PROSPECTUS Dated March 26, 1998 Pricing Supplement No. 13 to
PROSPECTUS SUPPLEMENT Registration Statement No. 333-46935
Dated March 26, 1998 Dated May 13, 1998
Rule 424(b)(3)
$138,250,000
Morgan Stanley Dean Witter & Co.
MEDIUM-TERM NOTES, SERIES C
Senior Fixed Rate Notes
Reset Performance Equity-linked Redemption Quarterly-pay Securities(SM)
("Reset PERQS(SM)")
6% RESET PERQS DUE MAY 15, 2000
Reset PERQS Mandatorily Exchangeable For Shares of Common Stock of
APPLIED MATERIALS, INC.
The 6% Reset PERQS due May 15, 2000 (the "Reset PERQS") 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 principal amount of each of the Reset PERQS being offered
hereby will be $39.50 (the Market Price of the common stock, $0.01 par value,
of Applied Materials, Inc. ("Applied Materials") on May 13, 1998) (the
"Initial AMAT Price"). The Reset PERQS will mature on May 15, 2000. Interest
on the Reset PERQS, at the rate of 6% of the principal amount per annum
(equivalent to $2.37 per annum per Reset PERQS), is payable quarterly in
arrears on each February 15, May 15, August 15 and November 15, beginning
August 15, 1998.
At maturity upon delivery of each Reset PERQS to the Trustee,
each $39.50 principal amount of such Reset PERQS will be applied by the
Company as payment for a number of shares of the common stock of AMAT (the
"AMAT Stock") at the then applicable Exchange Ratio. The Exchange Ratio,
initially set at 1.0, is subject to adjustment on the First Year Determination
Date and at maturity in order to cap the value of the AMAT Stock to be
received upon delivery of the Reset PERQS at $70.40 per $39.50 principal
amount of each Reset PERQS (178.23% of the Issue Price). Solely for purposes
of adjustment upon the occurrence of certain corporate events, the number of
shares of AMAT Stock to be delivered will also be adjusted by an Exchange
Factor, initially set at 1.0. See "Exchange at Maturity," "Exchange Factor"
and "Antidilution Adjustments" in this Pricing Supplement.
If the Market Price per share of AMAT Stock on May 17, 1999 (as
defined herein, the "First Year Closing Price") is less than or equal to
$52.7325 (the "First Year Cap Price"), no adjustment to the Exchange Ratio
will be made at such time. If the First Year Closing Price exceeds the First
Year Cap Price, the Exchange Ratio will be adjusted so that the new Exchange
Ratio will equal the product of (i) the existing Exchange Ratio and (ii) a
fraction the numerator of which will be the First Year Cap Price and the
denominator of which will be the First Year Closing Price. In addition, on
the First Year Determination Date, the Calculation Agent will establish the
"Second Year Cap Price" that will be equal to the greater of (x) 133.5% of the
First Year Closing Price and (y) the First Year Cap Price. If the Market
Price at maturity (as defined herein, the "Maturity Price") is less than or
equal to the Second Year Cap Price, no further adjustment to the Exchange
Ratio will be made. If the Maturity Price exceeds the Second Year Cap Price,
the existing Exchange Ratio will be adjusted so that the final Exchange Ratio
will equal the product of (i) the existing Exchange Ratio and (ii) a fraction
the numerator of which will be the Second Year Cap Price and the denominator
of which will be the Maturity Price. See "Exchange at Maturity" and
"Hypothetical Payments on the Reset PERQS" in this Pricing Supplement.
The opportunity for appreciation afforded by an investment in
the Reset PERQS is less than that afforded by an investment in the AMAT Stock
because at maturity a holder may receive less than one share of AMAT Stock per
Reset PERQS if the Exchange Ratio has been adjusted to cap the value of the
AMAT Stock to be received upon delivery of the Reset PERQS. The value of the
AMAT Stock received by a holder of the Reset PERQS upon exchange at maturity,
determined as described herein, may be more or less than the principal amount
of the Reset PERQS. See "Hypothetical Payments on the Reset PERQS" in this
Pricing Supplement.
Applied Materials is not affiliated with the Company, is not
involved in this offering of Reset PERQS and will have no obligations with
respect to the Reset PERQS. See "Historical Information" in this Pricing
Supplement for information on the range of Market Prices for AMAT Stock.
The Company will cause the Market Price, any adjustments to the
Exchange Ratio, the Exchange Factor and any other antidilution adjustments to
be determined by the Calculation Agent for The Chase Manhattan Bank, as
Trustee under the Senior Debt Indenture.
An investment in the Reset PERQS entails risks not associated
with similar investments in a conventional debt security, as described under
"Risk Factors" on PS-6 through PS-9 herein.
The Reset PERQS have been approved for listing on the American
Stock Exchange, Inc. ("AMEX"), subject to official notice of issuance. The
AMEX symbol for the Reset PERQS is "APP." It is not possible to predict
whether the Reset PERQS will trade in the secondary market or if such market
will be liquid or illiquid.
---------------
PRICE $39.50 PER RESET PERQS
---------------
Price to Agent's Proceeds to
Public(1)(2) Commissions(3)(4) Company(1)
------------ ----------------- ------------
Per Reset PERQS... $39.50 $0.60 $38.90
Total............. $138,250,000 $2,100,000 $136,150,000
(1) Plus accrued interest, if any, from May 18, 1998.
(2) The price to public for investors purchasing greater than or equal to
50,000 Reset PERQS in any single transaction will be $38.9075 per Unit
(98.50% of the Issue Price), subject to the holding period requirement
described under "Supplemental Information Concerning Plan of Distribution"
herein.
(3) The Company has agreed to indemnify the Agent against certain liabilities,
including liabilities under the Securities Act of 1933.
(4) The underwriting discounts and commissions for investors purchasing
greater than or equal to 50,000 Reset PERQS will be $0.0075 per Unit.
MORGAN STANLEY DEAN WITTER
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE RESET PERQS OR THE
AMAT STOCK. SPECIFICALLY, THE AGENT MAY OVERALLOT IN CONNECTION WITH THE
OFFERING, AND MAY BID FOR, AND PURCHASE, THE RESET PERQS OR THE AMAT STOCK IN
THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "SUPPLEMENTAL
INFORMATION CONCERNING PLAN OF DISTRIBUTION" AND "USE OF PROCEEDS AND HEDGING."
Capitalized terms not defined herein have the meanings given to such terms in
the accompanying Prospectus Supplement.
Principal Amount.............. $138,250,000
Maturity Date................. May 15, 2000
Interest Rate................. 6% per annum (equivalent to $2.37 per annum
per Reset PERQS)
Interest Payment Dates........ Each February 15, May 15, August 15 and
November 15, beginning August 15, 1998.
Specified Currency............ U.S. Dollars
Issue Price................... $39.50 per Reset PERQS
Initial AMAT Price............ $39.50
Original Issue Date
(Settlement Date)............. May 18, 1998
CUSIP......................... 617446331
Book Entry Note or
Certificated Note............. Book Entry
Senior Note or Subordinated
Note.......................... Senior
Denominations................. $39.50 and integral multiples thereof
Trustee....................... The Chase Manhattan Bank
Agent......................... Morgan Stanley & Co. Incorporated
First Year Cap Price.......... $52.7325 (133.5% of the Initial AMAT Price)
First Year Determination Date. May 17, 1999 (or if such date is not a
Trading Day on which no Market Disruption
Event occurs, the immediately succeeding
Trading Day on which no Market Disruption
Event occurs)
First Year Closing Price...... First Year Closing Price means the product of
(i) the Market Price of one share of AMAT
Stock and (ii) the Exchange Factor, each
determined as of the First Year Determination
Date.
Second Year Cap Price......... Second Year Cap Price means the greater of
(x) 133.5% of the First Year Closing Price
and (y) the First Year Cap Price. See
"Exchange at Maturity" below.
Maturity Price................ Maturity Price means the product of (i) the
Market Price of one share of AMAT Stock and
(ii) the Exchange Factor, each determined as
of the second scheduled Trading Day
immediately prior to maturity.
Exchange at Maturity.......... At maturity (including as a result of
acceleration or otherwise), upon delivery of
each Reset PERQS to the Trustee, each $39.50
principal amount of such Reset PERQS will be
applied by the Company as payment for a
number of shares of AMAT Stock at the Exchange
Ratio. The Exchange Ratio, initially set at
1.0, is subject to adjustment on the First
Year Determination Date and at maturity in
order to cap the value of the AMAT Stock to
be received upon delivery of the Reset PERQS
at $70.40 per principal amount of each Reset
PERQS (178.23% of the Initial AMAT Price).
Solely for purposes of adjustment upon the
occurrence of certain corporate events, the
number of shares of AMAT Stock to be
delivered at maturity will also be adjusted
by an Exchange Factor, initially set at 1.0.
See "Exchange Factor" and "Antidilution
Adjustments" below.
If the First Year Closing Price is less than
or equal to $52.7325 (the "First Year Cap
Price"), no adjustment to the Exchange Ratio
will be made at such time. If the First Year
Closing Price exceeds the First Year Cap
Price, the Exchange Ratio will be adjusted so
that the new Exchange Ratio will equal the
product of (i) the existing Exchange Ratio
and (ii) a fraction the numerator of which
will be the First Year Cap Price and the
denominator of which will be the First Year
Closing Price. In addition, on the First
Year Determination Date, the Calculation
Agent will establish the "Second Year Cap
Price" that will be equal to the greater of
(x) 133.5% of the First Year Closing Price
and (y) the First Year Cap Price. Notice of
the Second Year Cap Price and of any such
adjustment to the Exchange Ratio shall
promptly be sent by first-class mail to The
Depository Trust Company, New York, New York
(the "Depositary"). If the Maturity Price is
less than or equal to the Second Year Cap
Price, no further adjustment to the Exchange
Ratio will be made. If the Maturity Price
exceeds the Second Year Cap Price, the
existing Exchange Ratio will be adjusted so
that the final Exchange Ratio will equal the
product of (i) the existing Exchange Ratio
and (ii) a fraction the numerator of which
will be the Second Year Cap Price and the
denominator of which will be the Maturity
Price. See "Hypothetical Payments on the
Reset PERQS" below.
All calculations with respect to the Exchange
Ratios for the Reset PERQS will be rounded to the
nearest one hundred-thousandth, with five
one-millionths rounded upwards (e.g. .876545
would be rounded to .87655); all calculations
with respect to the Second Year Cap Price will be
rounded to the nearest ten-thousandth, with five
one-hundred-thousandths rounded upwards (e.g.
$12.34567 would be rounded to $12.3457); and all
dollar amounts related to payments at maturity
resulting from such calculations will be rounded
to the nearest cent with one-half cent being
rounded upwards.
The Company shall, or shall cause the
Calculation Agent to, (i) provide written
notice to the Trustee and to the Depositary,
on or prior to 10:30 a.m. on the Trading Day
immediately prior to maturity of the Reset
PERQS, of the amount of AMAT Stock to be
delivered with respect to each $39.50
principal amount of each Reset PERQS and (ii)
deliver such shares of AMAT Stock (and cash
in respect of interest and any fractional
shares of AMAT Stock) to the Trustee for
delivery to the holders. The Calculation
Agent shall determine the Exchange Ratio
applicable at the maturity of the Reset PERQS
and calculate the Exchange Factor. References
to payment "per Reset PERQS" refer to each
$39.50 principal amount of any Reset PERQS.
No Fractional Shares.......... Upon delivery of the Reset PERQS to the
Trustee at maturity (including as a result of
acceleration or otherwise), the Company will
pay cash in lieu of issuing fractional shares
of AMAT Stock in an amount equal to the
corresponding fractional Market Price of such
fraction of a share of AMAT Stock as
determined by the Calculation Agent as of the
second scheduled Trading Day prior to
maturity of the Reset PERQS.
Exchange Factor............... The Exchange Factor will be set initially at
1.0, but will be subject to adjustment upon
the occurrence of certain corporate events
through and including the second scheduled
Trading Day immediately prior to maturity.
See "Antidilution Adjustments" below.
Market Price.................. If AMAT Stock (or any other security for
which a Market Price must be determined) is
listed on a national securities exchange, is a
security of The Nasdaq National Market
("NASDAQ NMS") or is included in the OTC
Bulletin Board Service ("OTC Bulletin Board")
operated by the National Association of
Securities Dealers, Inc. (the "NASD"), the
Market Price for one share of AMAT Stock (or
one unit of any such other security) on any
Trading Day means (i) the last reported sale
price, regular way, on such day on the
principal United States securities exchange
registered under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), on
which AMAT Stock (or such other security) is
listed or admitted to trading or (ii) if not
listed or admitted to trading on any such
securities exchange or if such last reported
sale price is not obtainable, the last
reported sale price on the over-the-counter
market as reported on the NASDAQ NMS or OTC
Bulletin Board on such day. If the last
reported sale price is not available pursuant
to clause (i) or (ii) of the preceding
sentence, the Market Price for any Trading
Day shall be the mean, as determined by the
Calculation Agent, of the bid prices for AMAT
Stock (or such other security) obtained from
as many dealers in such stock, but not
exceeding three, as will make such bid prices
available to the Calculation Agent. The term
"NASDAQ NMS security" shall include a
security included in any successor to such
system and the term "OTC Bulletin Board
Service" shall include any successor service
thereto.
Trading Day................... A day, as determined by the Calculation Agent, on
which trading is generally conducted on the New
York Stock Exchange ("NYSE"), the AMEX, the
NASDAQ NMS, the Chicago Mercantile Exchange, and
the Chicago Board of Options Exchange and in the
over-the-counter market for equity securities in
the United States.
Acceleration Event............ If on any date the product of the Market
Price per share of AMAT Stock and the
Exchange Factor is less than $2.00, the
maturity date of the Reset PERQS will be
deemed to be accelerated to such date, and
each $39.50 principal amount of each Reset
PERQS will be applied by the Company as
payment for a number of shares of AMAT Stock
at the then current Exchange Ratio, as
adjusted by the then current Exchange Factor.
See also "Antidilution Adjustments" below.
Calculation Agent............. Morgan Stanley & Co. Incorporated and its
successors ("MS & Co.")
Because the Calculation Agent is an affiliate
of the Company, potential conflicts of
interest may exist between the Calculation
Agent and the holders of the Reset PERQS,
including with respect to certain
determinations and judgments that the
Calculation Agent must make in making
adjustments to the Exchange Factor or other
antidilution adjustments or determining any
Market Price or whether a Market Disruption
Event has occurred. MS & Co. is obligated to
carry out its duties as Calculation Agent in
good faith using its reasonable judgment.
See "Antidilution Adjustments" and "Market
Disruption Event" below.
Risk Factors.................. An investment in the Reset PERQS entails
significant risks not associated with similar
investments in a conventional debt security,
including those set forth below. In
accordance with AMEX requirements, the Agent
and any dealer may only sell Reset PERQS to
investors whose accounts have been
specifically approved by such Agent or dealer
for trading equity-linked securities.
The Reset PERQS combine features of equity
and debt instruments. For example, the terms
of the Reset PERQS differ from those of debt
securities in that the value of the AMAT
Stock that a holder of the Reset PERQS will
receive upon mandatory exchange of the
principal amount thereof at maturity is not
fixed, but is based on the price of the AMAT
Stock on the First Year Determination Date
and at maturity of the Reset PERQS. Because
the price of the AMAT Stock is subject to
market fluctuations and because the Exchange
Ratio will be adjusted to cap the value of
the AMAT Stock to be received upon delivery
of the Reset PERQS, the value of the AMAT
Stock received by a holder of Reset PERQS
upon exchange at maturity, determined as
described herein, may be more or less than
the principal amount of the Reset PERQS. The
amount receivable upon exchange will be less
than the principal amount of the Reset PERQS
if the Maturity Price of the AMAT Stock is
(x) less than the Initial AMAT Price or (y)
not sufficiently above the Initial AMAT Price
following any adjustment of the Exchange
Ratio on the First Year Determination Date.
In either case, an investment in the Reset
PERQS would result in a loss. See
"Hypothetical Payments on the Reset PERQS"
below.
The opportunity for capital appreciation
afforded by an investment in the Reset PERQS
is less than that afforded by an investment in
AMAT Stock because of the First and Second
Year Cap Prices and because at maturity a
holder may receive less than one share of
AMAT Stock per Reset PERQS if the Exchange
Ratio has been adjusted to cap the value of
the AMAT Stock to be received upon delivery
of the Reset PERQS. In addition, because the
Exchange Ratio and the Maturity Price are
determined as of the second scheduled Trading
Day prior to maturity of the Reset PERQS and
because the price of AMAT Stock may fluctuate
after such Trading Day and prior to its
delivery at maturity, the value of any AMAT
Stock delivered at maturity may be less than
the value of such AMAT Stock on such Trading
Day. The amount payable at maturity with
respect to each Reset PERQS, determined as of
the second scheduled Trading Day prior to
maturity, will not under any circumstances
exceed $70.40 per Reset PERQS.
Although the amount that holders of the Reset
PERQS 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 AMAT Stock, including, without
limitation, the occurrence of a partial
tender or exchange offer for the AMAT Stock
by Applied Materials or any third party.
Such other events may adversely affect the
market value of the Reset PERQS.
There can be no assurance as to whether there
will be a secondary market in the Reset PERQS
or, if there were to be such a secondary
market, how the Reset PERQS will trade in the
secondary market or whether such market will
be liquid or illiquid. Securities with
characteristics similar to the Reset PERQS
are novel securities, and there is currently
no secondary market for the Reset PERQS. The
market value for the Reset PERQS will be
affected by a number of factors in addition
to the creditworthiness of the Company and the
value of AMAT Stock, including, but not
limited to, the volatility of AMAT Stock, the
dividend rate on AMAT Stock, market interest
and yield rates and the time remaining to the
maturity of the Reset PERQS. In addition,
the value of AMAT 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 Applied Materials is
a part and over which the Company has no
control. The market value of the Reset PERQS
is expected to depend primarily on changes in
the Market Price of AMAT Stock. The price at
which a holder will be able to sell Reset
PERQS prior to maturity may be at a discount,
which could be substantial, from the
principal amount thereof, if, at such time,
the Market Price of AMAT Stock is below,
equal to or not sufficiently above the
Initial AMAT Price. The historical Market
Prices of AMAT Stock should not be taken as
an indication of AMAT Stock's future
performance during the term of any Reset
PERQS.
The Company is not affiliated with Applied
Materials and, although the Company as of the
date of this Pricing Supplement does not have
any material non-public information
concerning Applied Materials, corporate
events of Applied Materials, including those
described below in "Antidilution
Adjustments," are beyond the Company's
ability to control and are difficult to
predict.
Applied Materials is not involved in the
offering of the Reset PERQS and has no
obligations with respect to the Reset PERQS,
including any obligation to take the
interests of the Company or of holders of
Reset PERQS into consideration for any
reason. Applied Materials will not receive
any of the proceeds of the offering of the
Reset PERQS made hereby and is not
responsible for, and has not participated in,
the determination of the timing of, prices
for or quantities of, the Reset PERQS offered
hereby.
Holders of the Reset PERQS will not be
entitled to any rights with respect to the
AMAT Stock (including, without limitation,
voting rights, the rights to receive any
dividends or other distributions in respect
thereof and the right to tender or exchange
AMAT Stock in any partial tender or exchange
offer by Applied Materials or any third
party) until such time as the Company shall
deliver shares of AMAT Stock to holders of
the Reset PERQS at maturity.
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 Reset PERQS,
including with respect to certain adjustments
to the Exchange Factor and other antidilution
adjustments that may influence the
determination of the amount of AMAT Stock or
other property receivable at the maturity of
the Reset PERQS. See "Antidilution
Adjustments" and "Market Disruption Event."
It is suggested that prospective investors
who consider purchasing the Reset PERQS
should reach an investment decision only after
carefully considering the suitability of the
Reset PERQS in light of their particular
circumstances.
Investors should also consider the tax
consequences of investing in the Reset PERQS.
No statutory, judicial or administrative
authority definitively addresses the
characterization for U.S. federal income tax
purposes of the Reset PERQS or instruments
similar to the Reset PERQS. As a result,
significant aspects of the U.S. federal income
tax treatment of an investment in the Reset
PERQS are uncertain. No ruling has been or
will be requested from the Internal Revenue
Service ("IRS") with respect to the Reset
PERQS and no assurance can be given that the
IRS or a court will agree with the analysis
set forth herein. See "United States Federal
Income Taxation" below.
Antidilution Adjustments...... The Exchange Factor will be adjusted as
follows:
1. If AMAT Stock is subject to a stock split or
reverse stock split, then once such split has
become effective, the Exchange Factor will be
adjusted to equal the product of the prior
Exchange Factor and the number of shares issued
in such stock split or reverse stock split with
respect to one share of AMAT Stock.
2. If AMAT Stock is subject to a stock dividend
(issuance of additional shares of AMAT Stock)
that is given ratably to all holders of shares of
AMAT Stock, then once the dividend has become
effective and AMAT Stock is trading ex-dividend,
the Exchange Factor will be adjusted so that the
new Exchange Factor shall equal the prior
Exchange Factor plus the product of (i) the
number of shares issued with respect to one share
of AMAT Stock and (ii) the prior Exchange Factor.
3. There will be no adjustments to the Exchange
Factor to reflect cash dividends or other
distributions paid with respect to AMAT 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 AMAT Stock will be
deemed to be an "Extraordinary Dividend" if such
dividend or other distribution exceeds the
immediately preceding non- Extraordinary Dividend
for AMAT Stock by an amount equal to at least 10%
of the Market Price of AMAT 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 AMAT Stock, the Exchange
Factor with respect to AMAT Stock will be
adjusted on the ex-dividend date with respect to
such Extraordinary Dividend so that the new
Exchange Factor will equal the product of (i) the
then current Exchange Factor 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 AMAT 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 AMAT 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 AMAT Stock described in
clause (v) of paragraph 5 below that also
constitutes an Extraordinary Dividend shall cause
an adjustment to the Exchange Factor pursuant
only to clause (v) of paragraph 5.
4. If Applied Materials issues rights or
warrants to all holders of AMAT Stock to
subscribe for or purchase AMAT Stock at an
exercise price per share less than the Market
Price of the AMAT Stock on both (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 Reset PERQS, then the Exchange Factor will be
adjusted to equal the product of the prior
Exchange Factor and a fraction, the numerator of
which shall be the number of shares of AMAT Stock
outstanding immediately prior to the issuance of
such rights or warrants plus the number of
additional shares of AMAT Stock offered for
subscription or purchase pursuant to such rights
or warrants and the denominator of which shall be
the number of shares of AMAT Stock outstanding
immediately prior to the issuance of such rights
or warrants plus the number of additional shares
of AMAT Stock which the aggregate offering price
of the total number of shares of AMAT 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 of
AMAT Stock, (ii) Applied Materials or any
surviving entity or subsequent surviving entity
of Applied Materials (an "Applied Materials
Successor") has been subject to a merger,
combination or consolidation and is not the
surviving entity, (iii) any statutory exchange of
securities of Applied Materials or any Applied
Materials Successor with another corporation
occurs (other than pursuant to clause (ii)
above), (iv) Applied Materials is liquidated, (v)
Applied Materials issues to all of its
shareholders equity securities of an issuer other
than Applied Materials (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 AMAT Stock (any such event
in clauses (i) through (vi) a "Reorganization
Event"), the method of determining the amount
payable upon exchange at maturity for each Reset
PERQS will be adjusted to provide that each
holder of Reset PERQS will receive at maturity,
in respect of each $39.50 principal amount of
each Reset PERQS, securities, cash or any other
assets distributed in any such Reorganization
Event, including, in the case of a Spin-off
Event, the share of AMAT Stock with respect to
which the spun-off security was issued
(collectively, the "Exchange Property") in an
amount with a value equal to (a) if the Exchange
Ratio has not been adjusted prior to maturity,
the Transaction Value or (b) if the Exchange
Ratio has been adjusted, an amount equal to the
product of the final Exchange Ratio and the
Transaction Value. In addition, following a
Reorganization Event, the method of determining
the Maturity Price will be adjusted so that the
Maturity Price will mean the Transaction Value as
of the second scheduled Trading Day immediately
prior to maturity, and if the Reorganization
Event occurs prior to the First Year
Determination Date, the First Year Closing Price
will mean the Transaction Value determined as of
the First Year Determination Date.
Notwithstanding the above, if the Exchange
Property received in any such Reorganization
Event consists only of cash, the maturity date of
the Reset PERQS will be deemed to be accelerated
to the date on which such cash is distributed to
holders of AMAT Stock and holders will receive in
lieu of any AMAT Stock and as liquidated damages
in full satisfaction of the Company's obligations
under the Reset PERQS the product of (i) the
Transaction Value as of such date and (ii) the
then current Exchange Ratio adjusted as if such
date were the next to occur of either the First
Year Determination Date or the second scheduled
Trading Day prior to maturity. If Exchange
Property consists of more than one type of
property, holders of Reset PERQS will receive at
maturity a pro rata share of each such type of
Exchange Property. "Transaction Value" at any
date means (i) for any cash received in any such
Reorganization Event, the amount of cash received
per share of AMAT Stock, as adjusted by the
Exchange Factor, (ii) for any property other than
cash or securities received in any such
Reorganization Event, the market value, as
determined by the Calculation Agent, as of the
date of receipt, of such Exchange Property
received for each share of AMAT Stock, as
adjusted by the Exchange Factor and (iii) for any
security received in any such Reorganization
Event, an amount equal to the Market Price, as of
the date on which the Transaction Value is
determined, per share of such security multiplied
by the quantity of such security received for
each share of AMAT Stock, as adjusted by the
Exchange Factor.
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 Exchange Factor will be
required unless such adjustment would require a
change of at least 0.1% in the Exchange Factor
then in effect. The Exchange Factor resulting
from any of the adjustments specified above will
be rounded to the nearest one hundred-thousandth
with five one-millionths being rounded upward.
No adjustments to the Exchange Factor or method
of calculating the Exchange Ratio will be made
other than those specified above. The
adjustments specified above do not cover all
events that could affect the Market Price of the
AMAT Stock, including, without limitation, a
partial tender or exchange offer for the AMAT
Stock.
NOTWITHSTANDING THE FOREGOING, THE AMOUNT PAYABLE
BY THE COMPANY AT MATURITY WITH RESPECT TO EACH
RESET PERQS, DETERMINED AS OF THE SECOND
SCHEDULED TRADING DAY PRIOR TO MATURITY, WILL NOT
UNDER ANY CIRCUMSTANCES EXCEED $70.40 PER RESET
PERQS OR AN AMOUNT OF AMAT STOCK HAVING AN
EQUIVALENT VALUE AS OF SUCH SECOND SCHEDULED
TRADING DAY.
The Calculation Agent shall be solely responsible
for the determination and calculation of any
adjustments to the Exchange Factor or method of
calculating the Exchange 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 Exchange Factor or
method of calculating the Exchange Ratio upon
written request by any holder of the Reset PERQS.
Market Disruption Event....... "Market Disruption Event" means, with respect
to AMAT Stock:
(i) a suspension, absence or material
limitation of trading of AMAT Stock on the
primary market for AMAT Stock for more than two
hours of trading or during the one-half hour
period preceding the close of trading in such
market; or the suspension or material
limitation on the primary market for trading in
options contracts related to AMAT Stock, if
available, during the one-half hour period
preceding the close of trading in the
applicable market, in each case as determined
by the Calculation Agent in its sole
discretion; and
(ii) a determination by the Calculation Agent
in its sole discretion that the event described
in clause (i) above materially interfered with
the ability of the Company or any of its
affiliates to unwind all or a material portion
of the hedge with respect to the Reset PERQS.
For purposes of determining whether a Market
Disruption Event has occurred: (1) a
limitation on the hours or number of days of
trading will not constitute a Market
Disruption Event if it results from an
announced change in the regular business
hours of the relevant exchange, (2) a
decision to permanently discontinue trading
in the relevant option contract will not
constitute a Market Disruption Event, (3)
limitations pursuant to New York Stock
Exchange Rule 80A (or any applicable rule or
regulation enacted or promulgated by the New
York Stock Exchange, any other self-regulatory
organization or the Securities and Exchange
Commission of similar scope as determined by
the Calculation Agent) on trading during
significant market fluctuations shall
constitute a suspension, absence or material
limitation of trading, (4) a suspension of
trading in an options contract on AMAT 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 AMAT Stock and (5) a suspension,
absence or material limitation of trading on
the primary securities market on which
options contracts related to AMAT Stock are
traded will not include any time when such
securities market is itself closed for
trading under ordinary circumstances.
AMAT Stock; Public
Information................... Applied Materials develops, manufactures,
markets and services semiconductor wafer
fabrication equipment and related spare parts for
the worldwide semiconductor industry. AMAT Stock
is registered under the Exchange Act. Companies
with securities registered under the Exchange Act
are required to file periodically certain
financial and other information specified by the
Securities and Exchange Commission (the
"Commission"). Information provided to or filed
with the Commission can be inspected and copied
at the public reference facilities maintained by
the Commission at Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549 or at its Regional
Offices located at Suite 1400, Citicorp Center,
500 West Madison Street, Chicago, Illinois 60661
and at Seven World Trade Center, 13th Floor, New
York, New York 10048, and copies of such material
can be obtained from the Public Reference Section
of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. In
addition, information provided to or filed with
the Commission electronically can be accessed
through a Website maintained by the Commission.
The address of the Commission's Website is
http:/www.sec.gov. Information provided to or
filed with the Commission by Applied Materials
pursuant to the Exchange Act of 1934 can be
located by reference to Commission file number
0-6920. In addition, information regarding
Applied Materials 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 RESET
PERQS OFFERED HEREBY AND DOES NOT RELATE TO AMAT
STOCK OR OTHER SECURITIES OF APPLIED MATERIALS.
ALL DISCLOSURES CONTAINED IN THIS PRICING
SUPPLEMENT REGARDING APPLIED MATERIALS 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 APPLIED
MATERIALS IN CONNECTION WITH THE OFFERING OF THE
RESET PERQS. NEITHER THE COMPANY NOR THE AGENT
MAKES ANY REPRESENTATION THAT SUCH PUBLICLY
AVAILABLE DOCUMENTS OR ANY OTHER PUBLICLY
AVAILABLE INFORMATION REGARDING APPLIED MATERIALS
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 AMAT STOCK (AND THEREFORE THE
INITIAL AMAT PRICE, THE FIRST YEAR CAP PRICE AND
THE MAXIMUM APPRECIATION AMOUNT) HAVE BEEN
PUBLICLY DISCLOSED. SUBSEQUENT DISCLOSURE OF ANY
SUCH EVENTS OR THE DISCLOSURE OF OR FAILURE TO
DISCLOSE MATERIAL FUTURE EVENTS CONCERNING
APPLIED MATERIALS COULD AFFECT THE VALUE RECEIVED
AT MATURITY WITH RESPECT TO THE RESET PERQS AND
THEREFORE THE TRADING PRICES OF THE RESET PERQS.
NEITHER THE COMPANY NOR ANY OF ITS AFFILIATES
MAKES ANY REPRESENTATION TO ANY PURCHASER OF
RESET PERQS AS TO THE PERFORMANCE OF AMAT STOCK.
The Company or its affiliates may presently or
from time to time engage in business with Applied
Materials, including extending loans to, or
making equity investments in, Applied Materials
or providing advisory services to Applied
Materials, 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
Applied Materials and, in addition, one or more
affiliates of the Company may publish research
reports with respect to Applied Materials. The
statement in the preceding sentence is not
intended to affect the right of holders of the
Reset PERQS under the securities laws. Any
prospective purchaser of a Reset PERQS should
undertake an independent investigation of Applied
Materials as in its judgment is appropriate to
make an informed decision with respect to an
investment in AMAT Stock.
Historical Information........ The following table sets forth the high and low
Market Price during 1995, 1996, 1997 and 1998
through May 13, 1998. The Market Price on May
13, 1998 was $39(1)/(2). The Market Prices
listed below were obtained from Bloomberg
Financial Markets and the Company believes such
information to be accurate. The historical prices
of AMAT Stock should not be taken as an
indication of future performance, and no
assurance can be given that the price of AMAT
Stock will not decrease so that the beneficial
owners of the Reset PERQS will receive at
maturity shares of AMAT Stock worth less than the
principal amount of the Reset PERQS. Nor can
assurance be given that the price of AMAT Stock
will increase above the Initial AMAT Price so
that at maturity the beneficial owners of the
Reset PERQS will receive an amount in excess of
the principal amount of the Reset PERQS.
AMAT High Low
---- ---- ---
(CUSIP 038222105)
1995
First Quarter.................... 15 9 5/8
Second Quarter................... 21 11/16 13 7/16
Third Quarter.................... 29 9/16 21 7/16
Fourth Quarter................... 27 11/16 19 3/8
1996
First Quarter.................... 22 1/16 15 11/16
Second Quarter................... 21 1/8 14 7/8
Third Quarter.................... 15 3/4 11 1/4
Fourth Quarter................... 19 7/8 12 15/16
1997
First Quarter.................... 27 7/32 17 5/8
Second Quarter................... 36 11/16 22 7/8
Third Quarter.................... 54 36 19/32
Fourth Quarter................... 52 3/4 26 1/8
1998
First Quarter.................... 37 7/8 28
Second Quarter
(through May 13, 1998)......... 39 1/2 34 1/4
Historical prices have been adjusted for two 2
for 1 stock splits of AMAT stock, which became
effective in the fourth quarter of 1995 and the
fourth quarter of 1997, respectively.
AMAT has not paid cash dividends on the AMAT
Stock to date. The Company makes no
representation as to the amount of dividends, if
any, that AMAT will pay in the future. In any
event, holders of the Reset PERQS will not be
entitled to receive dividends, if any, that may
be payable on AMAT Stock.
Use of Proceeds and Hedging... The net proceeds to be received by the Company
from the sale of the Reset PERQS 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 Reset PERQS. See also "Use of Proceeds"
in the accompanying Prospectus.
On the date of this Pricing Supplement, the
Company, through its subsidiaries or others,
hedged its anticipated exposure in connection
with the Reset PERQS by taking positions in AMAT
Stock. Purchase activity could potentially have
increased the price of AMAT Stock, and therefore
effectively have increased the level to which
AMAT Stock must rise before a holder of a Reset
PERQS would receive at maturity an amount of AMAT
Stock worth as much as or more than the principal
amount of the Reset PERQS. The Company, through
its subsidiaries, is likely to modify its hedge
position throughout the life of the Reset PERQS
by purchasing and selling AMAT Stock, options on
AMAT Stock listed on major securities markets or
positions in any other instruments that it may
wish to use in connection with such hedging.
Although the Company has no reason to believe
that its hedging activity had or will have a
material impact on the price of AMAT Stock, there
can be no assurance that the Company did not, or
in the future will not, affect such price as a
result of its hedging activities.
Supplemental Information
Concerning Plan of
Distribution.................. In order to facilitate the offering of the Reset
PERQS, the Agent may engage in transactions that
stabilize, maintain or otherwise affect the price
of the Reset PERQS or the AMAT Stock.
Specifically, the Agent may overallot in
connection with the offering, creating a short
position in the Reset PERQS for its own account.
In addition, to cover allotments or to stabilize
the price of the Reset PERQS, the Agent may bid
for, and purchase, the Reset PERQS or the AMAT
Stock in the open market. See "Use of Proceeds
and Hedging" above.
The Agent proposes initially to offer the Reset
PERQS directly to the public at the public
offering price set forth on the cover page
hereof; provided that the price will be $38.9075
per Reset PERQS and the underwriting discounts
and commissions will be $0.0075 per Reset PERQS
for purchasers of greater than or equal to 50,000
Reset PERQS in any case single transaction,
subject to the holding period requirements
described below.
Generally, delivery of approximately 98.50% of
the Reset PERQS purchased by an investor at the
reduced price (the "Delivered Reset PERQS") will
be made on the date of delivery of the Reset
PERQS referred to on the cover of this Pricing
Supplement. The balance of approximately 1.50%
of the Reset PERQS (the "Escrowed Reset PERQS")
purchased by each such investor will be held in
escrow and delivered to such investor if the
investor and any accounts in which the investor
may have deposited any of its Delivered Reset
PERQS have held all of the Delivered Reset PERQS
for 45 calendar days following the date of the
Pricing Supplement or any shorter period deemed
appropriate by the Agent. If an investor or any
accounts in which the investor has deposited any
of its Delivered Reset PERQS fails to satisfy the
holding period requirement, as determined by the
Agent, all of the investor's Escrowed Reset PERQS
will be forfeited by the investor and not
delivered to it. The Escrowed Reset PERQS will
instead be delivered to the Agent for sale to
investors. This forfeiture will have the effect
of increasing the purchase price per Reset PERQS
for such investors to 100% of the principal
amount of the Reset PERQS. Should investors who
are subject to the holding period requirement
sell their Reset PERQS once the holding period is
no longer applicable, the market price of the
Reset PERQS may be adversely affected. See also
"Plan of Distribution" in the accompanying
Prospectus Supplement.
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 Reset PERQS purchasing
the Reset PERQS at the first price to the public
at which a substantial amount of the Reset PERQS
is sold for money (the "Issue Price"), and who
will hold the Reset PERQS as capital assets
within the meaning of Section 1221 of the
Internal Revenue Code of 1986, as amended (the
"Code"). This summary is based on the Code,
administrative pronouncements, judicial decisions
and existing and proposed Treasury Regulations,
changes to any of which subsequent to the date of
this Pricing Supplement may affect the tax
consequences described herein. This summary does
not address all aspects of the U.S. federal
income taxation that may be relevant to a
particular holder in light of its individual
circumstances or to certain types of holders
subject to special treatment under the U.S.
federal income tax laws (e.g., certain financial
institutions, insurance companies, tax-exempt
organizations, dealers in options or securities,
or persons who hold a Reset PERQS 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 Reset PERQS 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.
U.S. Holders
As used herein, the term "U.S. Holder" means an
owner of a Reset PERQS that is, for U.S. federal
income tax purposes, (i) a citizen or resident of
the United States, (ii) a corporation created or
organized under the laws of the United States or
any political subdivision thereof or (iii) an
estate or trust the income of which is subject to
U.S. federal income taxation regardless of its
source.
General
Pursuant to the terms of the Reset PERQS, the
Company and every holder of a Reset PERQS agree
(in the absence of an administrative
determination or judicial ruling to the contrary)
to characterize a Reset PERQS for all tax
purposes as an investment unit consisting of the
following components (the "Components"): (i) a
deposit with the Company of an amount of cash to
secure the holder's obligation to purchase the
AMAT Stock (the "Deposit"), which Deposit
provides for quarterly interest payments (the
"Deposit Interest Payments") at a rate of 6% per
annum, and (ii) a contract (the "Forward
Contract") that requires the holder of the Reset
PERQS to purchase, and the Company to sell, for
an amount equal to $39.50 (the "Forward Price"),
the AMAT Stock at maturity (or, alternatively,
upon an earlier redemption of the Reset PERQS).
Based on the Company's determination of the
relative fair market values of the Components at
the time of issuance of the Reset PERQS, the
Company will allocate 100% of the Issue Price of
the Reset PERQS 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 holder of the Reset PERQS, unless
such holder timely and explicitly discloses to
the Internal Revenue Service (the "IRS") that its
allocation is different from the Company's. The
treatment of the Reset PERQS 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 Reset PERQS
or instruments similar to the Reset PERQS for
U.S. federal income tax purposes, and no ruling
is being requested from the IRS with respect to
the Reset PERQS. DUE TO THE ABSENCE OF
AUTHORITIES THAT DIRECTLY ADDRESS INSTRUMENTS
THAT ARE SIMILAR TO THE RESET PERQS, TAX COUNSEL
IS UNABLE TO RENDER AN OPINION AS TO THE PROPER
U.S. FEDERAL INCOME TAX CHARACTERIZATION OF THE
RESET PERQS. AS A RESULT, SIGNIFICANT ASPECTS OF
THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF AN
INVESTMENT IN THE RESET PERQS ARE NOT CERTAIN,
AND NO ASSURANCE CAN BE GIVEN THAT THE IRS OR THE
COURTS WILL AGREE WITH THE CHARACTERIZATION
DESCRIBED ABOVE. ACCORDINGLY, PROSPECTIVE
PURCHASERS ARE URGED TO CONSULT THEIR TAX
ADVISORS REGARDING THE U.S. FEDERAL INCOME TAX
CONSEQUENCES OF AN INVESTMENT IN THE RESET PERQS
(INCLUDING ALTERNATIVE CHARACTERIZATIONS OF THE
RESET PERQS) AND WITH RESPECT TO ANY TAX
CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE,
LOCAL OR FOREIGN TAXING JURISDICTION. UNLESS
OTHERWISE STATED, THE FOLLOWING DISCUSSION IS
BASED ON THE TREATMENT AND THE ALLOCATION
DESCRIBED ABOVE.
Tax Treatment of the Reset PERQS
Assuming the characterization of the Reset
PERQS and the allocation of the Issue Price as
set forth above, Tax Counsel believes that the
following U.S. federal income tax consequences
should result.
Deposit Interest Payment. The Deposit Interest
Payment will generally be taxable to a U.S.
Holder as ordinary income at the time it accrues
or is received in accordance with the U.S.
Holder's method of accounting for U.S. federal
income tax purposes.
Tax Basis. Based on the Company's
determination set forth above, the U.S.
Holder's tax basis in the Forward Contract
will be zero, and the U.S. Holder's tax basis
in the Deposit will be 100% of the Issue
Price.
Settlement of the Forward Contract. Upon the
maturity of the Forward Contract, a U.S. Holder
would, pursuant to the Forward Contract, be
deemed to have applied the Forward Price (which
would equal the Issue Price) toward the purchase
of AMAT Stock, and a U.S. Holder would not
recognize any gain or loss with respect to any
AMAT Stock received thereon. With respect to any
cash received upon maturity, 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 pro rata
portion of the Forward Price allocable to the
cash. Any such gain or loss would generally be
capital gain or loss, as the case may be. With
respect to any AMAT Stock received upon maturity,
the U.S. Holder would have an adjusted tax basis
in such AMAT Stock equal to the pro rata portion
of the Forward Price allocable thereto. The
allocation of the Forward Price between cash and
AMAT Stock should be based on the amount of the
cash received and the relative fair market value,
as of the maturity, of the AMAT Stock. The U.S.
Holder's holding period of any AMAT Stock
received would start on the day after the
maturity of the Reset PERQS.
Sale or Exchange of the Components. Upon a sale
or exchange of a Reset PERQS prior to the
maturity of the Reset PERQS, 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 aggregate
tax basis in the Components so sold or exchanged.
Any such gain or loss would generally be capital
gain or loss, as the case may be. For these
purposes, the amount realized does not include
any amount attributable to accrued but unpaid
Deposit Interest, which would be taxed as
described under "--Deposit Interest Payment"
above.
Possible Alternative Tax Treatments of an
Investment in the Reset PERQS
Due to the absence of authorities that directly
address the proper characterization of the Reset
PERQS, 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 Reset PERQS 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 Reset PERQS. If the IRS were successful in
asserting that the Contingent Payment Regulations
applied to the Reset PERQS, the timing and
character of income thereon would be
significantly affected. Among other things, a
U.S. Holder would be required to accrue as
original issue discount income, subject to the
adjustments described below, at a "comparable
yield" on the Issue Price, which may be higher or
lower than the Deposit Interest. In addition,
the Contingent Payment Regulations require that a
projected payment schedule, which must result in
such a "comparable yield," be determined, and
that adjustments to income accruals be made to
account for differences between actual payments
and projected amounts. Furthermore, any gain
realized with respect to the Reset PERQS will
generally be treated as ordinary income, and any
loss realized will generally be treated as
ordinary loss to the extent of the U.S. Holder's
prior ordinary income inclusion (which were not
previously reversed) with respect to the Reset
PERQS.
Even if the Contingent Payment Regulations do not
apply to the Reset PERQS, other alternative U.S.
federal income characterizations or treatments of
the Reset PERQS are also possible, which may also
affect the timing and the character of the income
or loss with respect to the Reset PERQS. It is
possible, for example, that a Reset PERQS could
be treated as constituting 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 the Reset PERQS.
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 Reset PERQS. If the Kennelly Bill
were to apply to a Reset PERQS, the effect on a
U.S. Holder of a Reset PERQS would be to treat
any long term capital gain recognized by such
U.S. Holder on sale or exchange of the Reset
PERQS attributable to the Forward Contract 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
AMAT Stock itself on the issue date of the Reset
PERQS and disposed of the AMAT Stock upon
disposition of the Reset PERQS. In addition, the
Kennelly Bill would impose an interest charge on
the gain that was recharacterized on the sale or
exchange of the Reset PERQS. 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 Reset PERQS.
Backup Withholding and Information Reporting
A U.S. Holder of a Reset PERQS 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 Reset PERQS that is, for U.S.
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 U.S.
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 Reset PERQS
purchasing the Reset PERQS at the Issue Price,
and who will hold the Reset PERQS 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 U.S. citizenship or
that have ceased to be taxed as U.S. 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 U.S. federal income tax. In addition, the
following summary does not apply to persons for
whom interest or gain on a Reset PERQS 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 Reset PERQS agree (in the absence of
an administrative determination or judicial
ruling to the contrary) to characterize a Reset
PERQS for all purposes as an investment unit
consisting of the Forward Contract and the
Deposit.
Subject to the discussion below concerning backup
withholding, Deposit Interest Payments to a
Non-U.S. Holder, and gain realized by the
Non-U.S. Holder on the sale, exchange or other
disposition of the Reset PERQS, should not be
subject to U.S. federal income or withholding
tax, provided that: (i) the 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 as discussed below; and (iii) the
Non-U.S. Holder is not an individual who is
present in the U.S. 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 U.S.
Certification Requirements
With respect to the Deposit Interest Payments,
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 Reset PERQS, 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 Reset PERQS on behalf of such
beneficial owner, file a statement with the
withholding agent to the effect that the
beneficial owner of the Reset PERQS is not a U.S.
person. Under U.S. Treasury Regulations, such
requirement will be fulfilled if the beneficial
owner of a Reset PERQS certifies on IRS Form W-8,
under penalties of perjury, that it is not a U.S.
person and provides its name and address, and any
Financial Institution holding the Reset PERQS 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 Reset PERQS
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 Reset PERQS after December 31, 1999, unless
the foreign partnership has entered into a
withholding agreement with the IRS, 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.
Possible Alternative Tax Treatments of an
Investment in a Reset PERQS
As described above in "United States Federal
Income Taxation--U.S. Holders--Possible
Alternative Tax Treatments of an Investment in a
Reset PERQS," the IRS may seek to treat the Reset
PERQS 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 Reset PERQS would be the
same as those described immediately above.
However, if the IRS sought to recharacterize a
Reset PERQS as a pre-paid forward contract, it is
possible that all payments of stated interest
made with respect to a Reset PERQS 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, but will do so if required by
law. Due to the absence of authorities that
directly address instruments that are similar to
a Reset PERQS, significant aspects of the U.S.
federal income tax consequences of an investment
in a Reset PERQS are not certain, and no
assurance can be given that the IRS or the courts
will agree with the characterization of a Reset
PERQS 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 Reset
PERQS.
Backup Withholding and Information Reporting
Under current Treasury Regulations, backup
withholding at 31% will not apply to payments
by the Company made on a Reset PERQS 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
Reset PERQS made to or through a foreign office
of a broker generally will not be subject to
backup withholding. However, if such broker is a
U.S. person, a controlled foreign corporation for
U.S. tax purposes, a foreign person 50 percent or
more of whose gross income is effectively
connected with a U.S. 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 U.S.,
information reporting will be required unless the
broker has in its records documentary evidence
that the beneficial owner is not a U.S. person
and certain other conditions are met or the
beneficial owner otherwise establishes an
exemption. Payments to or through the U.S.
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 U.S. person or
otherwise establishes an exemption.
Non-U.S. Holders of Reset PERQS 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 U.S. federal income tax liability and
may entitle such Non-U.S. Holder to a refund,
provided that the required information is
furnished to the IRS.
HYPOTHETICAL PAYMENTS ON THE RESET PERQS
Based on an Initial AMAT Price of $39.50 per share of AMAT Stock
and a first year cap of 133.5% and a second year cap of 133.5%, the following
table illustrates, for a range of First Year Closing Prices and Maturity Prices,
the consequent adjustments to the Exchange Ratio, Second Year Cap Prices, the
Payments at Maturity Based on AMAT Stock for each $39.50 principal amount of
Reset PERQS and the total return including interest payments, based on an
interest rate of 6% per annum, for each $39.50 principal amount of Reset PERQS.
<TABLE>
<S> <C> <C> <C> <C> <C>
Initial 5/17/99
Initial AMAT Exchange First Year Cap First Year Adjusted Second Year Cap
Price Ratio Price Closing Price Exchange Ratio Price
- ------------ -------- -------------- ------------- -------------- ---------------
$39.50 1 $52.7325 $ 65.00 0.81127 $ 86.7750
$39.50 1 $52.7325 $ 50.00 1.00000 $ 66.7500
$39.50 1 $52.7325 $ 45.00 1.00000 $ 60.0750
$39.50 1 $52.7325 $ 65.00 0.81127 $ 86.7750
$39.50 1 $52.7325 $ 40.00 1.00000 $ 53.4000
$39.50 1 $52.7325 $ 48.00 1.00000 $ 64.0800
$39.50 1 $52.7325 $ 30.00 1.00000 $ 52.7325
$39.50 1 $52.7325 $ 60.00 0.87888 $ 80.1000
$39.50 1 $52.7325 $ 20.00 1.00000 $ 52.7325
$39.50 1 $52.7325 $100.00 0.52733 $133.5000
133.5% of Greater of (x)
Initial 133.5% of
AMAT Price First Year
Closing Price
and (y) First
Year Cap
Price
<CAPTION>
<S> <C> <C> <C>
Reset PERQS
Reset PERQS Payment at
5/15/2000 Payment at Maturity plus 6%
Adjusted Maturity Based Coupon ("Total
Maturity Price Exchange Ratio on AMAT Stock Payment")
- -------------- -------------- --------------- ----------------
$100.00 0.70398 $70.40 $75.14
$ 70.00 0.95357 $66.75 $71.49
$ 65.00 0.92423 $60.07 $64.81
$ 75.00 0.81127 $60.85 $65.59
$ 60.00 0.89000 $53.40 $58.14
$ 45.00 1.00000 $45.00 $49.74
$ 40.00 1.00000 $40.00 $44.74
$ 45.00 0.87888 $39.55 $44.29
$ 15.00 1.00000 $15.00 $19.74
$ 20.00 0.52733 $10.55 $15.29
Maturity Price
times Adjusted
Exchange Ratio
</TABLE>
