Subject to Completion, Pricing Supplement dated May 29, 1998
PROSPECTUS Dated March 26, 1998 Pricing Supplement No. 20 to
PROSPECTUS SUPPLEMENT Registration Statement No. 333-46935
Dated March 26, 1998 Dated , 1998
Rule 424(b)(3)
$100,000,000
Morgan Stanley Dean Witter & Co.
CANON INC. 3% CURRENCY PROTECTED SECURITIES ("CPS(SM)")
DUE JUNE 15, 2000
MEDIUM-TERM NOTES, SERIES C
The 3% Currency Protected Securities Due June 15, 2000 (the
"Canon CPS") are Medium-Term Notes, Series C (Senior Fixed Rate Notes) of
Morgan Stanley Dean Witter & Co. (the "Company"), as further described below
and in the Prospectus Supplement under "Description of Notes--Fixed Rate
Notes" and "--Exchangeable Notes." The Canon CPS permit the investor to
participate in the price fluctuations of the common stock, Yen50 par value per
share (the "Canon Stock"), of Canon Inc., a company incorporated under the
laws of Japan ("Canon"), without being affected by future changes in the
Japanese Yen/U.S. Dollar exchange rate. See "Hypothetical Movements in the
Japanese Yen/U.S. Dollar Exchange Rate" in this Pricing Supplement. The Canon
Stock is quoted in Japanese Yen on the Tokyo Stock Exchange. As of
, 1998, the Market Price of Canon Stock was Japanese Yen.
The principal amount of each Canon CPS being offered hereby
will be $ (the "Issue Price"), which equals the quotient of (a) the
Initial Stock Price of 50 shares (the "Initial Share Control Amount") of Canon
Stock divided by (b) an exchange rate of Japanese Yen per U.S.
Dollar. The Canon CPS will mature on June 15, 2000. Interest on the Canon
CPS, at the rate of 3% of the principal amount per annum, is payable
semiannually in arrears on each June 15 and December 15, beginning December
15, 1998. Interest on the Canon CPS will accrue at a higher rate than the rate
at which dividends have been paid to date on the Canon Stock.
At maturity (including as a result of acceleration or
otherwise), the Company will, with respect to the principal amount of each
Canon CPS, deliver either (i) an amount in U.S. Dollars equal to the product
of the principal amount thereof and the Stock Percentage Change (the "Cash
Amount") or (ii) if the holder so elects, the Equivalent Share Amount (see
"Right to Receive the Equivalent Share Amount" in this Pricing Supplement).
The Stock Percentage Change is a fraction, the numerator of which will be the
Final Stock Price and the denominator of which will be the Initial Stock
Price. The Initial Stock Price will equal the Market Price of Canon Stock on
the Pricing Date. The Final Stock Price will equal the Market Price of Canon
Stock on the Determination Date, which will be June 7, 2000, subject to
certain market disruption events. See "Exchange at Maturity" and "Antidilution
Adjustments" in this Pricing Supplement.
Canon is not affiliated with the Company, is not involved in
this offering of Canon CPS and will have no obligations with respect to the
Canon CPS. See "Historical Information" in this Pricing Supplement for
information on the range of Market Prices for Canon Stock on the Tokyo Stock
Exchange.
The Company will cause the Market Price and any antidilution
adjustments to be determined by the Calculation Agent for The Chase Manhattan
Bank, as Trustee under the Senior Debt Indenture.
As a result of the formula for determining the amount payable at the
maturity of the Canon CPS, a holder may receive more or less than the Issue
Price per Canon CPS at maturity. In addition, an investment in the Canon CPS
entails risks not associated with similar investments in a conventional debt
security, as described under "Risk Factors" on PS-6 and PS-7 herein.
Application will be made to list the Canon CPS on the American
Stock Exchange, Inc. ("AMEX"), subject to meeting the AMEX listing
requirements. It is not possible to predict whether the Canon CPS will meet
the AMEX listing requirements or trade in the secondary market or if such
market will be liquid or illiquid.
--------------
PRICE $ PER CANON CPS AND ACCRUED INTEREST
--------------
<TABLE>
Agent's Proceeds to
Price to Public(1) Commissions(2) Company(1)
------------------ -------------- -----------
<S> <C> <C> <C>
Per Canon CPS... $ $ $
Total........... $ $ $
</TABLE>
- ------------
(1) Plus accrued interest, if any, from , 1998.
(2) The Company has agreed to indemnify the Agent against certain liabilities,
including liabilities under the Securities Act of 1933.
MORGAN STANLEY DEAN WITTER
(This page intentionally left blank)
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. THESE
SECURITIES MAY NOT BE DELIVERED PRIOR TO THE TIME A FINAL PRICING SUPPLEMENT IS
DELIVERED. THIS PRICING SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS 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.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABLILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CANON CPS OR THE
CANON STOCK. SPECIFICALLY, THE AGENT MAY OVERALLOT IN CONNECTION WITH THE
OFFERING, AND MAY BID FOR, AND PURCHASE, THE CANON CPS OR THE CANON STOCK IN
THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "USE OF PROCEEDS
AND HEDGING" IN THIS PRICING SUPPLEMENT AND "PLAN OF DISTRIBUTION" IN THE
ACCOMPANYING PROSPECTUS SUPPLEMENT.
Capitalized terms not defined herein have the meanings given to such terms in
the accompanying Prospectus Supplement.
Principal Amount.............. $
Maturity Date................. June 15, 2000
Interest Rate................. 3% per annum.
Interest Payment Dates........ June 15 and December 15, beginning December
15, 1998
Specified Currency............ U.S. Dollars
Issue Price................... $ per Canon CPS, which equals the
quotient of (a) the Initial Stock Price times
the Initial Share Control Amount divided by
(b) the Initial FX Rate.
Original Issue Date
(Settlement Date)............. , 1998
Pricing Date.................. For the purpose of determining the Initial
Stock Price and the Initial FX Rate, the
Pricing Date will be the Trading Day in Tokyo
next succeeding the day on which the offering
of the Canon CPS is completed in the United
States.
CUSIP.........................
Book Entry Note or
Certificated Note............. Book Entry
Senior Note or Subordinated
Note.......................... Senior
Denominations................. $ and integral multiples thereof
Trustee....................... The Chase Manhattan Bank
Agent......................... Morgan Stanley & Co. Incorporated
Amount Payable at Maturity.... At maturity (including as a result of
acceleration or otherwise), the Company will,
with respect to the principal amount of each
Canon CPS, upon delivery of such Canon CPS to
the Trustee, deliver either (i) an amount in
U.S. Dollars equal to the product of the
principal amount thereof and the Stock
Percentage Change (the "Cash Amount") or (ii)
if the holder so elects, the Equivalent Share
Amount. See "Right to Receive Equivalent
Share Amount."
The Company shall, or shall cause the
Calculation Agent to, deliver U.S. Dollars
(or Canon ADRs, if any holder of the Canon CPS
exercises the Right to Receive the Equivalent
Share Amount) to the Trustee for delivery to
the holders. References to payment "per
Canon CPS" refer to each $ principal
amount of any Canon CPS.
Stock Percentage Change....... The Stock Percentage Change is a fraction,
the numerator of which will be the Final
Stock Price and the denominator of which will
be the Initial Stock Price.
Initial Stock Price........... Yen , the Market Price of one share of
Canon Stock on the Pricing Date, as
determined by the Calculation Agent.
Final Stock Price............. The product of the Market Price of one share
of Canon Stock and the Share Ratio, each as
determined on the Determination Date by the
Calculation Agent.
Initial Share Control Amount.. 50
Initial FX Rate............... Japanese Yen per U.S. $1.00, the
Japanese Yen/U.S. dollar exchange rate as of
the Pricing Date.
Share Ratio................... The Share Ratio will initially be set at 1.0,
but will be subject to adjustment upon the
occurrence of certain corporate events through
and including the Determination Date. See
"Antidilution Adjustments" below.
Right to Receive the
Equivalent Share Amount....... On or prior to the fifteenth Business Day
prior to the Maturity Date, holders of Canon
CPS will be entitled, upon completion by the
holder and delivery to the Company and the
Calculation Agent of an Official Notice of
Exercise of Right to Receive Equivalent Share
Amount (in the form of Annex A attached
hereto) prior to 11:00 a.m., New York City
time on such date, to elect to receive the
Equivalent Share Amount at maturity, in lieu
of the Cash Amount, unless it is not
reasonably practicable at such time for the
Calculation Agent, in the opinion of the
Calculation Agent, to obtain such Equivalent
Share Amount, in which case the Cash Amount
will be paid.
Equivalent Share Amount....... The Equivalent Share Amount for any Canon CPS
means an amount of American Depositary
Shares, as determined by the Calculation
Agent, representing Canon Stock ("Canon
ADRs") equivalent to the Cash Amount
otherwise payable on such Canon CPS
determined as follows. The Equivalent Share
Amount will be a number of Canon ADRs
resulting from the conversion into Canon ADRs
(at the then current ratio of Canon Stock to
Canon ADRs) of a number of shares of Canon
Stock having an aggregate Market Price on the
Determination Date equal to the Cash Amount
multiplied by the Final FX Rate; provided
that the Cash Amount shall be reduced by the
cost of converting such Canon Stock into
Canon ADRs assessed by Morgan Guaranty Trust
Company of New York, as Depositary for such
Canon ADRs (together with any successor
depositary, the "Canon ADR Depositary")
(estimated to be $0.05 per share of Canon
Stock, or $2.50 per Canon CPS, subject to any
adjustment of the Share Ratio) and by any tax
or other governmental charge levied in
connection with such conversion; and provided
further that the Company will pay cash in
lieu of delivering fractional Canon ADRs, in
an amount as determined by the Calculation
Agent. The Equivalent Share Amount will be
delivered to the investor on the later of (i)
the Maturity Date and (ii) the first Business
Day when Canon ADRs are available with
respect to shares of Canon Stock submitted to
the Canon ADR Depositary for conversion into
Canon ADRs on the Business Day immediately
succeeding the Determination Date. In the
event of certain Market Disruption Events,
the delivery of such Canon ADRs may be
delayed until after the Maturity Date.
Final FX Rate................. The Japanese Yen/U.S. dollar exchange rate as
of 1:00 p.m. (Tokyo time) on the
Determination Date as determined by reference
to Reuters Screen TKYFX, as determined by the
Calculation Agent on the Determination Date.
Determination Date............ June 7, 2000, or if such day is not a Trading
Day or if there is a Market Disruption Event
on such day, the Determination Date will be
the immediately succeeding Trading Day during
which no Market Disruption Event shall have
occurred; provided that the Determination
Date will be no later than the second
scheduled Trading Day preceding the Maturity
Date, notwithstanding the occurrence of a
Market Disruption Event on such second
scheduled Trading Day.
Market Price.................. The Market Price for any security for any
date means the official closing price
(afternoon session, as applicable) of such
security as reported by the principal
exchange on which such security is traded on
such date. If the official closing price is
not available for any reason (including,
without limitation, the occurrence of a Market
Disruption Event), the Market Price for such
security for any date shall be the mean, as
determined by the Calculation Agent, of the
bid prices for such security obtained from as
many dealers in such security, but not
exceeding three, as will make such bid prices
available to the Calculation Agent after 3:00
p.m. (local time in such principal market) on
such date.
Trading Day................... A day on which trading is generally conducted
on the Tokyo Stock Exchange ("TSE"), and in
the over-the-counter market for equity
securities in the United States and Japan, as
determined by the Calculation Agent.
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 or in Tokyo.
Calculation Agent............. Morgan Stanley & Co. Incorporated ("MS & Co.")
For potential conflicts of interest that may
exist between the Calculation Agent and the
holders of the Canon CPS, see "Risk Factors"
below. MS & Co. is obligated to carry out
its duties as Calculation Agent in good faith
using its reasonable judgment.
All percentages resulting from any
calculation on the Canon CPS 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.
Risk Factors.................. An investment in the Canon CPS entails
significant risks not associated with similar
investments in a conventional debt security,
including the following:
The Canon CPS combine features of equity and
debt instruments. For example, holders of
Canon CPS, unlike holders of Canon Stock,
will not be entitled to receive dividends, if
any, that may be payable on Canon Stock. In
addition, the terms of the Canon CPS differ
from those of ordinary debt securities in
that the amount due at maturity is not fixed,
but is based on the price of the Canon Stock
at maturity. Because the price of the Canon
Stock is subject to market fluctuations, the
amount of cash or the value of the ADRs
received by a holder of Canon CPS at
maturity, determined as described herein, may
be more or less than the principal amount of
the Canon CPS. If the Final Stock Price is
less than the Initial Stock Price, the amount
of cash or the value of the ADRs receivable
upon exchange will be less than the principal
amount of the Canon CPS, in which case an
investment in the Canon CPS may result in a
loss.
Although the amount that holders of the Canon
CPS are entitled to receive at maturity is
subject to adjustment for certain corporate
events, such adjustments do not cover all
events that could affect the Market Price of
the Canon Stock, including, without
limitation, the occurrence of a partial
tender or exchange offer for the Canon Stock
by Canon or any third party. Such other
events may adversely affect the market value
of the Canon CPS or any ADRs allocated on the
Determination Date (but not received by the
holder until maturity) pursuant to such
holder's election to receive the Equivalent
Share Amount.
There can be no assurance as to whether there
will be a secondary market in the Canon CPS
or, if there were to be such a secondary
market, whether such market will be liquid or
illiquid. Securities with characteristics
similar to the Canon CPS are novel securities,
and there is currently no secondary market
for the Canon CPS.
The market value for the Canon CPS will be
affected by a number of factors in addition
to the creditworthiness of the Company and the
value of Canon Stock, including, but not
limited to the dividend rate on Canon Stock,
market interest and yield rates and the time
remaining to the maturity of the Canon CPS.
In addition, the value of Canon Stock depends
on a number of interrelated factors,
including economic, financial and political
events, that can affect the capital markets
generally and the market segment of which
Canon is a part and over which the Company
has no control. The market value of the
Canon CPS is expected to depend primarily on
changes in the Market Price of Canon Stock.
The price at which a holder will be able to
sell Canon CPS prior to maturity may be at a
discount, which could be substantial, from
the principal amount thereof, if, at such
time, such Market Price is below, equal to or
not sufficiently above the Initial Stock
Price. The historical Market Prices of Canon
Stock should not be taken as an indication of
Canon Stock's future performance during the
term of any Canon CPS.
The Company is not affiliated with Canon and,
although the Company as of the date of this
Pricing Supplement does not have any material
non-public information concerning Canon,
corporate events of Canon, including those
described below in "Antidilution
Adjustments," are beyond the Company's
ability to control and are difficult to
predict.
Canon is not involved in the offering of the
Canon CPS and has no obligations with respect
to the Canon CPS, including any obligation
to take the interests of the Company or of
holders of Canon CPS into consideration for
any reason. Canon will not receive any of the
proceeds of the offering of the Canon CPS
made hereby and is not responsible for, and
has not participated in, the determination of
the timing of, prices for or quantities of,
the Canon CPS offered hereby.
Holders of the Canon CPS will not be entitled
to any rights with respect to the Canon Stock
(including, without limitation, the right to
receive dividends or other distributions,
voting rights and the right to tender or
exchange Canon Stock in any partial tender or
exchange offer by Canon or any third party).
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 Canon CPS,
including with respect to certain adjustments
to the Share Ratio and other antidilution
adjustments that may influence the
determination of the amount of cash
receivable at the maturity of the Canon CPS.
See "Antidilution Adjustments" and "Market
Disruption Event."
It is suggested that prospective investors
who consider purchasing the Canon CPS should
reach an investment decision only after
carefully considering the suitability of the
Canon CPS in light of their particular
circumstances.
Investors should also consider the tax
consequences of investing in the Canon CPS,
certain aspects of which are uncertain. See
"United States Federal Income Taxation" below.
Antidilution Adjustments...... The Share Ratio (and, in the case of
paragraph 5 below, the determination of the
Cash Amount) will be adjusted as follows:
1. If Canon Stock is subject to a stock
split or reverse stock split, then once such
split has become effective, the Share Ratio
will be adjusted to equal the product of the
prior Share Ratio and the number of shares
issued in such stock split or reverse stock
split with respect to one share of Canon Stock.
2. If Canon Stock is subject (i) to a stock
dividend (issuance of additional shares of
Canon Stock) that is given ratably to all
holders of shares of Canon Stock or (ii) to a
distribution of Canon Stock as a result of the
triggering of any provision of the corporate
charter of Canon by any shareholder that is not
a holder of the Canon CPS, then once the
dividend has become effective and Canon Stock
is trading ex-dividend, the Share Ratio will be
adjusted so that the new Share Ratio shall
equal the prior Share Ratio plus the product of
(i) the number of shares issued with respect to
one share of Canon Stock and (ii) the prior
Share Ratio.
3. There will be no adjustments to the
Share Ratio to reflect cash dividends or other
distributions paid with respect to Canon Stock
other than distributions described in clause
(v) of paragraph 5 below and Extraordinary
Dividends as described below. A cash dividend
or other distribution with respect to Canon
Stock will be deemed to be an "Extraordinary
Dividend" if such dividend or other
distribution exceeds the immediately preceding
non-Extraordinary Dividend for Canon Stock by
an amount equal to at least 10% of the Market
Price of Canon Stock on the Trading Day
preceding the ex-dividend date for the payment
of such Extraordinary Dividend (the
"ex-dividend date"). If an Extraordinary
Dividend occurs with respect to Canon Stock,
the Share Ratio with respect to Canon Stock
will be adjusted on the ex-dividend date with
respect to such Extraordinary Dividend so that
the new Share Ratio will equal the product of
(i) the then current Share Ratio and (ii) a
fraction, the numerator of which is the Market
Price on the Trading Day preceding the
ex-dividend date, and the denominator of which
is the amount by which the Market Price on the
Trading Day preceding the ex-dividend date
exceeds the Extraordinary Dividend Amount. The
"Extraordinary Dividend Amount" with respect to
an Extraordinary Dividend for Canon Stock will
equal (i) in the case of cash dividends or
other distributions that constitute quarterly
dividends, the amount per share of such
Extraordinary Dividend minus the amount per
share of the immediately preceding
non-Extraordinary Dividend for Canon Stock or
(ii) in the case of cash dividends or other
distributions that do not constitute quarterly
dividends, the amount per share of such
Extraordinary Dividend. To the extent an
Extraordinary Dividend is not paid in cash, the
value of the non-cash component will be
determined by the Calculation Agent, whose
determination shall be conclusive. A
distribution on the Canon Stock described in
clause (v) of paragraph 5 below that also
constitutes an Extraordinary Dividend shall
cause an adjustment to the Share Ratio pursuant
only to clause (v) of paragraph 5.
4. If Canon issues rights or warrants to
all holders of Canon Stock to subscribe for or
purchase Canon Stock at an exercise price per
share less than the Market Price of the Canon
Stock on (i) the date the exercise price of
such rights or warrants is determined and (ii)
the expiration date of such rights or warrants,
and if the expiration date of such rights or
warrants precedes the maturity of the Canon
CPS, then the Share Ratio will be adjusted to
equal the product of the prior Share Ratio and
a fraction, the numerator of which shall be the
number of shares of Canon Stock outstanding
immediately prior to such issuance plus the
number of additional shares of Canon Stock
offered for subscription or purchase pursuant
to such rights or warrants and the denominator
of which shall be the number of shares of Canon
Stock outstanding immediately prior to such
issuance plus the number of additional shares
of Canon Stock which the aggregate offering
price of the total number of shares of Canon
Stock so offered for subscription or purchase
pursuant to such rights or warrants would
purchase at the Market Price on the expiration
date of such rights or warrants, which shall be
determined by multiplying such total number of
shares offered by the exercise price of such
rights or warrants and dividing the product so
obtained by such Market Price.
5. If (i) there occurs any reclassification
or change of Canon Stock, (ii) Canon, or any
surviving entity or subsequent surviving entity
of Canon (a "Canon Successor") has been subject
to a merger, combination or consolidation and
is not the surviving entity, (iii) any
statutory exchange of securities of Canon or
any Canon Successor with another corporation
occurs (other than pursuant to clause (ii)
above), (iv) Canon is liquidated, (v) Canon
issues to all of its shareholders equity
securities of an issuer other than Canon (other
than in a transaction described in clauses
(ii), (iii) or (iv) above) (a "Spin-off Event")
or (vi) a tender or exchange offer is
consummated for all the outstanding shares of
Canon Stock (any such event in clauses (i)
through (vi) a "Reorganization Event"), the
method of determining the amount payable at
maturity for each Canon CPS will be adjusted to
provide that each holder of Canon CPS will
receive at maturity, in respect of the
principal amount of each Canon CPS and in lieu
of the Cash Amount, U.S. Dollars in an amount
equal to the Transaction Value (as defined
below); provided that, if the Exchange Property
(as defined below) received in any such
Reorganization Event consists only of cash, the
maturity date of the Canon CPS will be deemed
to be accelerated to the date on which such
cash is distributed to holders of Canon Stock.
"Exchange Property" means the securities, cash
or any other assets distributed in any such
Reorganization Event, including, in the case of
a Spin-off Event, the share of Canon Stock with
respect to which the spun-off security was
issued. "Transaction Value" means (i) for any
cash received in any such Reorganization Event,
the amount of cash received per share of Canon
Stock multiplied by the product of the Initial
Share Control Amount and the then current Share
Ratio divided by the Initial FX Rate, (ii) for
any property other than cash or securities
received in any such Reorganization Event, the
market value (as determined by the Calculation
Agent) of such Exchange Property received for
each share of Canon Stock at the date of the
receipt of such Exchange Property multiplied by
the product of the Initial Share Control Amount
and the then current Share Ratio divided by the
Initial FX Rate and (iii) for any security
received in any such Reorganization Event, an
amount equal to the Market Price per share of
such security on the Determination Date
multiplied by the quantity of such security
received for each share of Canon Stock
multiplied by the product of the Initial Share
Control Amount and the then current Share Ratio
divided by the Initial FX Rate.
6. In the event of a general revaluation of
the Japanese Yen pursuant to any governmental
action by Japan, the Share Ratio will be
adjusted by the Calculation Agent so that the
new Share Ratio will reflect the effect of such
revaluation on the Japanese Yen /U.S. dollar
exchange rate. For example, if Japan were to
revalue the Yen by the issuance of a new
currency (the "New Currency") whose value per
currency unit against the U.S. dollar was
equivalent to a multiple or fraction of the
then prevailing Japanese Yen/U.S. dollar rate
(and the price of Canon Stock was to be quoted
in such New Currency), the Market Price will be
determined by reference to the market price of
Canon Stock as quoted in such New Currency and
the Share Ratio will be adjusted by such
multiple or fraction so that the US dollar
value of the Canon CPS would remain constant
i.e. the Cash Amount, if determined immediately
after such revaluation would be the same as the
Cash Amount as determined immediately prior to
such revaluation.
For purposes of paragraph 5 above, in the
case of a consummated tender or exchange
offer for all Exchange Property of a
particular type, Exchange Property shall be
deemed to include the amount of cash or other
property paid by the offeror in the tender or
exchange offer with respect to such Exchange
Property (in an amount determined on the
basis of the rate of exchange in such tender
or exchange offer). In the event of a tender
or exchange offer with respect to Exchange
Property in which an offeree may elect to
receive cash or other property, Exchange
Property shall be deemed to include the kind
and amount of cash and other property received
by offerees who elect to receive cash.
No adjustments to the Share Ratio will be
required unless such Share Ratio adjustment
would require a change of at least 0.1% in the
Share Ratio then in effect. The Share Ratio
resulting from any of the adjustments
specified above will be rounded to the
nearest one thousandth with five
ten-thousandths being rounded upward.
No adjustments to the Share Ratio or to the
amount payable at maturity of the Canon CPS
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 Share
Ratio to reflect changes occurring in
relation to the Canon Stock or any other
Exchange Property in other circumstances where
the Company determines that it is
appropriate, but only to reflect such
changes, and not with the aim of spreading
investment risk. The required adjustments
specified above do not cover all events that
could affect the Market Price of the Canon
Stock, including, without limitation, a
partial tender or exchange offer for the
Canon Stock.
The Calculation Agent shall be solely
responsible for the determination and
calculation of any adjustments to the Share
Ratio and of any related determinations and
calculations with respect to any
distributions of stock, other securities or
other property or assets (including cash) in
connection with any corporate event described
in paragraph 5 above, and its determinations
and calculations with respect thereto shall
be conclusive.
The Calculation Agent will provide
information as to any adjustments to the
Share Ratio upon written request by any
holder of the Canon CPS.
Market Disruption Event....... "Market Disruption Event" means:
(i) a suspension, absence (including the
absence of an official closing price) or
material limitation of trading of Canon
Stock on the Tokyo Stock Exchange for more
than two hours of trading or during the
one-half hour period preceding or at the
close of trading in such market; or the
suspension or material limitation on the
primary market for trading in options
contracts related to Canon Stock, if
available, during the one-half hour period
preceding or at 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 Canon CPS or to
purchase Canon Stock for the purpose of
delivering the Equivalent Share Amount.
For purposes of determining whether a Market
Disruption Event has occurred: (1) a
limitation on the hours or number of days of
trading will not constitute a Market
Disruption Event if it results from an
announced change in the regular business
hours of the relevant exchange, (2) a
decision to permanently discontinue trading
in the relevant option contract will not
constitute a Market Disruption Event, (3)
limitations pursuant to any rule or
regulation enacted or promulgated by the
Tokyo Stock Exchange (or other regulatory
organization in Japan with jurisdiction over
the Tokyo Stock Exchange) on trading during
significant market fluctuations will
constitute a suspension or material
limitation of trading in Canon Stock, (4) a
suspension of trading in an options contract
on Canon Stock by the primary securities
market trading in such options, if available,
by reason of (x) a price change exceeding
limits set by such securities exchange or
market, (y) an imbalance of orders relating
to such contracts or (z) a disparity in bid
and ask quotes relating to such contracts
will constitute a suspension or material
limitation of trading in options contracts
related to Canon Stock and (5) a suspension,
absence or material limitation of trading on
the primary securities market on which
options contracts related to Canon Stock are
traded will not include any time when such
securities market is itself closed for
trading under ordinary circumstances.
Alternative Determination
Date in case of an Event
of Default.................... In case an Event of Default with respect to
any Canon CPS shall have occurred and be
continuing, the amount declared due and
payable upon any acceleration of the Canon
CPS will be determined by the Calculation
Agent and will be equal to the Cash Amount
determined as though the Determination Date
were the date of acceleration plus any
accrued but unpaid interest to but not
including the date of acceleration.
Canon Stock; Public
Information................... Canon is engaged in the design, development,
manufacture and distribution of business
machines, cameras and optical and other
products. American Depositary Shares
representing Canon Stock are registered under
the Exchange Act of 1934, as amended (the
"Exchange Act"). Companies with securities
registered under the Exchange Act are
required to file periodically certain
financial and other information specified by
the Securities and Exchange Commission (the
"Commission"). Information provided to or
filed with the Commission can be inspected
and copied at the public reference facilities
maintained by the Commission at Room 1024,
450 Fifth Street, N.W., Washington, D.C.
20549 or at its Regional Office 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
assessed 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
Canon pursuant to the Exchange Act can be
located by reference to Commission file
number 0-12131. In addition, information
regarding Canon 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
CANON CPS OFFERED HEREBY AND DOES NOT RELATE
TO CANON STOCK OR OTHER SECURITIES OF CANON.
ALL DISCLOSURES CONTAINED IN THIS PRICING
SUPPLEMENT REGARDING CANON 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 CANON.
NEITHER THE COMPANY NOR THE AGENT MAKES ANY
REPRESENTATION THAT SUCH PUBLICLY AVAILABLE
DOCUMENTS OR ANY OTHER PUBLICLY AVAILABLE
INFORMATION REGARDING CANON 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 CANON STOCK (AND THEREFORE
THE INITIAL STOCK PRICE) HAVE BEEN PUBLICLY
DISCLOSED. SUBSEQUENT DISCLOSURE OF ANY SUCH
EVENTS OR THE DISCLOSURE OF OR FAILURE TO
DISCLOSE MATERIAL FUTURE EVENTS CONCERNING
CANON COULD AFFECT THE VALUE RECEIVED AT
MATURITY WITH RESPECT TO THE CANON CPS AND
THEREFORE THE TRADING PRICES OF THE CANON CPS.
NEITHER THE COMPANY NOR ANY OF ITS AFFILIATES
MAKE ANY REPRESENTATION TO ANY PURCHASER OF
CANON CPS AS TO THE PERFORMANCE OF CANON
STOCK.
The Company or its affiliates may presently
or from time to time engage in business with
Canon including extending loans to, or making
equity investments in, Canon or providing
advisory services to Canon, including merger
and acquisition advisory services. In the
course of such business, the Company or its
affiliates may acquire non-public information
with respect to Canon and, in addition, one
or more affiliates of the Company may publish
research reports with respect to Canon. The
statement in the preceding sentence is not
intended to affect the right of holders of
the Canon CPS under the securities laws. Any
prospective purchaser of a Canon CPS should
undertake an independent investigation of
Canon as in its judgment is appropriate to
make an informed decision with respect to an
investment in Canon Stock.
Historical Information........ The following table sets forth the high and
low Market Price during 1995, 1996, 1997, and
during 1998 through May 29, 1998. The Market
Price on May 29, 1998 was Yen3,300. The
Market Prices and Dividends Per Share listed
below were obtained from Bloomberg Financial
Markets and the Company believes such
information to be accurate. The historical
prices of Canon Stock should not be taken as
an indication of future performance, and no
assurance can be given that the price of
Canon Stock will not decrease so that the
beneficial owners of the Canon CPS will
receive at maturity cash in an amount that is
less than the principal amount of the Canon
CPS. Nor can assurance be given that the
price of Canon Stock will increase above the
Initial Stock Price so that at maturity the
beneficial owners of the Canon CPS will
receive cash in an amount in excess of the
principal amount of the Canon CPS.
<TABLE>
<CAPTION>
Dividends Per
Canon High Low Share(1)
- --------------------- --------- -------- -------------
(SEDOL #6172323)
<S> <C> <C> <C>
1995
First Quarter...... Yen1,700 Yen1,330 Yen -
Second Quarter..... 1,420 1,230 6.25
Third Quarter...... 1,860 1,380 -
Fourth Quarter..... 1,920 1,670 6.75
1996
First Quarter...... 2,170 1,800 -
Second Quarter..... 2,330 2,000 6.50
Third Quarter...... 2,300 2,000 -
Fourth Quarter..... 2,580 2,150 8.50
1997
First Quarter...... 2,780 2,330 -
Second Quarter..... 3,270 2,690 7.50
Third Quarter...... 3,780 3,080 -
Fourth Quarter..... 3,670 2,750 9.50
1998
First Quarter...... 3,190 2,620 -
Second Quarter
(through May 29,
1998).............. 3,300 2,740
</TABLE>
(1) Dividends are reported at ex-dividend date. The Company makes no
representation as to the amount of dividends, if any, that Canon will pay in
the future. In any event, holders of the Canon CPS will not be entitled to
receive dividends, if any, that may be payable on Canon Stock.
Comparative Historical
Returns....................... The following table sets forth, for each of
the years in the left hand column, (i) the
historical annual rate of return (including
dividends) of the Canon Stock in Japanese
Yen, (ii) the historical rate of return
(including dividends) of the Canon Stock
stated in U.S. dollars, using the Japanese
Yen/ U.S. Dollar exchange rate at the
beginning and end of each yearly period, and
(iii) the hypothetical annualized rate of
return of the Canon CPS (including the 3%
coupon), calculated as if the Stock
Percentage Change were determined for each
one-year period (although the Stock
Percentage Change will actually be calculated
on the basis of a two-year term).
The historical returns of Canon Stock in
either Japanese Yen or U.S. Dollars should
not be taken as an indication of future
performance, and no asssurance can be given
that the price of Canon Stock will not
decrease with the result that the beneficial
owners of the Canon CPS would receive at
maturity cash in an amount that is less than
the principal amount of the Canon CPS.
<TABLE>
<CAPTION>
Annual Total Annual Total Hypothetical
Return of Return of Annualized Return
Canon Stock in Yen Canon Stock in $ of Canon CPS
------------------ ---------------- -----------------
<S> <C> <C> <C>
1994 10.55% 24.17% 12.74%
1995 11.42% 7.19% 13.65%
1996 37.70% 23.19% 39.90%
1997 19.41% 5.81% 21.75%
</TABLE>
Hypothetical Movements in
the Japanese Yen/U.S. Dollar
Exchange Rate................. By linking the amount payable at maturity to
the Stock Percentage Change rather than the
U.S. Dollar value of Canon Stock at maturity,
the Canon CPS permit the investor to
participate in price fluctuations of the
Canon Stock without being affected by future
changes in the Japanese Yen/U.S. Dollar
exchange rate. Based on an initial Japanese
Yen/ U.S. Dollar exchange rate of Yen138/1
U.S. $ and a Market Price of Canon Stock of
Yen3,250 (or U.S. $23.55 at such initial
exchange rate) and assuming, solely for the
purpose of illustrating the lack of effect of
changes in such exchange rate, a hypothetical
20% increase in the Market Price of Canon
Stock to Yen3,900, the following table
illustrates, for a range of Final FX Rates,
the variations in the U.S. Dollar value of
Canon Stock at maturity (excluding dividends)
and compares such values to the total payment
on the Canon CPS.
<TABLE>
<CAPTION>
Final CPS
Internal Rate of
Canon Change Final Canon Canon Change Final CPS Return (including
Final FX Rate on TSE (%) Price (in $) in $ (%) Value ($) 3% Coupon)
------------- ------------ ------------ ------------ ---------- -----------------
<S> <C> <C> <C> <C> <C> <C>
158 20.00% 24.68 4.81% 1,413.04 26.00%
154 20.00% 25.32 7.53% 1,413.04 26.00%
150 20.00% 26.00 10.40% 1,413.04 26.00%
146 20.00% 26.71 13.42% 1,413.04 26.00%
142 20.00% 27.46 16.62% 1,413.04 26.00%
Hypothetical Initial FX Rate--> 138 20.00% 28.26 20.00% 1,413.04 26.00%
134 20.00% 29.10 23.58% 1,413.04 26.00%
130 20.00% 30.00 27.38% 1,413.04 26.00%
126 20.00% 30.95 31.43% 1,413.04 26.00%
122 20.00% 31.97 35.74% 1,413.04 26.00%
118 20.00% 33.05 40.34% 1,413.04 26.00%
</TABLE>
Use of Proceeds and Hedging... The net proceeds to be received by the
Company from the sale of the Canon CPS will
be used for general corporate purposes and,
in part, by the Company or one or more of its
affiliates in connection with hedging the
Company's obligations under the Canon CPS.
See also "Use of Proceeds" in the
accompanying Prospectus. On or prior to the
date of this Pricing Supplement, the Company,
through its subsidiaries and others, may
hedge its anticipated exposure in connection
with the Canon CPS by taking positions in
Canon Stock, options contracts on Canon Stock
listed on major securities markets or
positions in any other instruments that it
may wish to use in connection with such
hedging. In the event that the Company
pursues such a hedging strategy, the price at
which the Company is able to purchase such
positions may be a factor in determining the
Issue Price of the Canon CPS. Purchase
activity could potentially increase the
price of Canon Stock, and therefore
effectively increase the level to which
Canon Stock must rise before a holder of a
Canon CPS would receive at maturity cash in
an amount that is equal to or greater than
the principal amount of the Canon CPS. The
Company, through its subsidiaries, is likely
to modify its hedge position throughout the
life of the Canon CPS, including on the
Determination Date, by purchasing and selling
the securities and instruments listed above.
Although the Company has no reason to believe
that its hedging activity will have a
material impact on the price of Canon Stock,
there can be no assurance that the Company
will not affect such price as a result of its
hedging activities.
United States Federal Income
Taxation...................... The following summary is based on the
advice of Davis Polk & Wardwell, special tax
counsel to the Company, ("Tax Counsel") and
is a general discussion of the principal
potential U.S. federal income tax
consequences to holders who are initial
holders of the Canon CPS purchasing the Canon
CPS at the Issue Price, and who will hold the
Canon CPS 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 currently in effect, changes to
any of which subsequent to the date of this
Pricing Supplement may affect the tax
consequences described herein. This summary
does not address all aspects of the U.S.
federal income taxation that may be relevant
to a particular holder in light of its
individual circumstances or to certain types
of holders subject to special treatment under
the U.S. federal income tax laws (e.g.,
certain financial institutions, tax-exempt
organizations, dealers in options or
securities, or persons who hold a Canon CPS
as a part of a hedging transaction, straddle,
conversion or other integrated transaction).
As the law applicable to the U.S. federal
income taxation of instruments such as the
Canon CPS 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.
Pursuant to the terms of the Canon CPS, the
Company and every holder of a Canon CPS agree
(in the absence of an administrative
determination or judicial ruling to the
contrary) to characterize a Canon CPS for all
U.S. tax purposes as an investment unit
consisting of the following components (the
"Components"): (i) a contract (the "Forward
Contract") that requires the holder of the
Canon CPS to pay an amount as described below
under "Settlement of the Forward Contract"
and entitles the holder to receive a cash
amount at maturity as provided above in
"Amount Payable at Maturity", and (ii) a
deposit with the Company of a fixed amount of
cash to secure the Holder's obligation under
the Forward Contract (the "Deposit"), which
Deposit bears a yield of % per annum.
Furthermore, based on the Company's
determination of the relative fair market
values of the Components at the time of
issuance of the Canon CPS, the Company will
allocate 100% of the Issue Price of the Canon
CPS to the Deposit and none to the Forward
Contract. The Company's allocation of the
Issue Price among the Components will be
binding on a U.S. Holder of a Canon CPS,
unless such U.S. Holder timely and explicitly
discloses to the Internal Revenue Service
(the "IRS") that its allocation is different
from the Company's. The treatment of the
Canon CPS described above and the Company's
allocation are not, however, binding on the
IRS or the courts. No statutory, judicial
or administrative authority directly
addresses the characterization of the Canon
CPS or instruments similar to the Canon CPS
for U.S. federal income tax purposes, and no
ruling is being requested from the IRS with
respect to the Canon CPS. DUE TO THE ABSENCE
OF AUTHORITIES THAT DIRECTLY ADDRESS
INSTRUMENTS THAT ARE SIMILAR TO A CANON CPS,
TAX COUNSEL IS UNABLE TO RENDER AN OPINION AS
TO THE PROPER U.S. FEDERAL INCOME TAX
CHARACTERIZATION OF THE CANON CPS. AS A
RESULT, SIGNIFICANT ASPECTS OF THE U.S.
FEDERAL INCOME TAX CONSEQUENCES OF AN
INVESTMENT IN THE CANON CPS ARE NOT CERTAIN,
AND NO ASSURANCE CAN BE GIVEN THAT THE IRS OR
THE COURTS WILL AGREE WITH THE
CHARACTERIZATION DESCRIBED ABOVE.
ACCORDINGLY, PROSPECTIVE PURCHASERS ARE URGED
TO CONSULT THEIR TAX ADVISORS REGARDING THE
U.S. FEDERAL INCOME TAX CONSEQUENCES OF AN
INVESTMENT IN A CANON CPS (INCLUDING
ALTERNATIVE CHARACTERIZATIONS OF A CANON CPS)
AND WITH RESPECT TO ANY TAX CONSEQUENCES
ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR
FOREIGN TAXING JURISDICTION. UNLESS
OTHERWISE STATED, THE FOLLOWING DISCUSSIONS
ARE BASED ON THE ASSUMPTION THAT THE
TREATMENT AND THE ALLOCATION DESCRIBED ABOVE
ARE ACCEPTED FOR U.S. FEDERAL INCOME TAX
PURPOSES.
U.S. Holders
As used herein, the term "U.S. Holder" means
a beneficial owner of a Canon CPS 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.
Tax Treatment of A Canon CPS
Interest on the Deposit. As described above,
the Deposit is treated as bearing a yield of
% per annum, which is greater than the
stated interest rate on the Deposit.
Accordingly, the Deposit will be subject to
the "original issue discount" rules. A U.S.
Holder will include "qualified stated
interest" equal to the stated interest on the
Canon CPS in income in accordance with the
U.S. Holder's method of accounting for
federal income tax purposes. Additionally,
each U.S. Holder, including a taxpayer who
otherwise uses the cash method of accounting,
will be required to include original issue
discount ("OID") on the Deposit in income as
it accrues, in accordance with a constant
yield method based on a compounding of
interest. Such method will generally cause
the U.S. Holder to include OID in each
accrual period in an amount equal to the
product of the adjusted issue price of the
Deposit at the beginning of the accrual
period and the yield of the Deposit, less the
amount of any qualified stated interest
allocable to the accrual period. Because the
yield on the Deposit is higher than the
stated interest rate, the amount of income
recognized by the U.S. Holder will generally
be more than the stated interest paid to the
U.S. Holder and will increase during the term
of the Canon CPS.
Tax Basis. Based on the Company's
determination set forth above, the U.S.
Holder's tax basis in the Deposit would
initially be 100% of the Issue Price. The
U.S. Holder's tax basis in the Deposit will be
subsequently increased by OID accrued with
respect thereto.
Settlement of the Forward Contract. Upon the
final settlement of the Forward Contract, a
U.S. Holder receiving cash would, pursuant to
the Forward Contract, be deemed to have
applied the Deposit (including the amount of
OID accrued) toward the exchange for the cash
payment at maturity, and a U.S. Holder would
recognize gain or loss. The amount of such
gain or loss would be the extent to which the
amount of such cash received differs from the
U.S. Holder's tax basis in the Deposit.
U.S. Holders should note that while the
accrued but unpaid OID on the Deposit would
be taxable as ordinary income, any gain or
loss recognized upon the final settlement of
the Forward Contract would be capital gain or
loss. The distinction between capital gain or
loss and ordinary gain or loss is potentially
significant in several respects. For
example, limitations apply to a U.S. Holder's
ability to offset capital losses against
ordinary income, and certain U.S. Holders may
be subject to lower U.S. federal income tax
rates with respect to long-term capital gain
than with respect to ordinary gain. U.S.
Holders should consult their tax advisors
with respect to the treatment of capital gain
or loss on a Canon CPS.
A U.S. Holder receiving the Equivalent Share
Amount pursuant to the Forward Contract would
be deemed to have applied the Deposit toward
the purchase of such Equivalent Share Amount,
and such U.S. Holder would not recognize any
gain or loss with respect to the Equivalent
Share Amount received upon the final
settlement of the Forward Contract. A U.S.
Holder's tax basis in the Equivalent Share
Amount so received would be equal to the U.S.
Holder's tax basis in the Deposit allocable
thereto. Such U.S. Holder's holding period of
the Equivalent Share Amount would start on
the day after the Maturity Date.
Sale or Exchange of the Canon CPS. Upon a
sale or exchange of a Canon CPS prior to the
maturity of the Canon CPS, a U.S. Holder
would recognize taxable gain or loss equal to
the difference between the amount realized on
such sale or exchange and such U.S. Holder's
tax basis in the Canon CPS so sold or
exchanged. Any such gain or loss would
generally be capital gain or loss, as the
case may be. Such U.S. Holder's tax basis in
the Canon CPS would generally equal the
Holder's tax basis in the Deposit. For these
purposes, the amount realized does not
include any amount attributable to accrued
interest or OID on the Deposit, which would
be taxed as described under "-- Interest on
the Deposit" above.
Possible Alternative Tax Treatments of an
Investment in a Canon CPS
Due to the absence of authorities that
directly address the proper characterization
of the Canon CPS, no assurance can be given
that the IRS will accept, or that a court
will uphold, the characterization and tax
treatment described above. In particular,
the IRS could seek to analyze the U.S.
federal income tax consequences of owning a
Canon CPS under Treasury regulations
governing contingent payment debt instruments
(the "Contingent Payment Regulations").
The Company will take the position that the
Contingent Payment Regulations do not apply
to the Canon CPS. If the IRS were successful
in asserting that the Contingent Payment
Regulations applied to the Canon CPS, the
timing and character of income thereon would
be significantly affected. Among other
things, a U.S. Holder would be required to
accrue as OID, subject to the adjustments
described below, income at a "comparable
yield" on the Issue Price, regardless of the
U.S. Holder's usual method of accounting for
federal income tax purposes. In addition, the
Contingent Payment Regulations require that a
projected payment schedule, which results in
such a "comparable yield," be determined, and
that adjustments to income accruals be made
to account for differences between actual
payments and projected amounts (including
upon receipt of the Equivalent Share Amount
at Maturity). Furthermore, any gain realized
with respect to a Canon CPS would generally
be treated as ordinary income, and any loss
realized would generally be treated as
ordinary loss to the extent of the U.S.
Holder's prior ordinary income inclusions
(which were not previously reversed) with
respect to the Canon CPS.
Even if the Contingent Payment Regulations do
not apply to the Canon CPS, other alternative
U.S. federal income characterizations or
treatments of the Canon CPS are also
possible, which may also affect the timing
and the character of the income or loss with
respect to the Canon CPS. It is possible,
for example, that a Canon CPS could be
treated as including a pre-paid forward
contract. Accordingly, prospective
purchasers are urged to consult their tax
advisors regarding the U.S. federal income
tax consequences of an investment in a Canon
CPS.
Proposed Legislation
On February 4, 1998, Representative Barbara
Kennelly released H.R. 3170 (the "Kennelly
Bill"), which, if enacted, would treat a
taxpayer owning certain types of derivative
positions in property as having "constructive
ownership" in that property, with the result
that all or a portion of the long term
capital gain recognized by such taxpayer with
respect to the derivative position would be
recharacterized as short term capital gain.
It is unclear whether, if enacted in its
present form, the Kennelly Bill would apply
to a Canon CPS. If the Kennelly Bill were to
apply to a Canon CPS, the effect on a U.S.
Holder of a Canon CPS would be to treat all
or a portion of the long term capital gain
recognized by such U.S. Holder on sale or
maturity of the Canon CPS (or the Equivalent
Share Amount received thereon) as short term
capital gain, but only to the extent such long
term capital gain exceeds the long term
capital gain that would have been recognized
by such U.S. Holder if the U.S. Holder had
acquired Canon Stock itself on the issue date
of the Canon CPS and disposed of the Canon
Stock upon disposition of the Canon CPS (or,
where the U.S. Holder elects to receive the
Equivalent Share Amount, upon disposition of
the Equivalent Share Amount). In addition,
the Kennelly Bill would impose an interest
charge on the gain that was recharacterized
on the sale or maturity of the Canon CPS (or
the Equivalent Share Amount received
thereon). As proposed, the Kennelly Bill
would be effective for gains recognized after
the date of enactment. U.S. Holders should
consult their tax advisors regarding the
potential application of the Kennelly Bill to
the purchase, ownership and disposition of a
Canon CPS.
Backup Withholding and Information Reporting
A U.S. Holder of a Canon CPS may be subject
to information reporting and to backup
withholding at a rate of 31 percent of the
amounts paid to the U.S. Holder, unless such
U.S. 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 U.S. Holder's U.S.
federal income tax liability, provided the
required information is furnished to the IRS.
Non-U.S. Holders
As used herein, the term "Non-U.S. Holder"
means an owner of a Canon CPS that is, for
United States federal income tax purposes, (i)
a nonresident alien individual, (ii) a
foreign corporation, (iii) a nonresident
alien fiduciary of a foreign trust or estate
or (iv) a foreign partnership one or more of
the members of which is, for United States
federal income tax purposes, a nonresident
alien individual, a foreign corporation or a
nonresident alien fiduciary of a foreign
trust or estate. The following summary
addresses certain U.S. federal income tax
consequences to holders who are initial
holders of the Canon CPS purchasing the Canon
CPS at the Issue Price, and who will hold the
Canon CPS as capital assets within the
meaning of Section 1221 of the Code. This
summary does not deal with persons that are
not Non-U.S. Holders or that are subject to
special rules, such as nonresident alien
individuals that have lost United States
citizenship or that have ceased to be taxed
as United States resident aliens,
corporations that are treated as foreign
personal holding companies, controlled
foreign corporations or passive foreign
investment companies, and certain other
Non-U.S. Holders that are owned or controlled
by persons subject to United States federal
income tax. In addition, the following
summary does not apply to persons for whom
interest or gain on a Canon CPS is
effectively connected with a trade or
business in the United States.
As described above in "United States Federal
Income Taxation-- General," the Company and
every holder of a Canon CPS agree (in the
absence of an administrative determination or
judicial ruling to the contrary) to
characterize a Canon CPS for all purposes as
an investment unit consisting of the Forward
Contract and the Deposit.
Subject to the discussion below concerning
backup withholding, payments with respect to
a Canon CPS (including the delivery of the
Equivalent Share Amount) by the Company or a
paying agent to a Non-U.S. Holder, and gain
realized on the sale, exchange or other
disposition of such Canon CPS, should not be
subject to United States federal income or
withholding tax, provided that: (i) such
Non-U.S. Holder does not own, actually or
constructively, 10 percent or more of the
total combined voting power of all classes of
stock of the Company entitled to vote, is not
a controlled foreign corporation related,
directly or indirectly, to the Company
through stock ownership, and is not a bank
receiving interest described in Section
881(c)(3)(A) of the Code; (ii) the statement
required by Section 871(h) or Section 881(c)
of the Code has been provided with respect
to the beneficial owner, as discussed below;
(iii) such Non-U.S. Holder is not an
individual who is present in the United
States for 183 days or more in the taxable
year of disposition, or such individual does
not have a "tax home" (as defined in Section
911(d)(3) of the Code) or an office or other
fixed place of business in the United States;
and (iv) such payment and gain are not
effectively connected with the conduct by
such Non-U.S. Holder of a trade or business
in the United States.
Sections 871(h) and 881(c) of the Code
require that, in order to obtain the
portfolio interest exemption from withholding
tax, either the beneficial owner of the Canon
CPS, or a securities clearing organization,
bank or other financial institution that
holds customers' securities in the ordinary
course of its trade or business (a "Financial
Institution") and that is holding the Canon
CPS on behalf of such beneficial owner, file
a statement with the withholding agent to the
effect that the beneficial owner of the Canon
CPS is not a United States person. Under
United States Treasury Regulations, such
requirement will be fulfilled if the
beneficial owner of a Canon CPS certifies on
Internal Revenue Service Form W-8, under
penalties of perjury, that it is not a United
States person and provides its name and
address, and any Financial Institution
holding the Canon CPS on behalf of the
beneficial owner files a statement with the
withholding agent to the effect that it has
received such a statement from the Non-
U.S. Holder (and furnishes the withholding
agent with a copy thereof). With respect to
Canon CPS held by a foreign partnership, under
current law, the Form W-8 may be provided by
the foreign partnership. However, for payments
with respect to a Canon CPS after December 31,
1999, unless the foreign partnership has
entered into a withholding agreement with the
Internal Revenue Service, a foreign partnership
will be required, in addition to providing an
intermediary Form W-8, to attach an appropriate
certification by each partner. Prospective
investors, including foreign partnerships and
their partners, should consult their tax
advisors regarding possible additional
reporting requirements.
A Canon CPS held by a Non-U.S. Holder at the
time of his death is likely be subject to
United States federal estate tax as a result
of such individual's death, to the extent of
the value of the Forward Contract, if any,
unless a relevant estate tax treaty applies.
Possible Alternative Tax Treatments of an
Investment in a Canon CPS
As described above in "United States Federal
Income Taxation--U.S. Holders--Possible
Alternative Tax Treatments of an Investment
in a Canon CPS," the IRS may seek to treat
the Canon CPS as a debt instrument subject to
the Contingent Payment Regulations. If such
a characterization were successful, the tax
consequences to a Non-U.S. Holder of
ownership and disposition of a Canon CPS
would be the same as those described
immediately above. However, if the IRS
sought to recharacterize a Canon CPS as a
pre-paid forward contract, it is possible
that payments of stated interest made with
respect to a Canon CPS would be subject to
withholding at a rate of 30%, unless a
relevant income tax treaty applies. The
Company does not currently intend to withhold
on payments of stated interest with respect
to a Canon CPS, but will do so if required by
law. Due to the absence of authorities that
directly address instruments that are similar
to a Canon CPS, significant aspects of the
U.S. federal income tax consequences of an
investment in a Canon CPS are not certain,
and no assurance can be given that the IRS or
the courts will agree with the
characterization of a Canon CPS as an
investment unit consisting of the Forward
Contract and the Deposit. Accordingly,
prospective purchasers are urged to consult
their tax advisors regarding the U.S. federal
income tax consequences of an investment in a
Canon CPS.
Backup Withholding and Information Reporting
Under current Treasury Regulations, backup
withholding at 31% will not apply to payments
by the Company made on a Canon CPS if the
certifications required by Sections 871(h) or
881(c) are received.
Under current Treasury Regulations, payments
on the sale, exchange or other disposition of
a Canon CPS made to or through a foreign
office of a broker generally will not be
subject to backup withholding. However, if
such broker is a United States person, a
controlled foreign corporation for United
States tax purposes, a foreign person 50
percent or more of whose gross income is
effectively connected with a United States
trade or business for a specified three-year
period or, in the case of payments made after
December 31, 1999, a foreign partnership with
certain connections to the United States,
information reporting will be required unless
the broker has in its records documentary
evidence that the beneficial owner is not a
United States person and certain other
conditions are met or the beneficial owner
otherwise establishes an exemption. Payments
to or through the United States office of a
broker will be subject to backup withholding
and information reporting unless the Non-U.S.
Holder certifies, under penalties of perjury,
that it is not a United States person or
otherwise establishes an exemption.
Non-U.S. Holders of Canon CPS should consult
their tax advisors regarding the application
of information reporting and backup
withholding in their particular situations,
the availability of an exemption therefrom,
and the procedure for obtaining such an
exemption, if available. Any amounts
withheld from a payment to a Non-U.S. Holder
under the backup withholding rules will be
allowed as a credit against such Non-U.S.
Holder's United States federal income tax
liability and may entitle such Non-U.S.
Holder to a refund, provided that the
required information is furnished to the
Internal Revenue Service.
ANNEX A
OFFICIAL NOTICE OF EXERCISE OF RIGHT TO
RECEIVE EQUIVALENT SHARE AMOUNT
CANON INC. 3% CURRENCY PROTECTED SECURITIES ("CPS[SM]")
DUE JUNE 15, 2000
MEDIUM-TERM NOTES
Dated: [On or prior to the fifteenth
Business Day prior to June 15, 2000]
Morgan Stanley Dean Witter & Co.
1585 Broadway
New York, New York 10036
Morgan Stanley & Co. Incorporated, as
Calculation Agent
1585 Broadway
New York, New York 10036
Fax No.: (212) 761-0674
(Attn: 5th Fl. Equity Derivatives
Trader Support/Syndicates)
Dear Sirs:
The undersigned holder of the Canon Inc. 3% Currency Protected
Securities ("CPS[SM]") Due June 15, 2000 of Morgan Stanley Dean Witter & Co.
(the "Canon CPS") hereby irrevocably elects to exercise with respect to the
number of Canon CPS indicated below, as of the date hereof, provided that such
day is prior to the fifteenth Business Day prior to June 15, 2000, the Right
to Receive the Equivalent Share Amount as described in Pricing Supplement No.
20 dated , 1998 (the "Pricing Supplement") to the Prospectus
Supplement dated March 26, 1998 and the Prospectus dated March 26, 1998
related to Registration Statement No. 333-46935. Capitalized terms not
defined herein have the meanings given to such terms in the Pricing
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 deliver Canon ADRs, in accordance with
the terms of the Canon CPS described in the Pricing Supplement.
Very truly yours,
-------------------------------------
[Name of Holder]
By:
---------------------------------
[Title]
------------------------------------
[Fax No.]
$
------------------------------------
Number of Canon CPS surrendered for
exchange
Receipt of the above Official
Notice of Exchange is hereby acknowledged
MORGAN STANLEY DEAN WITTER & CO., as Issuer
MORGAN STANLEY & CO. INCORPORATED, as Calculation Agent
By MORGAN STANLEY & CO. INCORPORATED, as Calculation Agent
By:
--------------------------------------
Title:
Date and time of acknowledgment
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