lehman Index during the
term of the Notes. While the trading prices
of the bonds underlying the Lehman Index and
their yield will determine the value of the
Lehman Index, it is impossible to predict
whether the value of the Lehman Index will
rise or fall. Trading prices of the bonds
underlying the Lehman Index will be
influenced by both the complex and
interrelated political, economic, financial
and other factors that can affect the capital
markets generally and the markets on which the
underlying bonds are traded, and by various
circumstances that can influence the values
of the underlying bonds.
The policies of Lehman concerning additions,
deletions and substitutions of the bonds
underlying the Lehman Index and the manner in
which Lehman takes account of certain changes
affecting such underlying bonds may affect
the value of the Lehman Index. The policies
of Lehman with respect to the calculation of
the Lehman Index could also affect the value
of the Lehman Index. Lehman may discontinue
or suspend calculation or dissemination of
the Lehman Index. Any such actions could
affect the value of the Notes. See "Lehman
Index" and "Discontinuance of the Lehman
Index; Alteration of Method of Calculation"
below.
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 the Final Index Value or
whether the maturity of the Notes should be
extended. See "Maturity Redemption Amount;
Extension of Maturity" and "Calculation
Agent" above and "Discontinuance of the
Lehman Index; Alteration of Method of
Calculation" below.
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.
Public Information............ All disclosure contained in this Pricing
Supplement is derived from publicly available
information prepared by Lehman Brothers Inc.,
Fixed Income Research Group. Neither the
Company nor the Agent take any responsibility
for the accuracy or completeness of such
information.
Lehman Index.................. The Lehman Index is published and calculated
by Lehman. The Lehman Index was started on
December 31, 1972 by Lehman and is comprised
of all publicly issued U.S. corporate and
Yankee debentures and secured notes that meet
the specifications enumerated below (the
"Index Bonds" or "Bonds").
Bonds included in the Lehman Index are all
bonds classified as (i) Industrial, (ii)
Utility, (iii) Finance or (iv) Yankee that
satisfy certain maturity, liquidity and
quality requirements. That is, Index Bonds
(i) must mature at least one year from their
issue date, regardless of their call
features, (ii) must have a minimum 100
million U.S. Dollar par amount outstanding,
(iii) must be rated investment grade Baa3 or
better by Moody's Investors Service (if a
Moody's rating is not available a Standard &
Poor's or Fitch rating will be used), (iv)
must be fixed rate, though they may carry a
coupon that steps up or changes according to
a predetermined schedule and (v) must be U.S.
Dollar denominated and non-convertible. All
Index Bonds must be registered with the
Securities and Exchange Commission.
Index Bonds may be (i) subordinated issues,
(ii) securities with normal call and put
provisions and sinking funds, (iii) publicly-
underwritten medium-term notes and (iv)
global issues, but they may not be (i)
structured notes with embedded swaps or
other special features, (ii) private
placements, (iii) 144A securities, (iv)
floating rate securities or (v)
Eurobonds.
Lehman, in its sole discretion, may add or
remove Index Bonds from the Lehman Index
based on its determination of whether such
Bonds meet the specified criteria.
The Lehman Index is calculated each month by
aggregating the monthly total returns for
each Index Bond, weighted according to market
value, to arrive at the total return of the
Lehman Index for such month. The monthly
total return for each Index Bond is
calculated as a fraction, the numerator of
which is (a) the sum of (i) the price of the
Index Bond at the end of the month, (ii) the
interest accrued at the end of the month and
(iii) any coupon payments received during the
month, minus (b) the sum of (i) the price of
the Index Bond at the beginning of the month
and (ii) accrued interest at the beginning of
the month, and the denominator of which is
the sum of (i) the price of the Index Bond at
the beginning of the month and (ii) the
interest accrued at the beginning of the
month.
As of November 1997, the Lehman Index
includes 4,017 issues with a total market
value of $961,390,000,000. The average
maturity of an Index Bond was 13.14 years.
The maturities of the Lehman Index Bonds as
of such date were as follows: approximately
56% of the market value has maturities of
less than nine years; approximately 14.8% has
maturities between 9 and 17 years, and 29.2%
has maturities of 17+ years. AAA rated bonds
made up 4.3% of the Lehman Index, AA rated
bonds 18.7%, A rated bonds 48.1% and BBB
rated bonds 28.9%.
Discontinuance of the Lehman
Index; Alteration of Method
of Calculation................. If Lehman discontinues publication of the
Lehman Index and Lehman or another entity
publishes a successor or substitute index
that the Calculation Agent determines, in its
sole discretion, to be comparable to the
discontinued Lehman Index (such index being
referred to herein as a "Successor Index"),
then the Index Closing Value shall be
determined by reference to the value of such
Successor Index at the close of trading on
the Final Determination Date and on any
other Business Day on which an Index Closing
Value must be determined.
Upon any selection by the Calculation Agent
of a Successor Index, the Calculation Agent
shall cause written notice thereof to be
furnished to the Trustee, to the Company and
to the holders of the Notes within three
Business Days of such selection.
If Lehman discontinues publication of the
Lehman Index prior to, and such
discontinuance is continuing on, the Final
Determination Date, or, on any other Business
Day on which an Index Closing Value must be
determined and the Calculation Agent
determines that no Successor Index is
available at such time, then on such Final
Determination Date (or any such earlier
Business Day), the Calculation Agent shall
determine the Index Closing Value that would
be used in computing the Supplemental
Redemption Amount on such Final Determination
Date (or the Index Closing Value on any such
other Business Day). The Index Closing Value
shall be computed by the Calculation Agent in
accordance with a formula for and method of
calculating a substitute corporate bond index
reasonably similar to the formula and method
for calculating the Lehman Index prior to
such discontinuance. Notwithstanding these
alternative arrangements, discontinuance of
the publication of the Lehman Index may
adversely affect the value of the Notes.
If at any time the method of calculating the
Lehman Index or a Successor Index, or the
value thereof, is changed in a material
respect, or if the Lehman Index or a
Successor Index is in any other way modified
so that such index does not, in the opinion
of the Calculation Agent, fairly represent
the value of the Lehman Index or such
Successor Index had such changes or
modifications not been made, then, from and
after such time, the Calculation Agent shall,
at the close of business in New York City on
the Final Determination Date or on any other
Business Day on which an Index Closing Value
must be determined, make such calculations
and adjustments as, in the good faith
judgment of the Calculation Agent, may be
necessary in order to arrive at a value of a
bond index comparable to the Lehman Index or
such Successor Index, as the case may be, as
if such changes or modifications had not been
made, and calculate the Supplemental
Redemption Amount with reference to the Lehman
Index or such Successor Index, as adjusted.
Accordingly, if the method of calculating the
Lehman Index or a Successor Index is modified
so that the value of such index is a fraction
of what it would have been if it had not been
modified (e.g., due to a split in the index),
then the Calculation Agent shall adjust such
index in order to arrive at a value of the
Lehman Index or such Successor Index as if it
had not been modified (e.g., as if such split
had not occurred).
Alternative Determination Date
in case of an Event of Default In case an Event of Default with respect to
any Notes shall have occurred and be
continuing, the amount declared due and
payable upon any acceleration of the Notes
will be determined by the Calculation Agent
and will be equal to the par amount plus the
Supplemental Redemption Amount determined as
though the Final Determination Date was the
date of acceleration.
Historical Information........ The following table sets forth end-of-quarter
closing values (the Since Inception Return),
of the Lehman Index for each quarter in the
period from January 1, 1992 through November
21, 1997. The historical values of the
Lehman Index should not be taken as an
indication of future performance, and no
assurance can be given that the Lehman Index
will increase sufficiently to cause the
holders of the Notes to receive any
Supplemental Redemption Amount.
Daily Index Closing Values
Period End
--------------------------
1992
First Quarter........................ 471.52
Second Quarter....................... 496.39
Third Quarter........................ 524.55
Fourth Quarter....................... 525.76
1993
First Quarter........................ 557.33
Second Quarter....................... 579.27
Third Quarter........................ 602.87
Fourth Quarter....................... 601.84
1994
First Quarter........................ 577.13
Second Quarter....................... 566.50
Third Quarter........................ 571.35
Fourth Quarter....................... 574.24
1995
First Quarter........................ 614.17
Second Quarter....................... 667.30
Third Quarter........................ 685.42
Fourth Quarter....................... 724.23
1996
First Quarter........................ 702.94
Second Quarter....................... 706.55
Third Quarter........................ 722.70
Fourth Quarter....................... 751.30
1997
First Quarter........................ 742.74
Second Quarter....................... 777.48
Third Quarter........................ 811.81
Fourth Quarter (through November 827.42
21, 1997)............................
[Copyright]1997 Lehman Brothers Inc. Used with permission.
(Source: Lehman Brothers Inc.)
Use of Proceeds............... The net proceeds to be received by the
Company from the sale of the Notes will be
used for general corporate purposes. See
also "Use of Proceeds" in the accompanying
Prospectus.
License Agreement............. Lehman and MS & Co. have entered into a
non-exclusive license agreement providing for
the license to MS & Co., or to its parent or
to a (directly or indirectly) majority-owned
subsidiary of MS & Co. or its parent, in
exchange for a fee, of the right to use the
Lehman Index, which is owned and published by
Lehman, in connection with certain
securities, including the Notes.
The license agreement between Lehman and MS &
Co. provides that the following language must
be set forth in this Pricing Supplement:
The Notes are not sponsored, endorsed, sold
or promoted by Lehman. Lehman makes no
representation or warranty, express or
implied, to the owners of the Notes or any
member of the public regarding the
advisability of investing in securities
generally or in the Notes particularly or the
ability of the Lehman Index to track general
bond market performance. Lehman's only
relationship to the Company is the licensing
of the Lehman Index which is determined,
composed and calculated by Lehman without
regard to the Company or the Notes. Lehman
has no obligation to take the needs of the
Company or the owners of the Notes into
consideration in determining, composing or
calculating the Lehman Index. Lehman is not
responsible for and has not participated in
the determination of the timing of, prices
at, or quantities of the Notes to be issued
or in the determination or calculation of the
equation by which the Notes are to be
converted into cash. Lehman has no
obligation or liability in connection with
the administration, marketing or trading of
the Notes.
LEHMAN DOES NOT GUARANTEE THE QUALITY,
ACCURACY AND/OR THE COMPLETENESS OF THE
LEHMAN INDEX OR ANY DATA INCLUDED THEREIN, OR
OTHERWISE OBTAINED BY THE COMPANY, OWNERS OF
THE NOTES, OR ANY OTHER PERSON OR ENTITY FROM
THE USE OF THE LEHMAN INDEX IN CONNECTION WITH
THE RIGHTS LICENSED UNDER THE LICENSE
AGREEMENT DESCRIBED HEREIN OR FOR ANY OTHER
USE. LEHMAN MAKES NO EXPRESS OR IMPLIED
WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS
ALL WARRANTIES OF MERCHANTABILITY OF FITNESS
FOR A PARTICULAR PURPOSE OR USE WITH RESPECT
TO THE LEHMAN INDEX OR ANY DATA INCLUDED
THEREIN. WITHOUT LIMITING ANY OF THE
FOREGOING, IN NO EVENT SHALL LEHMAN HAVE ANY
LIABILITY FOR ANY SPECIAL, PUNITIVE,
INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING
LOST PROFITS), EVEN IF NOTIFIED OF THE
POSSIBILITY OF SUCH DAMAGES.
United States Federal Taxation The following discussion summarizes certain
of the material U.S. federal income tax
consequences of an investment in the Notes and
is based on the opinion of Davis Polk &
Wardwell, special tax counsel to the Company
("Tax Counsel"). This summary is based on
the Internal Revenue Code of 1986, as amended
to the date hereof (the "Code"),
administrative pronouncements, judicial
decisions and existing and proposed Treasury
Regulations, changes to any of which
subsequent to the date of this Pricing
Supplement may affect the tax consequences
described herein. This summary discusses
only Notes held as capital assets within the
meaning of Section 1221 of the Code. This
summary also addresses only initial holders
who purchase the Notes at a price equal to
the first price at which a substantial amount
of the Notes are sold to the public for money
(the "issue price"). This summary does not
purport to address prospective purchasers in
special tax situations, such as persons other
than Holders (as defined below), financial
institutions, tax-exempt organizations,
insurance companies, regulated investment
companies, dealers in securities or foreign
currencies, persons holding Notes as a hedge
against currency risks or as a position in a
"straddle," conversion transaction or other
integrated transaction, or persons whose
functional currency (as defined in Section
985 of the Code) is not the U.S. dollar.
As used herein, the term "Holder" means an
owner of a Note that is, for U.S. federal
income tax purposes, (i) a citizen or
resident of the U.S., (ii) a corporation
created or organized in or under the laws of
the U.S. or of 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.
For U.S. federal income tax purposes, the
Notes will be treated as debt instruments
subject to final Treasury Regulations
relating to contingent payment debt
instruments (the "Regulations"). As
discussed below, certain aspects of the U.S.
federal income tax treatment of an investment
in the Notes remain uncertain. No ruling has
been or will be requested from the Internal
Revenue Service ("IRS") with respect to the
Notes, and no assurance can be given that the
IRS or a court will agree with the analysis
set forth herein. Accordingly, prospective
purchasers are urged to consult their tax
advisors regarding the U.S. federal income
tax consequences of an investment in the Notes
and with respect to any tax consequences
arising under the laws of any state, local or
foreign taxing jurisdiction.
Interest Accrual on the Notes
Prior to the Initial Maturity
Date........................... Under the Regulations, a Holder will be
required to accrue interest income on a Note
(in an amount described in the succeeding
paragraph) regardless of whether such Holder
uses the cash or accrual method of tax
accounting. As a result, a Holder that
employs the cash method of accounting will be
required to include interest in taxable
income prior to the Initial Maturity Date of
the Note even though no payment will be made
on the Note prior to its maturity.
Under the Regulations, for each accrual
period prior to and including the Initial
Maturity Date of the Note, the amount of
interest that accrues, as original issue
discount, on a Note equals the product of (i)
the "adjusted issue price" (as of the
beginning of the accrual period) and (ii) the
"Comparable Yield" (adjusted for the length of
the accrual period). This amount is ratably
allocated to each day in the accrual period
and is includible as interest income by a
Holder for each day in the accrual period on
which the Holder holds the Note. The
adjusted issue price is the issue price of
the Note, increased by any interest
previously accrued. The Comparable Yield is
the annual yield the Company would pay, as of
the issue date, on a fixed rate note with no
contingent payment but with terms and
conditions otherwise comparable to those of
the Notes. Amounts treated as interest under
the Regulations are treated as original issue
discount for all purposes of the Code.
The Company has determined that the
Comparable Yield is 6.17%, compounded
semiannually. Under the Regulations, the
Company is required, solely for tax purposes,
to provide a schedule of the projected
amounts of payments on a Note (the
"Schedule"). Based on the Company's
determination of the Comparable Yield, the
Schedule for a Note (assuming a par amount of
$100,000 or with respect to each integral
multiple thereof) consists of a projected
amount due at the Initial Maturity Date,
equal to $119,998 (the "Projected Amount").
For U.S. federal income tax purposes, a
Holder is required to use the Comparable
Yield and the Schedule in determining its
interest accruals and adjustments in respect
of the Note, unless such Holder timely
discloses and justifies the use of other
estimates to the IRS.
THE COMPARABLE YIELD, THE SCHEDULE AND THE
PROJECTED AMOUNT ARE NOT PROVIDED FOR ANY
PURPOSE OTHER THAN THE DETERMINATION OF
HOLDERS' INTEREST ACCRUALS AND ADJUSTMENTS IN
RESPECT OF THE NOTES AND DO NOT CONSTITUTE A
REPRESENTATION REGARDING THE ACTUAL AMOUNT
OR TIMING OF THE AMOUNT PAYABLE UNDER THE
NOTES.
On the Initial Maturity Date, provided the
term of the Notes was not otherwise extended,
if the amount received is more than the
Projected Amount, the difference will produce
a "Net Positive Adjustment" under the
Regulations, which will be treated as
additional interest for the taxable year. If
the amount received is less than the
Projected Amount, the difference will produce
a "Net Negative Adjustment" under the
Regulations, which will reduce the amount of
interest income, for the taxable year that
includes the Initial Maturity Date, that a
Holder would otherwise have accounted for on
a Note. If the Net Negative Adjustment
exceeds such interest, the excess will be
treated as ordinary loss to the extent of
prior interest accrual on a Note.
Sale or Exchange Prior to the
Initial Maturity Date......... Upon the sale or exchange of a Note prior to
the Initial Maturity Date, the Holder will
recognize gain or loss equal to the difference
between the amount realized and the Holder's
"Adjusted Basis." The Adjusted Basis will be
the Holder's original basis in the Note,
increased by the interest previously accrued
by the Holder on the Note. Any gain upon
sale or exchange of a Note will be additional
interest income; any loss will be ordinary
loss to the extent of the interest previously
included as income by the Holder on the Note,
and thereafter, capital loss.
The distinction between capital loss and
ordinary loss is potentially significant in
several respects. For example, limitations
apply to a Holder's ability to offset capital
losses against ordinary income.
Extension of Maturity......... Under the terms of the Notes, the Notes'
maturity may be extended, in one-month
increments, under certain circumstances. See
"Maturity Redemption Amount; Extension of
Maturity." Upon the first extension of the
maturity of the Notes, there would be a "Net
Negative Adjustment" in an amount equal to
the Projected Amount with respect to the
Notes, which, as described above, would first
reduce the amount of interest income, for the
taxable year that includes the Initial
Maturity Date, that the Holders would
otherwise have accounted for on the Notes
and, thereafter, be treated as ordinary loss
to the extent of prior interest accrual on
the Notes. No gain or loss would be
recognized upon any subsequent extensions of
the Notes' maturity.
Upon the first extension of the maturity of
the Notes, Tax Counsel is of the view that,
although not free from doubt, Holders should
cease accruing interest income with respect
to the Notes. However, upon the final
maturity of the Notes, any amount received in
excess of the issue price should be treated
as additional interest income for the taxable
year. Upon the sale or exchange of the Notes
after the Initial Maturity Date, Tax Counsel
is of the view that (i) to the extent that
the amount realized exceeds the issue price,
Holders should recognize ordinary interest
income to the extent of such excess, and (ii)
to the extent that the issue price exceeds
the amount realized, Holders should
recognize a capital loss to the extent of
such excess. However, prospective investors
should note that Tax Counsel's opinion is not
binding on a court or the IRS, and the IRS
could contend that a Holder should continue
to accrue interest income, even after the
first extension of the Notes' maturity, at a
rate equal to the Comparable Yield with
respect to the Notes.
Backup Withholding and
Information Reporting......... Certain noncorporate Holders may be subject
to backup withholding at a rate of 31% on
payments of principal, premium and interest
(including original issue discount, if any)
on, and the proceeds of disposition of, a
Note. Backup withholding will apply only if
the Holder (i) fails to furnish its Taxpayer
Identification Number ("TIN") which, for an
individual, would be his or her Social
Security number, (ii) furnishes an incorrect
TIN, (iii) is notified by the IRS that it has
failed to properly report payments of
interest and dividends or (iv) under certain
circumstances, fails to certify, under
penalty of perjury, that it has furnished a
correct TIN and has not been notified by the
IRS that it is subject to backup withholding
for failure to report interest and dividend
payments. Holders should consult their tax
advisors regarding their qualification for
exemption from backup withholding and the
procedure for obtaining such an exemption if
applicable.
The amount of any backup withholding from a
payment to a Holder will be allowed as a
credit against such Holder's U.S. federal
income tax liability and may entitle such
Holder to a refund, provided that the
required information is furnished to the IRS.
