Subject to Completion, Pricing Supplement dated April 29, 1998
PROSPECTUS Dated March 26, 1998 Pricing Supplement No. 13 to
PROSPECTUS SUPPLEMENT Registration Statement No. 333-46935
Dated March 26, 1998 Dated , 1998
Rule 424(b)(3)
$25,000,000
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)")
% RESET PERQS DUE MAY , 2000
Reset PERQS Mandatorily Exchangeable For Shares of Common Stock of
APPLIED MATERIALS, INC.
The % Reset PERQS due May , 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 $ (the Market Price of the common stock, $0.01 par value,
of Applied Materials, Inc. ("Applied Materials") on May , 1998) (the
"Initial AMAT Price"). The Reset PERQS will mature on May , 2000. Interest
on the Reset PERQS, at the rate of % of the principal amount per annum
(equivalent to $ per annum per Reset PERQS), is payable quarterly in
arrears on each February , May , August and November , beginning
August , 1998.
At maturity upon delivery of each Reset PERQS to the Trustee,
each $ 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 $ per $ principal
amount of each Reset PERQS ( % 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 ,
1999 (as defined herein, the "First Year Closing Price") is less than or equal
to % of the Initial AMAT Price (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) % 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.
Application will be made to list the Reset PERQS on the
American Stock Exchange, Inc. ("AMEX"), subject to meeting the AMEX listing
requirements. It is not possible to predict whether the Reset PERQS will meet
the AMEX listing requirements or trade in the secondary market or if such
market will be liquid or illiquid.
------------------------
PRICE $ PER RESET PERQS
------------------------
Price to Agent's Proceeds to
Public(1)(2) Commissions(3)(4) Company(1)
------------ ----------------- -----------
Per Reset PERQS... $ $ $
Total............. $ $ $
- ------------
(1) Plus accrued interest, if any, from , 1998.
(2) The price to public for investors purchasing greater than or equal to
50,000 Reset PERQS in any single transaction will be $ 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 $ per
Unit ( %).
MORGAN STANLEY DEAN WITTER
Information contained in this preliminary pricing supplement is subject to
completion or amendment. These securities may not be delivered prior to the
time a final pricing supplement is delivered. This pricing supplement and the
accompanying prospectus and prospectus supplement shall not constitute an
offer to sell or the solicitation of an offer to buy nor shall there be any
sale of these securities in any State in which such offer, solicitation or
sale would be unlawful prior to registration or qualification under the
securities laws of any such State.
(This page intentionally left blank)
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE 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.............. $25,000,000
Maturity Date................. May , 2000
Interest Rate................. % per annum (equivalent to $ per annum
per Reset PERQS)
Interest Payment Dates........ Each February , May , August and
November , beginning August , 1998.
Specified Currency............ U.S. Dollars
Issue Price................... $ per Reset PERQS
Initial AMAT Price............ $
Original Issue Date
(Settlement Date)........... , 1998
CUSIP......................... 617446331
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
First Year Cap Price.......... $ ( % of the Initial AMAT Price)
First Year Determination Date. May , 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) % 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 $
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 $ per principal amount of each Reset
PERQS ( % 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 % of the Initial AMAT
Price (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) % 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 $
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 $
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 $ 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 $ 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.
The Notes are not currently listed on any
exchange, but the Company intends to apply to
list the Reset PERQS on the AMEX, subject to
meeting the AMEX listing requirements. It is
not possible to predict whether the Reset
PERQS will meet the AMEX listing requirements,
and 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 $
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 $ 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 April 20, 1998. The Market
Price on April 29, 1998 was $35(7)/(8). 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 April 29, 1998)........ 38 7/8 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 or prior to the date of this Pricing
Supplement, the Company, through its
subsidiaries or others, may hedge its
anticipated exposure in connection with the
Reset PERQS by taking positions in AMAT
Stock, in options contracts 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. In the event that the Company
pursues such a hedging strategy, the price at
which the Company is able to purchase such
positions may be a factor in determining the
pricing of the Reset PERQS. Purchase
activity could potentially increase the price
of AMAT Stock, and therefore effectively
increase 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. Although the
Company has no reason to believe that its
hedging activity will have a material impact
on the price of AMAT Stock, there can be no
assurance that the Company will not affect
such price as a result of its hedging
activities. The Company, through its
subsidiaries, is likely to modify its hedge
position throughout the life of the Reset
PERQS by purchasing and selling the
securities and instruments listed above and
any other available securities and
instruments.
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
$_______ per Reset PERQS and the underwriting
discounts and commissions will be $_______
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 % 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 $ (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 and Original Issue
Discount. 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. In addition, if the Issue
Price is less than 99.50% of the Forward
Price, then the Deposit will be considered to
have original issue discount, and such
difference must be included in income for
U.S. federal income tax purposes as it
accrues, in accordance with a constant yield
method based on a compounding of interest,
even though the U.S. Holder will not receive
cash payments attributable to such income.
If the Issue Price equals or exceeds 99.50%
(but less than 100.00%) of the Forward Price,
then the Deposit will be considered to have
only de minimis original issue discount, and
such difference need not be included in
income for U.S. federal income tax purposes
as it accrues but would, instead, be
includible in income as capital gain upon
maturity (even though the U.S. Holder will
not receive cash payments attributable to such
income).
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 would be 100% of the Issue
Price, increased by the amount of original
issue discount, if any, included in such U.S.
Holder's income during the period such U.S.
Holder held the Reset PERQS.
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 plus any original issue discount or de
minimis original issue discount) 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
(other than, as describe above, capital gain
attributable to de minimis original issue
discount). 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 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 and
Original Issue Discount" 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 a hypothetical Initial AMAT Price of $36 share of AMAT
Stock and a first year cap of 135% and a second year cap of 135%, 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 $36
principal amount of Reset PERQS and the total return including interest
payments, based on a hypothetical interest rate of 6.00% per annum, for each
$36 principal amount of Reset PERQS.
<TABLE>
<CAPTION>
Initial
Initial AMAT Exchange First Year Cap First Year 5/ /99 Adjusted Second Year Cap
Price Ratio Price Closing Price Exchange Ratio Price
- ------------ -------- -------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
$36.00 1.00 $48.60 $ 65.00 0.74769 $ 87.75
$36.00 1.00 $48.60 $ 50.00 0.97200 $ 67.50
$36.00 1.00 $48.60 $ 45.00 1.00000 $ 60.75
$36.00 1.00 $48.60 $ 65.00 0.74769 $ 87.75
$36.00 1.00 $48.60 $ 40.00 1.00000 $ 54.00
$36.00 1.00 $48.60 $ 48.00 1.00000 $ 64.80
$36.00 1.00 $48.60 $ 30.00 1.00000 $ 48.60
$36.00 1.00 $48.60 $ 60.00 0.81000 $ 81.00
$36.00 1.00 $48.60 $ 20.00 1.00000 $ 48.60
$36.00 1.00 $48.60 $ 100.00 0.48600 $ 135.00
135% of Greater of (x)
Initial 135% of First
AMAT Price Year Closing
Price and (y)
First Year Cap
Price
<CAPTION>
Reset PERQS
Reset PERQS Payment at
5/ /2000 Payment at Maturity plus
Adjusted Maturity Based 6.00% Coupon
Maturity Price Exchange Ratio on AMAT Stock ("Total Payment")
- -------------- -------------- -------------- -----------------
<C> <C> <C> <C>
$ 100.00 0.65610 $65.61 $69.93
$ 65.00 0.97200 $63.18 $67.50
$ 65.00 0.93462 $60.75 $65.07
$ 75.00 0.74769 $56.08 $60.40
$ 60.00 0.90000 $54.00 $58.32
$ 45.00 1.00000 $45.00 $49.32
$ 40.00 1.00000 $40.00 $44.32
$ 45.00 0.81000 $36.45 $40.77
$ 15.00 1.00000 $15.00 $19.32
$ 20.00 0.48600 $ 9.72 $14.04
Maturity Price
times Adjusted
Exchange Ratio
</TABLE>
