PROSPECTUS SUPPLEMENT (Subject to Completion, Issued March 4, 1998)
(To Prospectus dated June 2, 1997)
Morgan Stanley, Dean Witter, Discover & Co.
250,000 SEPARABLE UNITS MANDATORILY EXCHANGEABLE
FOR STANDARD & POOR'S DEPOSITARY RECEIPTS
CONSISTING OF
PURCHASE CONTRACTS SETTLING SEPTEMBER 30, 2005
PUT WARRANTS SETTLING SEPTEMBER 30, 2005
Each Separable Unit Mandatorily Exchangeable for Standard & Poor's
Depositary Receipts ("SPDRS") (a "Unit") consists of (i) a Purchase Contract
Settling September 30, 2005 (a "Purchase Contract") of Morgan Stanley, Dean
Witter, Discover & Co. (the "Company") requiring the Company to deliver to the
holder thereof a number of SPDRS and (ii) one Put Warrant Settling September 30,
2005 (a"Put Warrant") of the Company entitling the holder thereof upon exercise
to sell SPDRS to the Company. Each SPDR represents a proportionate undivided
interest in the portfolio of securities held by the SPDR Trust Series I (the
"SPDR Trust"), consisting of substantially all of the common stocks of the S&P
500 Composite Stock Price Index (the "S&P 500 Index"). The SPDR Trust was formed
by PDR Services Corporation, a wholly-owned subsidiary of the American Stock
Exchange, Inc. (the "AMEX"). Standard & Poor's Depositary Receipts and SPDRS are
trademarks of the McGraw-Hill Companies Inc. The Units, including the Purchase
Contracts and Put Warrants, are further described below and will be issued in
denominations of 1,000 Units, Purchase Contracts and Put Warrants, respectively,
and any integral multiple thereof. The Units will be issued at an issue price of
$____ per Unit the closing ask price of SPDRS on the date of this Prospectus
Supplement (the "Unit Issue Price").
On September 30, 2005 (subject to adjustment in the event of certain market
disruption events, the "Contract Settlement Date"), the Company will be required
to deliver to the holder of each Purchase Contract a number of SPDRS with a
value equal to the Final SPDR Value. The Final SPDR Value will equal the
arithmetic average of the SPDR Closing Values, as determined on each of March
30, 2004, December 30, 2004 and September 27, 2005, subject to adjustment upon
the occurrence of certain market disruption events (each a "Determination Date")
and will be calculated on the last Determination Date. The number of SPDRS with
a value equal to such Final SPDR Value will be determined at the close of
business on the last Determination Date. The value of the SPDRS received by a
holder of a Purchase Contract on the Contract Settlement Date, determined as
described herein, may be more or less than the Unit Issue Price.
On September 30, 2005 (subject to adjustment in the event of certain market
disruption events, the "Warrant Settlement Date"), the holder of a Put Warrant
will have the right, which may be exercised only in whole multiples of 1,000 Put
Warrants, upon (i) completion by the holder and delivery to the Warrant Agent
and the Calculation Agent of an Official Notice of Exercise on or after August
26, 2005 and prior to 11:00 a.m. New York City time on the Exercise Expiration
Date and (ii) delivery of a number of SPDRS per Put Warrant with a value equal
to the Final SPDR Value, as described in the preceding paragraph, to the Warrant
Agent on the Warrant Settlement Date, to sell such SPDRS to the Company and to
receive from the Company on the Warrant Settlement Date, as the purchase price
for such SPDRS, $______ (the "Put Price"). The Exercise Expiration Date for the
Put Warrants will be the same as the last Determination Date under the Purchase
Contracts, and the number of SPDRS with a value equal to the Final SPDR Value
will be determined at the close of business on the last Determination Date.
Prior to June __, 1998 (the "Automatic Separation Date"), the Purchase
Contracts and Put Warrants may be purchased and transferred only as Units and
will trade under the CUSIP number for the Units. On the Automatic Separation
Date, the Units will automatically separate into their constituent Purchase
Contracts and Put Warrants (which will thereafter trade under separate CUSIP
numbers), and the Units will cease to exist. The Units and the constituent
Purchase Contracts and Put Warrants will be represented by global securities
registered in the name of a nominee of The Depository Trust Company ("DTC"), as
Depositary. Beneficial interests in the Units and, after the Automatic
Separation Date, the Purchase Contracts and Put Warrants will be shown on, and
transfers thereof will be effected only through, records maintained by the
Depositary (with respect to participants' interests) and its participants.
Except as described in the accompanying Prospectus, Units, Purchase Contracts
and Put Warrants in certificated form will not be issued in exchange for the
global securities.
The SPDR Closing Values are subject to adjustment. See "Description of
Units -- Antidilution Adjustments" in this Prospectus Supplement. The Company
will cause the Final SPDR Value, the number of SPDRS with a value equal to the
Final SPDR Value and any antidilution adjustments to be determined by the
Calculation Agent for The Chase Manhattan Bank, as Trustee under the Senior Debt
Indenture.
The SPDR Trust is not affiliated with the Company, is not involved in this
offering of Units and will have no obligations with respect to the Units, the
Purchase Contracts or the Put Warrants. The Market Price of SPDRS on the date of
this Prospectus Supplement was $__ . See "SPDRS -- Historical Information" in
this Prospectus Supplement for information on the range of Market Prices of
SPDRS.
An investment in the Units and the constituent Purchase Contracts and Put
Warrants entails a high degree of risk, as described under "Risk Factors" on S-8
through S-11 herein.
-----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-----------------------
PRICE $ PER UNIT
Underwriting Discounts Proceeds to
Price to Public(1) and Commissions(2)(3) Company(4)
------------------ ---------------------- -------------
Per Unit .........$ $ $
Total.............$ $ $
- -------------------
(1) The price to public for investors purchasing (i) greater than or equal to
100,000 Units and less than 250,000 Units in any single transaction will be
$___ per Unit (99.75% of the Unit Issue Price), and (ii) greater than or
equal to 250,000 Units in any single transaction will be $ ____ per Unit
(99.50% of the Unit Issue Price), subject to the holding period requirement
described under "Underwriter" herein.
(2) The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933.
(3) The underwriting discounts and commissions for investors purchasing (i)
greater than or equal to 100,000 Units and less than 250,000 Units in any
single transaction will be $____ per Unit (.375%) and (ii) greater than or
equal to 250,000 Units will be $____ per Unit (.125%).
(4) Before deduction of expenses payable by the Company estimated at $____ .
-----------------------
The Units are offered, subject to prior sale, when, as and if accepted by
the Underwriter and subject to approval of certain legal matters by Davis Polk &
Wardwell, counsel for the Underwriter. It is expected that delivery of the Units
will be made on or about ______, 1998 through the book-entry facilities of The
Depository Trust Company, against payment therefor in immediately available
funds.
-----------------------
MORGAN STANLEY DEAN WITTER
, 1998
-----------------
Information contained in this preliminary prospectus supplement is subject to
completion or amendment. These securities may not be sold nor may offers to buy
be accepted without the delivery of a final prospectus supplement and
accompanying prospectus. This prospectus supplement and the accompanying
prospectus shall not constitute an offer to sell or the solicitation of an offer
to buy nor shall there be any sale of these securities in any State in which
such offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such State.
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus Supplement and the accompanying Prospectus in connection with the
offer contained in this Prospectus Supplement and the accompanying Prospectus
and, if given or made, such information or representations must not be relied
upon as having been authorized by the Company or by the Underwriter. This
Prospectus Supplement and the accompanying Prospectus do not constitute an offer
to sell or a solicitation of an offer to buy Securities by anyone in any
jurisdiction in which such offer or solicitation is not authorized or in which
the person making such offer or solicitation is not qualified to do so or to any
person to whom it is unlawful to make such offer or solicitation.
TABLE OF CONTENTS
Page
-----
Prospectus Supplement
Consolidated Ratio of Earnings to Fixed Charges............................S-3
Description of Units.......................................................S-3
Risk Factors Relating to the Units.........................................S-8
SPDRS; Public Information.................................................S-11
Historical Information....................................................S-12
United States Federal Income Taxation.....................................S-13
Underwriter...............................................................S-17
Glossary...................................................................A-1
Official Notice of Exercise................................................B-1
Prospectus
Available Information........................................................2
Incorporation of Certain Documents by Reference..............................2
The Company..................................................................4
Use of Proceeds..............................................................4
Consolidated Ratios of Earnings to Fixed Charges and Earnings to
Fixed Charges and Preferred Stock Dividends.............................5
Description of Debt Securities...............................................5
Description of Warrants.....................................................11
Description of Purchase Contracts...........................................14
Description of Units........................................................14
Limitations on Issuance of Bearer Securities and Bearer
Debt Warrants..........................................................14
Description of Capital Stock................................................15
Global Securities...........................................................28
Plan of Distribution........................................................30
Legal Matters...............................................................31
Experts.....................................................................31
ERISA Matters for Pension Plans and Insurance Companies.....................32
-----------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE UNITS, SPDRS OR THE
INDIVIDUAL STOCKS UNDERLYING THE S&P 500 INDEX. SPECIFICALLY, THE UNDERWRITER
MAY OVERALLOT IN CONNECTION WITH THE OFFERING, AND MAY BID FOR, AND PURCHASE,
THE UNITS, SPDRS OR THE INDIVIDUAL STOCKS UNDERLYING THE S&P 500 INDEX IN THE
OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES SEE "UNDERWRITER."
-----------------------
CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the consolidated ratio of earnings to fixed
charges for the Company for the periods indicated. The fiscal year information
for 1996, 1995, 1994 and 1993 combines the historical financial information of
Dean Witter, Discover & Co. ("Dean Witter Discover") for the years ended
December 31, 1996, 1995, 1994 and 1993 with the historical financial information
of Morgan Stanley Group Inc. ("Morgan Stanley") for the fiscal years ended
November 30, 1996, 1995, 1994 and 1993. Subsequent to the merger of Morgan
Stanley with and into Dean Witter Discover on May 31, 1997 (the "Merger"), the
Company adopted a fiscal year end of November 30. The fiscal year information
for 1997 reflects the change in fiscal year end.
Fiscal Year
----------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Ratio of earnings
to fixed charges.......... 1.4 1.3 1.3 1.3 1.4
For the purpose of calculating the ratio of earnings to fixed charges,
earnings consist of income before income taxes and fixed charges (exclusive of
preferred stock dividends). For the purpose of calculating the ratio, the fixed
charges consist of interest expense, capitalized interest and that portion of
rent expense estimated to be representative of the interest factor.
DESCRIPTION OF UNITS
The following description of the particular terms of the Separable Units
Mandatorily Exchangeable for Standard & Poor's Depositary Receipts consisting of
Purchase Contracts Settling September 30, 2005 and Put Warrants Settling
September 30, 2005 (the "Units") offered hereby supplements the description of
the general terms and provisions of the Units, Purchase Contracts and Warrants
set forth in the Prospectus, to which description reference is hereby made. In
particular, as used under this caption, the term "Company" means Morgan Stanley,
Dean Witter, Discover & Co. Capitalized terms not defined herein have the
meanings given to such terms in the Glossary attached as Annex A hereto or in
the accompanying Prospectus.
The Units will be issued pursuant to the Unit Agreement dated as of , 1998
(the "Unit Agreement") among the Company, The Chase Manhattan Bank, as Unit
Agent (the "Unit Agent"), and as Trustee and Paying Agent under the Senior Debt
Indenture and as Warrant Agent under the Warrant Agreement dated as of , 1998
(the "Warrant Agreement") between the Company and The Chase Manhattan Bank, as
Warrant Agent (the "Warrant Agent"). The Purchase Contracts initially comprised
by the Units are pre-paid purchase contracts that require the holders thereof to
satisfy their obligations thereunder when the Purchase Contracts are issued. The
Purchase Contracts will be issued under the Senior Debt Indenture and the
Company's obligation to settle the Purchase Contracts on the Contract Settlement
Date will constitute Senior Indebtedness of the Company and will rank pari passu
with all other unsecured and unsubordinated debt of the Company. The Put
Warrants initially comprised by the Units will be issued pursuant to the Warrant
Agreement and are unsecured contractual obligations of the Company that rank
pari passu with the Company's other unsecured contractual obligations and with
the Company's unsecured and unsubordinated debt. The following summaries of
certain provisions of the Units, Purchase Contracts and Put Warrants do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, the detailed provisions of the Unit Agreement, the Senior Debt
Indenture and Warrant Agreement.
General
Each Unit consists of (i) a Purchase Contract of the Company, requiring the
Company to deliver to the holder thereof a number of SPDRS, representing a
proportionate undivided interest in the portfolio of securities held by the SPDR
Trust, consisting of substantially all of the common stocks of the S&P 500 Index
and (ii) a Put Warrant, entitling the holder thereof upon exercise to sell SPDRS
to the Company on the Warrant Settlement Date at the Put Price, as described
below. The number of Units will be limited to 250,000 and will be issued in
fully registered form only in denominations of 1,000 Units, Purchase Contracts
and Put Warrants, respectively, and any integral multiple thereof. The Units
will be issued at an issue price of $ per Unit (the "Unit Issue Price").
Prior to June __, 1998 (the "Automatic Separation Date"), the Purchase
Contracts and Put Warrants may be purchased and transferred only as Units and
will trade under the CUSIP number for the Units (617446364). On the Automatic
Separation Date, the Units will automatically separate into their constituent
Purchase Contracts and Put Warrants (which will thereafter trade under their
respective CUSIP numbers), and the Units will cease to exist. Each beneficial
owner of a Unit on the Automatic Separation Date will become the owner of one
Purchase Contract (CUSIP 617446190) and one Put Warrant (CUSIP 617446182), which
may thereafter be transferred as separate securities. The Units and the
constituent Purchase Contracts and Put Warrants will be represented by global
securities registered in the name of a nominee of The Depository Trust Company
("DTC"), as Depositary. Beneficial interests in the Units and, after the
Automatic Separation Date, beneficial interests in the Purchase Contracts and
Put Warrants will be shown on, and transfers thereof will be effected only
through, records maintained by the Depositary (with respect to participants'
interests) and its participants. A further description of the Depositary's
procedures with respect to such global securities is set forth in the Prospectus
under "Global Securities," and, except as described therein, Units, Purchase
Contracts and Put Warrants in certificated form will not be issued in exchange
for such global securities.
The Depositary has advised the Company as follows: The Depositary is a
limited-purpose trust company organized under the New York Banking Law, a
"banking organization" within the meaning of the New York Banking Law, a member
of the Federal Reserve System, a "clearing corporation" within the meaning of
the New York Uniform Commercial Code, and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Securities Exchange Act of
1934, as amended. The Depositary holds securities deposited with it by its
participants and facilitates the settlement of transactions among its
participants in such securities through electronic computerized book-entry
changes in accounts of the participants, thereby eliminating the need for
physical movement of securities certificates. The Depositary's participants
include securities brokers and dealers (including the Underwriter), banks, trust
companies, clearing corporations and certain other organizations, some of whom
(and/or their representatives) own the Depositary. Access to the Depositary
book-entry system is also available to others, such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a participant, either directly or indirectly.
The Company has appointed Morgan Stanley & Co. Incorporated ("MS & Co.") as
Calculation Agent with respect to the Purchase Contracts and Put Warrants. All
determinations made by the Calculation Agent will be at the sole discretion of
the Calculation Agent and will, in the absence of manifest error, be conclusive
for all purposes and binding on the Company and holders of the Units, Purchase
Contracts and Put Warrants.
Because the Calculation Agent is an affiliate of the Company, potential
conflicts of interest may exist between the Calculation Agent and the holders of
the Units, Purchase Contracts and Put Warrants, including with respect to
certain determinations and judgments that the Calculation Agent must make in
determining the Final SPDR Value, the number of SPDRS with a value equal to the
Final SPDR Value, any antidilution adjustments or whether a Market Disruption
Event has occurred. MS & Co., as a registered broker-dealer, is required to
maintain policies and procedures regarding the handling and use of confidential
proprietary information, and such policies and procedures will be in effect
throughout the term of the Units, Purchase Contracts and Put Warrants to
restrict the use of information relating to the calculation of the Final SPDR
Value prior to the dissemination of such information. MS & Co. is obligated to
carry out its duties and functions as Calculation Agent in good faith and using
its reasonable judgment.
Certain Provisions of the Unit Agreement
Remedies
The Unit Agent will act solely as an agent of the Company in connection
with the Units and will not assume any obligation or relationship of agency or
trust for or with any holders of Units or interests therein. Any holder of Units
or interests therein may, without the consent of the Unit Agent or any other
holder or beneficial owner of Units, enforce by appropriate legal action, on its
own behalf, it rights under the Unit Agreement; provided that the holders of
Units or interests therein may only enforce their rights under the Purchase
Contracts and the Put Warrants issued as parts of such Units in accordance with
the terms of the Senior Debt Indenture and the Warrant Agreement, respectively.
Modification
The Unit Agreement may be amended by the Company and the Unit Agent,
without the consent of the holders, for the purpose of curing any ambiguity, or
of curing, correcting or supplementing any defective or inconsistent provision
therein or in any other manner which the Company may deem necessary or desirable
and which will not adversely affect the interest of the affected holders of
Units in any material respect.
The Unit Agreement will contain provisions permitting the Company and the
Unit Agent, with the consent of the holders of not less than a majority of Units
at the time outstanding, to modify the rights of the holders of the Units so
affected and the terms of the Unit Agreement, except that no such modification
may, without the consent of the holder of each outstanding Unit affected
thereby, (i) materially adversely affect the holders' rights under any Unit or
(ii) reduce the aforesaid percentage of outstanding Units issued under the Unit
Agreement, the consent of the holders of which is required for the modification
or amendment of the provisions of the Unit Agreement. Modifications of Purchase
Contracts issued as part of Units may only be made in accordance with the Senior
Debt Indenture, as described under "Description of Debt Securities--Modification
of the Indentures" in the accompanying Prospectus. Modifications of Put Warrants
issued as part of Units may only be made in accordance with the terms of the
Warrant Agreement as described in the accompanying Prospectus under "Description
of Warrants--Modifications."
Title
The Company, the Unit Agent, the Trustee, the Warrant Agent and any agent
thereof will treat the registered owner of any Unit (and, after the Automatic
Separation Date, of any Purchase Contract or Put Warrant) as the owner thereof
(notwithstanding any notice to the contrary) for all purposes.
Purchase Contracts
The number of Purchase Contracts Settling September 30, 2005 will be
limited to 250,000 and will be issued in fully registered form only in
denominations of 1,000 Purchase Contracts and any integral multiple thereof. On
the Contract Settlement Date (including as a result of acceleration or
otherwise), the Company will be required to deliver to the holder of each
Purchase Contract a number of SPDRS with a value equal to the Final SPDR Value.
The Final SPDR Value will equal the arithmetic average of the SPDR Closing
Values as determined on each of the three Determination Dates, and will be
calculated by the Calculation Agent on the last Determination Date. The number
of SPDRS with a value equal to such Final SPDR Value will be determined at the
close of business on the last Determination Date. The Purchase Contracts are not
redeemable by the Company prior to the Contract Settlement Date; nor do the
Purchase Contracts entitle the holder thereof to receive any SPDRS prior to the
Contract Settlement Date. See "Antidilution Adjustments" below.
The Company will, or will cause the Calculation Agent to, (i) provide
written notice to the Trustee on or prior to 10:30 a.m. on the Trading Day
immediately prior to the Contract Settlement Date of the number of SPDRS to be
delivered in satisfaction of each Purchase Contract and (ii) deliver such SPDRS
(and any cash representing fractional SPDRS) to the agent referred to in the
immediately succeeding paragraph for delivery to the holders. Upon the
settlement of the Purchase Contracts, the Company will pay cash in lieu of
delivering fractional SPDRS in an amount equal to the corresponding Market Price
of such fraction of a SPDR, as determined by the Calculation Agent as of the
second Trading Day immediately prior to the Contract Settlement Date.
On the Contract Settlement Date, the Purchase Contracts may be presented
for delivery of SPDRS (and any cash representing fractional SPDRS) at the agency
in the Borough of Manhattan, The City of New York, maintained by the Company for
such purpose. On the date hereof, the agent for such presentation and delivery
with respect to the Purchase Contracts (the "Paying Agent") is The Chase
Manhattan Bank (formerly known as Chemical Bank), acting through its corporate
trust office at 450 West 33rd Street, New York, New York 10001.
In case an Event of Default (as defined under the Senior Debt Indenture)
with respect to the Purchase Contracts shall have occurred and be continuing,
the number of SPDRS declared due and payable upon any acceleration of the
Purchase Contracts will be determined by the Calculation Agent and will be a
number of SPDRS with a value on the date of acceleration equal to the Final SPDR
Value, determined as though each Determination Date scheduled to occur on or
after such date of acceleration were the date of acceleration.
Put Warrants
The Put Warrants are Universal Warrants of the Company, as further
described in the Prospectus under "Description of Warrants." The number of Put
Warrants will be limited to 250,000 and will be issued only in fully registered
form in denominations of 1,000 Put Warrants and any integral multiple thereof.
On the Warrant Settlement Date, the holder of a Put Warrant will have the right,
which may be exercised only in whole multiples of 1,000 Put Warrants, upon (i)
completion by the holder and delivery to the Warrant Agent and the Calculation
Agent of an Official Notice of Exercise, in the form attached hereto as Annex B,
on or after August 26, 2005 and prior to 11:00 a.m. New York City time on the
Exercise Expiration Date and (ii) the delivery of the Put Warrant Certificate
and a number of SPDRS per Put Warrant with a value equal to the Final SPDR
Value, as described under "--Purchase Contracts" above, to the Warrant Agent at
the Warrant Agent's Window prior to 10:30 a.m. on the Warrant Settlement Date,
to sell such SPDRS to the Company and to receive from the Company on such
Warrant Settlement Date, as the purchase price for such SPDRS, $ (the "Put
Price"). The Company will, or will cause the Calculation Agent to, notify the
holders of the Put Warrants and the Warrant Agent at the close of business on
the Exercise Expiration Date of (i) the Final SPDR Value and (ii) the number of
SPDRS per Put Warrant with a value equal to the Final SPDR Value that may be
sold to the Company for the Put Price. In order to eliminate the risk of any
upward movement in the market price of SPDRS after a holder submits an Official
Notice of Exercise, the exercise of a Put Warrant will be deemed subject to a
limit order so that the Put Warrant will not be exercised if the Final SPDR
Value, as determined by the Calculation Agent on the Exercise Expiration Date,
is equal to or greater than the Put Price. If the Exercise Expiration Date is
postponed as described in the definition thereof, such limit order will apply on
the Exercise Expiration Date as so postponed. None of the Put Warrants is
redeemable by the Company prior to the Warrant Settlement Date; nor does any Put
Warrant entitle the holder thereof to sell any SPDRS to the Company prior to the
Warrant Settlement Date. A holder of a Put Warrant may not sell to the Company
less than the number of SPDRS with a value equal to the Final SPDR Value upon
exercise of such Put Warrant. See "Antidilution Adjustments" below.
So long as the Put Warrants are represented by global securities, the
Depositary's nominee will be the only entity that can exercise such Put
Warrants. In order to ensure that the Depositary's nominee will timely exercise
the rights conferred by the Put Warrants, the beneficial owner of such Put
Warrant must instruct the broker or other direct or indirect participant through
which it holds an interest in such Put Warrant to notify the Depositary of its
desire to exercise such Put Warrant. Different firms have different deadlines
for accepting instructions from their customers and, accordingly, each
beneficial owner should consult the broker or other direct or indirect
participant through which it holds an interest in a Put Warrant in order to
ascertain the deadline for such an instruction in order for timely notice to be
delivered to the Depositary prior to 11:00 a.m. on the Exercise Expiration Date.
A further description of the Depositary's procedures with respect to
Registered Global Securities (including the registered global Units, Purchase
Contracts and Put Warrants) representing Book-Entry Securities is set forth in
the Prospectus under "Global Securities." The Depositary has confirmed to the
Company, the Unit Agent, the Paying Agent, the Warrant Agent and the Trustee
that it intends to follow such procedures.
The provisions of the Warrant Agreement are described more fully in the
accompanying Prospectus under "Description of Warrants."
Antidilution Adjustments
If SPDRS are subject to a split or reverse split, then once such split has
become effective, the Adjustment Factor (one (1) if not previously adjusted)
used to calculate the SPDR Closing Values will be adjusted to equal the product
of the prior Adjustment Factor and the number of SPDRS issued in such split or
reverse split with respect to one SPDR.
If the SPDR Trust is liquidated or otherwise terminated (a "Liquidation
Event"), (i) the Market Price of SPDRS on any Determination Date (or Exercise
Expiration Date) following such Liquidation Event will be determined by the
Calculation Agent and will be deemed to be a fraction of the closing value of
the S&P 500 Index (or any Successor Index, as described below) on such
Determination Date (or Exercise Expiration Date) (taking into account any
material changes in the method of calculating the S&P 500 Index following such
Liquidation Event) equal to that fraction of the closing value of the S&P 500
Index represented by the Market Price of SPDRS on the last day prior to the
occurrence of such Liquidation Event on which a Market Price of SPDRS was
available, (ii) at the Contract Settlement Date, the Company will deliver the
Final SPDR Value in cash to the holder of a Purchase Contract in lieu of
delivering SPDRS and (iii) at the Warrant Settlement Date, with respect to any
Put Warrant expiring on or after the occurrence of a Liquidation Event, the
Company will deliver, or cause the Calculation Agent to deliver, an amount in
cash equal to the excess, if any of the Put Price over the Final SPDR Value, as
determined by the Calculation Agent on the Exercise Expiration Date of such Put
Warrant; provided that holders of 20,000 or more Purchase Contracts shall have
the option to request, prior to 11:00 a.m. New York City time on the fifth
Business Day prior to the last Determination Date, that the Company pay, or
cause the Calculation Agent to pay, the Final SPDR Value by delivering, if
reasonably practicable, the component stocks of the S&P 500 Index in proportion
to their representation in such index.
If Standard & Poor's ("S&P") discontinues publication of the S&P 500 Index
and S&P or another entity publishes a successor or substitute index that the
Calculation Agent determines, in its sole discretion, to be comparable to the
discontinued S&P 500 Index (such index being referred to herein as a "Successor
Index"), then any subsequent Market Price of SPDRS will be determined by
reference to the value of such Successor Index at the close of trading on the
NYSE, the AMEX, NASDAQ NMS or the relevant exchange or market for the Successor
Index on the relevant Determination Date or Exercise Expiration Date, as the
case may be. Upon any selection by the Calculation Agent of a Successor Index,
the Calculation Agent will cause written notice thereof to be furnished to the
Trustee, the Warrant Agent, the Company and to the holders of the Purchase
Contracts and Put Warrants within three Trading Days of such selection.
If S&P discontinues publication of the S&P 500 Index prior to, and such
discontinuance is continuing on, any Determination Date (or Exercise Expiration
Date) that follows a Liquidation Event and the Calculation Agent determines that
no Successor Index is available at such time, then on such Determination Date
(or Exercise Expiration Date), the Calculation Agent will determine the closing
value that would be used in computing the Market Price of SPDRS on such
Determination Date (or Exercise Expiration Date). The closing value will be
computed by the Calculation Agent in accordance with the formula for and method
of calculating the S&P 500 Index last in effect prior to such discontinuance,
using the closing price (or, if trading in the relevant securities has been
materially suspended or materially limited, its good faith estimate of the
closing price that would have prevailed but for such suspension or limitation)
on such Determination Date (or Exercise Expiration Date) of each security most
recently comprising the S&P 500 Index. Notwithstanding these alternative
arrangements, a Liquidation Event or the discontinuance of the publication of
the S&P 500 Index may adversely affect the value of the Purchase Contracts and
the Put Warrants.
No adjustments to the Adjustment Factor pursuant to the first paragraph of
this section will be required unless such adjustment would require a change of
at least 0.1% in the amount being adjusted as then in effect. Any number so
adjusted will be rounded to the nearest one hundred-thousandth with five
one-millionths being rounded upward. No adjustments to the terms of the Put
Warrants or Purchase Contracts will be required other than those specified
above. However, the Company may, at its sole discretion, cause the Calculation
Agent to make additional adjustments to the Purchase Contracts or the Put
Warrants to reflect changes in the SPDRS in other circumstances if the Company
determines such adjustments to be appropriate. The adjustments specified above
do not cover all events that could affect the Market Price of the SPDRS.
The Calculation Agent shall be solely responsible for the determination and
calculation of any of the adjustments specified above and of any related
determinations and calculations with respect to any distributions in connection
with any events described above, and its determinations and calculations with
respect thereto shall be conclusive.
The Calculation Agent will provide information as to any such adjustments
upon written request by any holder of the Units, Purchase Contracts or Put
Warrants.
RISK FACTORS RELATING TO THE UNITS
Comparison to Conventional Debt Security
An investment in the Units entails significant risks not associated with
similar investments in a conventional debt security. The risks will be increased
significantly if, after the Automatic Separation Date, an investor holds a
Purchase Contract without also holding the Put Warrant (the "Related Put
Warrant") originally combined with such Purchase Contract as a Unit or holds a
Put Warrant without also holding the Purchase Contract (the "Related Purchase
Contract") originally combined with such Put Warrant as a Unit. Risks of an
investment in the Units, Purchase Contracts and Put Warrants include the
following:
Risks of Investments in Purchase Contracts
The value of SPDRS that a holder of a Purchase Contract will receive upon
settlement of the Purchase Contracts is not fixed, but is based on the price of
SPDRS on each of the Determination Dates. Because the price of SPDRS is subject
to market fluctuations, the value of the SPDRS received upon settlement of a
Purchase Contract, determined as described herein, may be more or less than the
Unit Issue Price. If the Final SPDR Price is less than the Unit Issue Price, an
investment in the Units may result in a loss at the Contract Settlement Date if
the holder of the settling Purchase Contract has not held and timely exercised
the Related Put Warrant or if the Final SPDR Price is not sufficiently greater
than the Unit Issue Price to compensate the investor for the time value of
money. Investors who hold a Purchase Contract without also holding the Related
Put Warrant will suffer a loss if the Final SPDR Price is less than the portion
of the Unit Issue Price allocated to such Purchase Contract.
Investment decisions relating to the Purchase Contracts require the
investor to predict the direction of movements in the underlying SPDRS, and,
accordingly, of the S&P 500 Index, as well as the amount and timing of those
movements. Before making any investment in the Purchase Contracts, it is
important that a prospective investor become informed about and understand the
nature of forward contracts in general, the specific terms of the Purchase
Contracts and the nature of SPDRS.
No Ownership Rights of SPDRS Prior to Delivery
Holders of the Purchase Contracts will not be entitled to any rights with
respect to SPDRS (including, without limitation, voting rights and the rights to
receive any dividends, capital gain distributions or other distributions in
respect thereof) until such time as the Company shall deliver SPDRS to holders
upon settlement of the Purchase Contracts.
Risks of Investments in Put Warrants
At maturity of the Put Warrants, a holder of a Put Warrant has the right to
deliver a number of SPDRS with a value equal to the Final SPDR Value to the
Warrant Agent and to receive in exchange from the Company the Put Price. If, on
the Exercise Expiration Date, the Final SPDR Value is greater than the Put
Price, the holder will not deliver such SPDRS and will forfeit the price paid
for the Put Warrant. Because the Final SPDR Value is based on the arithmetic
average of the SPDR Closing Values on each of three Determination Dates, an
investor may so forfeit the price paid for a Put Warrant even if the SPDR
Closing Values on the first two Determination Dates were less than the Put
Price. In addition, the Put Warrants require physical settlement: an investor in
the Put Warrants will have to own or acquire SPDRS in the market in order to
exercise a Put Warrant and receive the Put Price from the Company. The Put
Warrants are European-style warrants that may be exercised only on the Exercise
Expiration Date. Therefore, if an investor fails to exercise the Put Warrants or
deliver a SPDR to the Warrant Agent on a timely basis, the investor will not
receive the Put Price.
Investment decisions relating to the Put Warrants require the investor to
predict the direction of movements in the underlying SPDRS, and, accordingly, of
the S&P 500 Index, as well as the amount and timing of those movements. The Put
Warrants may change substantially in value, or lose all of their value, with
relatively small movements in the Market Price of SPDRS. Moreover, a Put Warrant
is a "wasting asset" in that in the absence of countervailing factors, such as
an offsetting movement in the level of the Market Price of SPDRS, the market
value of a Put Warrant will tend to decrease over time and a Put Warrant will
have no market value after the time for exercise has expired. Accordingly,
owning the Put Warrants, especially when held separately from the Related
Purchase Contracts, involves a high degree of risk and is not appropriate for
every investor. As such, investors who are considering purchasing the Put
Warrants and holding them without also holding the Related Purchase Contracts
must be able to understand and bear the risk of a speculative investment in the
Put Warrants and be experienced with respect to options and option transactions
and understand the risks of stock index transactions. Such investors should
reach an investment decision only after careful consideration, with their
advisers, of the suitability of the Put Warrants in light of their particular
financial circumstances and the information set forth in this Prospectus
Supplement and in the Prospectus.
The Put Warrants share many of the risks of standardized options but,
unlike standardized options, they are backed only by the credit of the Company
(not The Options Clearing Corporation).
Before making any investment in the Put Warrants, it is important that a
prospective investor become informed about and understand the nature of the
Warrants in general, as described in the accompanying Prospectus, the specific
terms of the Put Warrants and the nature of SPDRS. It is especially important
for an investor to be familiar with the procedures governing the exercise of the
Put Warrants, since the failure to properly exercise a Put Warrant on or prior
to the Exercise Expiration Date for such Put Warrant will result in the loss of
the opportunity to receive the Put Price.
Limited Pricing Information; Possible Illiquidity of the Secondary Market
The Units (and, after the Automatic Separation Date, the Purchase Contracts
and the Put Warrants) will not be listed on any national securities exchange or
accepted for quotation on a trading market and, as a result, pricing information
for the Units, Purchase Contracts and Put Warrants may be difficult to obtain.
There can be no assurance as to how the Units, Purchase Contracts or Put
Warrants will trade in the secondary market or whether such market will be
liquid or illiquid. Securities with characteristics similar to the Units are
novel securities, and there is currently no secondary market for the Units. The
market value for the Units (and, after the Automatic Separation Date, of the
Purchase Contracts and Put Warrants) will be affected by a number of factors in
addition to the creditworthiness of the Company and the value of SPDRS,
including, but not limited to, the volatility of SPDRS, the dividend rate on
SPDRS, the comparative value of the SPDRS and the value of the S&P 500 Index,
market interest and yield rates and the time remaining to the expiration of the
Put Warrants and the settlement of the Purchase Contracts. In addition, the
value of SPDRS depends on a number of interrelated factors, including economic,
financial and political events, that can affect the capital markets generally.
The market value of the Units (and, after the Automatic Separation Date, of the
Purchase Contracts and Put Warrants) is expected to depend primarily on changes
in the Market Price of SPDRS. The price at which a holder will be able to sell
Units (or, after the Automatic Separation Date, a combination of a Purchase
Contract and the Related Put Warrant) prior to the Contract Settlement Date may
be at a discount, which could be substantial, from the Unit Issue Price, if, at
such time, the Market Price of SPDRS is below, equal to or not sufficiently
above the Unit Issue Price. The historical Market Prices of SPDRS should not be
taken as an indication of the future performance of SPDRS during the term of any
Unit.
Limited Antidilution Adjustments
Although the amount that holders of the Units are entitled to receive at
settlement of the Purchase Contracts and the number of SPDRS salable under a Put
Warrant are each subject to adjustment for certain events, such required
adjustments do not cover all events that could affect the Market Price of the
SPDRS. Although the Company may, at its sole discretion, cause the Calculation
Agent to make additional adjustments to the Purchase Contracts or Put Warrants
to reflect changes in the SPDRS in other circumstances, it is under no
obligation to do so. Such other events may adversely affect the market value of
the Units, Purchase Contracts and Put Warrants.
Variations in Composition of the SPDR Trust and the S&P 500 Index
The performance of the SPDR Trust may not exactly replicate the performance
of the S&P 500 Index because the total return generated by the securities
included in the S&P 500 Index (the "Index Securities") will be reduced by
transaction costs incurred in adjusting the balance of securities included in
the SPDR Trust and other SPDR Trust expenses, whereas such transaction costs and
expenses are not included in the calculation of the S&P 500 Index. In addition,
the SPDR Trust may make capital gain distributions from time to time which could
lower the Market Price of SPDRS. It is also possible that the SPDR Trust may not
fully replicate the performance of the S&P 500 Index due to the temporary
unavailability of certain Index Securities in the secondary market or due to
other extraordinary circumstances.
Lack of Affiliation between the Company and the SPDR Trust
The Company is not affiliated with the SPDR Trust and, although the Company
as of the date of this Pricing Supplement does not have any material non-public
information concerning the SPDR Trust, events affecting the Trust, including
those described above under "Antidilution Adjustments," are beyond the Company's
ability to control and are difficult to predict.
The SPDR Trust is not involved in the offering of the Units and has no
obligations with respect to the Units, Purchase Contracts or Put Warrants,
including any obligation to take the interests of the Company or of holders of
Units, Purchase Contracts or Put Warrants into consideration for any reason. The
SPDR Trust will not receive any of the proceeds of the offering of the Units
made hereby and is not responsible for, and has not participated in, the
determination of the timing of, prices for or quantities of, the Units offered
hereby.
Affiliation between the Calculation Agent and the Company
Because the Calculation Agent is an affiliate of the Company, potential
conflicts of interest may exist between the Calculation Agent and the holders of
the Units, Purchase Contracts and Put Warrants, including with respect to
certain antidilution adjustments that may influence the determination of the
amount of SPDRS receivable upon settlement of the Purchase Contracts or the
number of SPDRS that may be sold to the Company for the Put Price upon exercise
of a Put Warrant. See "Antidilution Adjustments" above and "Market Disruption
Event" in the Glossary.
Other Considerations
It is suggested that prospective investors who consider purchasing the
Units should reach an investment decision only after carefully considering the
suitability of the Units in light of their particular circumstances.
Tax Considerations
Investors should consider the tax consequences of investing in the Units.
Due to the complexity of the rules affecting the federal income tax treatment of
the Units and the absence of authorities that directly address the proper
treatment of the Units or their components, prospective purchasers are strongly
urged to consult their tax advisors regarding the federal income tax
consequences of an investment in the Units. See "United States Federal Income
Taxation" in this Prospectus Supplement.
SPDRS; PUBLIC INFORMATION
The SPDR Trust, formed by PDR Services Corporation, a wholly-owned
subsidiary of the AMEX, is a unit investment trust registered under the
Investment Company Act of 1940 (the "40 Act") that holds a portfolio of
securities consisting of substantially all of the common stocks, in
substantially the same weighting, as the S & P 500 Index. Each unit,
representing a fractional undivided interest in the Trust, is a SPDR. SPDRS are
registered under the Exchange Act. Trusts with securities registered under the
Exchange Act are required to file periodically certain financial and other
information specified by the Securities and Exchange Commission (the
"Commission"). Information provided to or filed with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 or at
its Regional Offices located at Suite 1400, Citicorp Center, 500 West Madison
Street, Chicago, Illinois 60661 and at Seven World Trade Center, 13th Floor, New
York, New York 10048, and copies of such material can be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. In addition, information provided to or filed
with the Commission electronically can be accessed through a Website maintained
by the Commission. The address of the Commission's Website is http:/www.sec.gov.
Information provided to or filed with the Commission by the Trust pursuant to
the '40 Act and the Exchange Act of 1934 can be located by reference to
Commission file number 811-7330. In addition, information regarding the Trust
may be obtained from other sources including, but not limited to, press
releases, newspaper articles and other publicly disseminated documents. The
Company makes no representation or warranty as to the accuracy or completeness
of such reports.
THIS PRICING SUPPLEMENT RELATES ONLY TO THE UNITS OFFERED HEREBY AND DOES
NOT RELATE TO SPDRS. ALL DISCLOSURES CONTAINED IN THIS PRICING SUPPLEMENT
REGARDING THE SPDR TRUST ARE DERIVED FROM THE PUBLICLY AVAILABLE DOCUMENTS
DESCRIBED IN THE PRECEDING PARAGRAPH. NEITHER THE COMPANY NOR THE AGENT HAS
PARTICIPATED IN THE PREPARATION OF SUCH DOCUMENTS OR MADE ANY DUE DILIGENCE
INQUIRY WITH RESPECT TO THE SPDR TRUST IN CONNECTION WITH THE OFFERING OF THE
UNITS. NEITHER THE COMPANY NOR THE AGENT MAKES ANY REPRESENTATION THAT SUCH
PUBLICLY AVAILABLE DOCUMENTS OR ANY OTHER PUBLICLY AVAILABLE INFORMATION
REGARDING THE SPDR TRUST ARE ACCURATE OR COMPLETE. FURTHERMORE, THERE CAN BE NO
ASSURANCE THAT ALL EVENTS OCCURRING PRIOR TO THE DATE HEREOF (INCLUDING EVENTS
THAT WOULD AFFECT THE ACCURACY OR COMPLETENESS OF THE PUBLICLY AVAILABLE
DOCUMENTS DESCRIBED IN THE PRECEDING PARAGRAPH) THAT WOULD AFFECT THE TRADING
PRICE OF SPDRS (AND THEREFORE THE UNIT ISSUE PRICE) HAVE BEEN PUBLICLY
DISCLOSED. SUBSEQUENT DISCLOSURE OF ANY SUCH EVENTS OR THE DISCLOSURE OF OR
FAILURE TO DISCLOSE MATERIAL FUTURE EVENTS CONCERNING THE SPDR TRUST COULD
AFFECT THE VALUE RECEIVED ON THE CONTRACT SETTLEMENT DATE OR ANY WARRANT
SETTLEMENT DATE WITH RESPECT TO THE PURCHASE CONTRACTS OR PUT WARRANTS,
RESPECTIVELY, AND THEREFORE THE TRADING PRICES OF THE UNITS AND, AFTER THE
AUTOMATIC SEPARATION DATE, OF THE PURCHASE CONTRACTS AND THE PUT WARRANTS.
NEITHER THE COMPANY NOR ANY OF ITS AFFILIATES MAKES ANY REPRESENTATION TO
ANY PURCHASER OF UNITS AS TO THE PERFORMANCE OF SPDRS.
The Company or its affiliates may presently or from time to time engage in
business with the SPDR Trust. In the course of such business, the Company or its
affiliates may acquire non-public information with respect to the SPDR Trust.
The statement in the preceding sentence is not intended to affect the rights of
holders of the Units under the securities laws. Any prospective purchaser of a
Unit should undertake an independent investigation of the SPDR Trust as in its
judgment is appropriate to make an informed decision with respect to an
investment in SPDRS.
HISTORICAL INFORMATION
The following table sets forth the high and low Market Price of SPDRS
during 1993, 1994, 1995, 1996, 1997 and 1998 through March 3, 1998. The AMEX
symbol for SPDRS is "SPY" (CUSIP 78462F103). The Market Price of SPDRS on March
3, 1998 was $105.500. The Market Prices listed below were obtained from
Bloomberg Financial Markets. The Company believes all such information to be
accurate. The historical prices of SPDRS should not be taken as an indication of
future performance, and no assurance can be given that the price of SPDRS will
increase sufficiently to cause the beneficial owners of the Purchase Contracts
to receive an amount in excess of the Unit Issue Price on the Contract
Settlement Date.
Dividends
High Low per Share
SPDRS ------- ------- ---------
1993
First Quarter............................ $45.750 $43.406 $0.2132
Second Quarter........................... 45.656 43.406 0.3180
Third Quarter............................ 47.063 44.219 0.2862
Fourth Quarter........................... 47.094 45.844 0.3172
1994
First Quarter............................ $48.281 $44.469 $0.2712
Second Quarter........................... 46.531 43.906 0.3050
Third Quarter............................ 47.781 44.563 0.2882
Fourth Quarter........................... 47.640 44.875 0.3627
1995
First Quarter............................ 50.422 45.781 0.2682
Second Quarter........................... 55.125 50.234 0.3162
Third Quarter............................ 58.781 54.609 0.3123
Fourth Quarter........................... 62.625 57.750 0.3820
1996
First Quarter............................ 66.328 59.969 0.2855
Second Quarter........................... 68.188 62.922 0.3509
Third Quarter............................ 68.813 62.656 0.3500
Fourth Quarter........................... 76.125 69.000 0.3171*
1997
First Quarter............................ 81.875 74.031 0.2993
Second Quarter........................... 90.234 73.375 0.3500
Third Quarter............................ 96.031 89.344 0.3484
Fourth Quarter........................... 98.938 87.188 0.3795
1998
First Quarter (through March 3, 1998).... 105.500 92.313 0.0000
*The SPDR Trust also made a capital gain distribution of $0.897 per SPDR in
the fourth quarter of 1996.
The Company makes no representation as to the amount of dividends, if any,
that will be payable on each SPDR in the future. In any event, holders of the
Units (and, after the Automatic Separation Date, of Purchase Contracts) will not
be entitled to receive dividends, if any, that may be payable on SPDRS.
UNITED STATES FEDERAL INCOME TAXATION
This summary addresses certain U.S. federal income tax consequences to
holders who are initial holders of the Units, who purchase the Units at the Unit
Issue Price, and who will hold the Units as capital assets within the meaning of
Section 1221 of the Internal Revenue Code of 1986, as amended (the "Code"). This
summary is based on the Code, administrative pronouncements, judicial decisions,
and existing and proposed Treasury Regulations, all as currently in effect, any
of which may be changed subsequent to the date of this Prospectus Supplement,
thereby potentially affecting the tax consequences described herein. This
summary does not address all aspects of the U.S. federal income taxation that
may be relevant to a particular holder in light of its individual circumstances
or to certain types of holders subject to special treatment under the U.S.
federal income tax laws (e.g., certain financial institutions, insurance
companies, tax-exempt organizations, dealers in options or securities, or
persons who hold positions (such as SPDRS) other than the Unit or either of the
Components (as defined below) such that the Unit or either of the Components are
treated as a part of a hedging transaction, straddle, conversion or other
integrated transaction); further, it does not address holders who will incur
interest or carrying charges in order to acquire and hold a Unit or the
Components. As the law applicable to the U.S. federal income taxation of
instruments such as the Units is technical and complex, the discussion below
necessarily represents only a general summary. Moreover, the effect of any
applicable state, local or foreign tax laws is not discussed.
As used herein, the term "U.S. Holder" means a beneficial owner of a Unit
that is, for U.S. federal income tax purposes, (i) a citizen or resident of the
U.S., (ii) a corporation created or organized under the laws of the U.S. or any
political subdivision thereof, or (iii) an estate or trust the income of which
is subject to U.S. federal income taxation regardless of its source.
General
Pursuant to the terms of the Units, the Company and every U.S. Holder of a
Unit agree (in the absence of an administrative determination or judicial ruling
to the contrary) to characterize a Unit for all tax purposes as an investment
unit consisting of the following components (the "Components"): (i) a Purchase
Contract and (ii) a Put Warrant. Although no statutory, judicial or
administrative authority directly addresses the characterization of the Units or
instruments similar to the Purchase Contract for U.S. federal income tax
purposes and the matter is not free from doubt, Davis Polk & Wardwell, special
tax counsel to the Company ("Tax Counsel"), is of the opinion that the
characterization of the Units by the Company and the U.S. Holders will be
respected as separate components as described above. Based on the Company's
determination of the relative fair market values of the Components at the time
of issuance of the Units, the Company will allocate % of the Unit Issue Price as
premium for the Put Warrant and the remainder of the Unit Issue Price to the
Purchase Contract. The characterization of the Units by the Company and the U.S.
Holders and the opinion of Tax Counsel are not binding on the Internal Revenue
Service ("IRS") or the courts and no ruling is being requested from the IRS with
respect to the Units; accordingly, there can be no assurance that the treatment
of the Units described in this summary will be upheld by a court. Unless
otherwise indicated, the following discussion assumes that the characterization
of the Units and the allocation of the Unit Price as set forth above are
respected.
Tax Treatment of the Units
Tax Basis. Based on the Company's determination as set forth above, the
U.S. Holder's tax basis in the Purchase Contract and the Put Warrant will be __%
and __% of the Unit Issue Price, respectively.
Settlement of the Purchase Contract. Upon the final settlement of the
Purchase Contract, a U.S. Holder will not recognize any gain or loss with
respect to any SPDRS received thereon. With respect to any cash received upon
settlement in lieu of any fractional shares of SPDRS, a U.S. Holder will
recognize gain or loss. The amount of such gain or loss will be determined by
the extent to which the amount of such cash received differs from the pro rata
portion of the U.S. Holder's tax basis in the Purchase Contract allocable to the
cash. With respect to any SPDRS received upon settlement, the U.S. Holder will
have an adjusted tax basis in such SPDRS equal to the pro rata portion of the
U.S. Holder's tax basis in the Purchase Contract allocable thereto. The
allocation of the U.S. Holder's tax basis in the Purchase Contract between cash
and SPDRS should be based on the amount of the cash received and the relative
fair market value, as of the second Trading Day prior to the Contract Settlement
Date, of the SPDRS. At the time of issuance of the Units, the Purchase Contract
and the Put Warrant that constitute a Unit will be treated as offsetting
positions constituting a straddle within the meaning of Section 1092 of the Code
and corresponding Treasury Regulations (the "Straddle Rules"). Under the
Straddle Rules, the holding period of a position is suspended during the time
such position is part of a straddle. Therefore, the holding period of the
Purchase Contract will not begin until the U.S. Holder has disposed of the Put
Warrant, and the holding period of the Put Warrant will not begin until the U.S.
Holder has disposed of the Purchase Contract. Thus, any gain or loss with
respect to any cash received upon settlement in lieu of any fractional share of
SPDRS will be short-term capital gain or loss, as the case may be, unless the
U.S. Holder has disposed of the Put Warrant more than twelve months before the
final settlement of the Purchase Contract. The U.S. Holder's holding period for
any SPDRS received will start on the day after the Contract Settlement Date.
Expiration of the Put Warrant. Upon the expiration of the Put Warrant, a
U.S. Holder will realize loss equal to the U.S. Holder's tax basis in the
expired Put Warrant. Under the Straddle Rules, if the U.S. Holder holds SPDRS
received on settlement of the Purchase Contract upon expiration of the Put
Warrant, the U.S. Holder may be required to defer recognition of the loss
realized on the expiration of such Put Warrant until the taxable year in which
the U.S. Holder disposes of its interest in the SPDRS.
Exercise of the Put Warrant. Upon the exercise of the Put Warrant, a U.S.
Holder will realize capital gain or loss to the extent the Put Price differs
from the sum of the U.S. Holder's tax basis in the SPDRS sold and the U.S.
Holder's tax basis in the exercised Put Warrant. A U.S. Holder who exercises the
Put Warrant with SPDRS other than those received on settlement of the Purchase
Contract will be required to defer recognition of any loss attributable to the
exercise of the Put Warrant if it continues to hold SPDRS received on settlement
of the Purchase Contract. By virtue of Section 1233 of the Code and
corresponding Treasury Regulations (the "Short Sale Rules"), any capital gain
realized upon the exercise of the Put Warrant will generally be short-term
capital gain if the U.S. Holder has acquired any SPDRS within the period
beginning twelve months before the purchase of the Units and ending upon the
exercise of the Put Warrant.
Sale or Exchange of the Components. Upon a sale or exchange of a U.S.
Holder's separate interest in the Purchase Contract or the Put Warrant prior to
the relevant settlement date, the U.S. Holder will recognize capital gain, if
any, equal to the difference between the amount realized and the U.S. Holder's
tax basis in the Component so sold or exchanged. Under the Straddle Rules, if
the U.S. Holder realizes a capital loss on such sale or exchange, measured by
the difference between the U.S. Holder's basis in the Component so sold or
exchanged and the amount realized, the U.S. Holder may have to defer recognition
of the loss until or unless the U.S. Holder has (i) in the case of a sale or
exchange of the Purchase Contract, disposed of the Put Warrant; and (ii) in the
case of a sale or exchange of a Put Warrant, disposed of the Purchase Contract.
Under the Straddle Rules, any recognized gain will be short-term capital gain
unless the U.S. Holder has (i) in the case of a sale or exchange of the Purchase
Contract, disposed of the Put Warrant more than twelve months prior to such sale
or exchange; and (ii) in the case of a sale or exchange of the Put Warrant,
disposed of the Purchase Contract more than twelve months prior to such sale or
exchange.
Possible Alternative Tax Treatments of an Investment in the Units
Due to the absence of authorities that directly address the proper
treatment of the Units or the Components, it is possible that the IRS could seek
to analyze the U.S. federal income tax consequences of owning a Unit or either
of the Components thereof under Treasury Regulations governing contingent
payment debt instruments (the "Contingent Payment Regulations").
Based on the advice of Tax Counsel, the Company will take the position that
neither a Unit nor either of the Components is a debt instrument for tax
purposes, and, therefore, the Contingent Payment Regulations do not apply to the
Units or either of the Components. If the IRS were successful in asserting that
the Contingent Payment Regulations applied to the Units or either of the
Components, the timing and character of income thereon would be significantly
affected. Among other consequences, a U.S. Holder would be required to accrue as
original issue discount income at a "comparable yield" on the issue price of the
deemed debt instrument, regardless of the U.S. Holder's usual method of
accounting for federal income tax purposes. In addition, gain or loss would be
recognized with respect to the receipt of SPDRS on final settlement of the
Purchase Contract. Further, any gain realized with respect to such a deemed debt
instrument would generally be characterized as ordinary income rather than
capital gain.
Even if the Contingent Payment Regulations do not apply to the Units or
Components, other alternative U.S. federal income characterizations or
treatments of the Units or Components are also possible, which may affect the
timing and the character of the income or loss with respect to the Units or
Components.
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. If the Kennelly Bill applied to a
Purchase Contract, the effect would be to treat all or a portion of the long
term capital gain recognized by a U.S. Holder on sale of the Purchase Contract
or the SPDRS received thereon as short term capital gain, but only to the extent
such long term capital gain exceeds the long term capital gain that would have
been recognized by such U.S. Holder if the U.S. Holder had acquired SPDRS
directly from the issue date of the Unit and disposed of the SPDRS upon
disposition of the Purchase Contract. In addition, the Kennelly Bill would
impose an interest charge on the gain that was recharacterized on the sale of
the Purchase Contract or the SPDRS received thereon. As proposed, the Kennelly
Bill would be effective for gains recognized after the date of enactment. U.S.
Holders should consult their tax advisors regarding the potential application of
the Kennelly Bill to the purchase, ownership and disposition of a Unit or its
components.
Backup Withholding and Information Reporting
A U.S. Holder of a Unit or a Component may be subject to information
reporting and to backup withholding at a rate of 31 percent of the amounts paid
(or property delivered) to the 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.
DUE TO THE COMPLEXITY OF THE STRADDLE RULES AND THE SHORT SALE RULES AND
THE ABSENCE OF AUTHORITIES THAT DIRECTLY ADDRESS THE PROPER TREATMENT OF THE
UNITS OR THE COMPONENTS, PROSPECTIVE PURCHASERS ARE STRONGLY URGED TO CONSULT
THEIR TAX ADVISORS REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF AN
INVESTMENT IN THE UNITS, INCLUDING, IN PARTICULAR, THE EXTENT TO WHICH THEIR
INDIVIDUAL CIRCUMSTANCES MAY AFFECT THE GENERAL RESULTS OUTLINED ABOVE.
Non-U.S. Holders
As used herein, the term "Non-U.S. Holder" means an owner of a Unit that
is, for United States federal income tax purposes, (i) a nonresident alien
individual, (ii) a foreign corporation, (iii) a nonresident alien fiduciary of a
foreign trust or estate or (iv) a foreign partnership one or more of the members
of which is, for United States federal income tax purposes, a nonresident alien
individual, a foreign corporation or a nonresident alien fiduciary of a foreign
trust or estate. The following summary does not deal with persons that are not
Non-U.S. Holders or that are subject to special rules, such as nonresident alien
individuals that have lost United States citizenship or that have ceased to be
taxed as United States resident aliens, corporations that are treated as foreign
personal holding companies, controlled foreign corporations or passive foreign
investment companies, and certain other Non-U.S. Holders that are owned or
controlled by persons subject to United States federal income tax. In addition,
the following summary does not apply to persons for whom interest or gain on a
Unit is effectively connected with a trade or business in the United States. For
purposes of the discussion below, references to a Unit refer equally to a
Component thereof.
As described above in "United States Federal Income Taxation--Possible
Alternative Tax Treatments of an Investment in the Units," the IRS may seek to
recharacterize the Unit as a debt instrument subject to the Contingent Payment
Regulations. The following discussion applies regardless of whether the IRS
successfully applies such a recharacterization.
Subject to the discussion below concerning backup withholding, payments
with respect to a Unit by the Company or a paying agent to a Non-U.S. Holder,
and gain realized on the sale, exchange or other disposition of such Unit, will
not be subject to United States federal income or withholding tax, provided
that: (i) such Non-U.S. Holder does not own, actually or constructively, 10
percent or more of the total combined voting power of all classes of stock of
the Company entitled to vote, is not a controlled foreign corporation related,
directly or indirectly, to the Company through stock ownership, and is not a
bank receiving interest described in Section 881(c)(3)(A) of the Code; (ii) the
statement required by Section 871(h) or Section 881(c) of the Code has been
provided with respect to the beneficial owner, as discussed below; (iii) such
Non-U.S. Holder is not an individual who is present in the United States for 183
days or more in the taxable year of disposition, or such individual does not
have a "tax home" (as defined in Section 911(d)(3) of the Code) or an office or
other fixed place of business in the United States; and (iv) such payment and
gain are not effectively connected with the conduct by such Non-U.S. Holder of a
trade or business in the United States.
Sections 871(h) and 881(c) of the Code require that, in order to obtain the
portfolio interest exemption from withholding tax, either the beneficial owner
of the Unit, 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 Unit on behalf
of such beneficial owner, file a statement with the withholding agent to the
effect that the beneficial owner of the Unit is not a United States person.
Under United States Treasury Regulations, such requirement will be fulfilled if
the beneficial owner of a Unit certifies on Internal Revenue Service Form W-8,
under penalties of perjury, that it is not a United States person and provides
its name and address, and any Financial Institution holding the Unit 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 Unit 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 Unit after December
31, 1998, unless the foreign partnership has entered into a withholding
agreement with the Internal Revenue Service, a foreign partnership will be
required, in addition to providing an intermediary Form W-8, to attach an
appropriate certification by each partner. Prospective investors, including
foreign partnerships and their partners, should consult their tax advisors
regarding possible additional reporting requirements.
A Unit held by a Non-U.S. Holder at the time of his death will be subject
to United States federal estate tax as a result of such individual's death,
unless an applicable estate tax treaty applies.
Under current Treasury Regulations, backup withholding at 31% will not
apply to payments by the Company made on a Unit if the certifications required
by Sections 871(h) and 881(c) are received, provided in each case that the
Company or such paying agent, as the case may be, does not have actual knowledge
that the payee is a United States person.
Under current Treasury Regulations, payments on the sale, exchange or other
disposition of a Unit made to or through a foreign office of a broker generally
will not be subject to backup withholding. However, if such broker is a United
States person, a controlled foreign corporation for United States tax purposes,
a foreign person 50 percent or more of whose gross income is effectively
connected with a United States trade or business for a specified three-year
period or, in the case of payments made after December 31, 1998, a foreign
partnership with certain connections to the United States, information reporting
will be required unless the broker has in its records documentary evidence that
the beneficial owner is not a United States person and certain other conditions
are met or the beneficial owner otherwise establishes an exemption. Under
proposed Treasury Regulations, backup withholding may apply to any payment which
such broker is required to report if such broker has actual knowledge that the
payee is a United States person. Payments to or through the United States office
of a broker will be subject to backup withholding and information reporting
unless the Non-U.S. Holder certifies, under penalties of perjury, that it is not
a United States person or otherwise establishes an exemption.
Non-U.S. Holders of Unit should consult their tax advisors regarding the
application of information reporting and backup withholding in their particular
situations, the availability of an exemption therefrom, and the procedure for
obtaining such an exemption, if available. Any amounts withheld from a payment
to a Non-U.S. Holder under the backup withholding rules will be allowed as a
credit against such Non-U.S. Holder's United States federal income tax liability
and may entitle such Non-U.S. Holder to a refund, provided that the required
information is furnished to the Internal Revenue Service.
UNDERWRITER
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof, Morgan Stanley & Co. Incorporated, (the
"Underwriter") has agreed to purchase, and the Company has agreed to sell to the
Underwriter 250,000 Units.
The Underwriting Agreement provides that the obligations of the Underwriter
to pay for and accept delivery of the Units are subject to the approval of
certain legal matters by their counsel and to certain other conditions. The
Underwriter is committed to take and pay for all of the Units if any are taken.
The Underwriter proposes initially to offer the Units directly to the
public at the public offering price set forth on the cover page hereof; provided
that the price will be $_______ per Unit and the underwriting discounts and
commissions will be $__________ per Unit for purchasers of greater than or equal
to 100,000 Units and less than 250,000 Units (a "Tier I Investor") and the price
will be $________ per Unit and the underwriting discounts and commissions will
be $__________ per Unit for purchasers of greater than or equal to 250,000 Units
(a "Tier II Investor", and any Tier I Investor or Tier II Investor being
referred to herein as a "Tier Investor"), in each case, in any single
transaction, subject to the holding period requirements described herein. After
the initial offering of the Units, the offering price and other selling terms
may from time to time be varied by the Underwriter.
Generally, delivery of approximately 99.75% of the Units purchased by a
Tier I Investor at the applicable reduced price (the "Delivered Tier I Units")
or approximately 99.50% of the Units purchased by a Tier II Investor at the
applicable reduced price (the "Delivered Tier II Units," and together with the
Delivered Tier I Units, the "Delivered Units") will be made on the date of
delivery of the Units referred to on the cover of this Prospectus Supplement.
The balance of approximately .25% of the Units (the "Escrowed Tier I Units")
purchased by each Tier I Investor or approximately .50% of the Units (the
"Escrowed Tier II Units," and together with the Escrowed Tier I Units, the
"Escrowed Units") purchased by each Tier II Investor, will be held in escrow and
delivered to such Tier Investor if the Tier Investor and any accounts in which
the Tier Investor may have deposited any of its Delivered Units have held all of
the Delivered Units for 45 days following the date of this Prospectus Supplement
or any shorter period deemed appropriate by MS & Co. If a Tier Investor or any
accounts in which the Tier Investor has deposited any of its Delivered Units
fails to satisfy the holding period requirement, as determined by MS & Co., all
of the Tier Investor's Escrowed Units will be forfeited by the Investor and not
delivered to it. The Escrowed Units will instead be delivered to the Underwriter
for sale to investors. This forfeiture will have the effect of increasing the
purchase price per Unit for such investors to 100% of the principal amount of
the Units. Should investors who are subject to the holding period requirement
sell their Units once the holding period is no longer applicable, the market
price of the Units may be adversely affected. See also "Plan of Distribution" in
the accompanying Prospectus.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
or to contribute to payments the Underwriter may be required to make in respect
thereof.
The Company does not intend to apply for listing of the Units or for the
Purchase Contracts or Put Warrants on a national securities exchange, but has
been advised by the Underwriter that it presently intends to make a market in
the Units and, following the Automatic Separation Date, in the Purchase
Contracts and the Put Warrants as permitted by applicable laws and regulations.
The Underwriter is not obligated, however, to make a market in the Units,
Purchase Contracts or Put Warrants and any such market-making may be
discontinued at any time by the Underwriter at its sole discretion. Accordingly,
no assurance can be given as to the liquidity of, or trading market for, the
Units, Purchase Contracts or Put Warrants.
This Prospectus Supplement and the accompanying Prospectus may be used by
the Underwriter and other affiliates of the Company in connection with offers
and sales of the Units, Purchase Contracts or Put Warrants in market-making
transactions at negotiated prices related to prevailing market prices at the
time of sale or otherwise. The Underwriter and such other affiliates of the
Company may act as principal or agent in such transactions.
The Underwriter is a wholly-owned subsidiary of the Company. The
Underwriter's participation in the offering of the Units will be conducted in
compliance with Rule 2720 of the Conduct Rules of the National Association of
Securities Dealers, Inc.
The Underwriter does not intend to confirm sales to accounts over which it
exercises discretionary authority.
In order to facilitate the offering of the Units, the Underwriter may
engage in transactions that stabilize, maintain or otherwise affect the price of
the Units, SPDRS or the individual stocks underlying the S&P 500 Index.
Specifically, the Underwriter may overallot in connection with the offering of
the Units, creating a short position in the Units for its own account. In
addition, to cover overallotments or to stabilize the price of the Units, the
Underwriter may bid for, and purchase, the Units in the open market. Any of
these activities may stabilize or maintain the market price of the Units above
independent market levels. The Underwriter is not required to engage in these
activities and may end any of these activities at any time.
On or prior to the date of this Prospectus Supplement, the Company, through
its subsidiaries and others, may hedge some or all of its anticipated exposure
in connection with the Units by the purchase and sale of SPDRS, exchange traded
and over the counter options on the S&P 500 Index, individual stocks included in
the S&P 500 Index, futures contracts on the S&P 500 Index and options on such
futures contracts or by taking positions in any other instruments that it may
wish to use in connection with such hedging. The Company, through its
subsidiaries, is likely to modify its hedge position throughout the life of the
Purchase Contracts and Put Warrants, including on each Determination Date and
Exercise Expiration Date, by purchasing and selling the securities and
instruments listed above and other available securities and instruments.
Although the Company has no reason to believe that its hedging activity will
have a material impact on the price of such SPDRS, options, stocks, futures
contracts, and options on futures contracts or on the value of the S&P 500
Index, there can be no assurance that the Company will not affect such prices as
a result of its hedging activities. See also "Use of Proceeds" in the
accompanying Prospectus.
ANNEX A
GLOSSARY
Adjustment Factor........... 1 (one), subject to adjustment as described under
"Description of Units--Antidilution Adjustments."
Automatic Separation Date... June , 1998
Business Day................ Any day, other than a Saturday or Sunday, that is
neither a legal holiday nor a day on which banking
institutions are authorized or required by law or
regulation to close in The City of New York.
Calculation Agent........... Morgan Stanley & Co. Incorporated ("MS & Co.")
Contract Settlement Date.... The third Trading Day following the last
Determination Date (expected to be September 30,
2005).
Determination Dates......... March 30, 2004, December 30, 2004 and September
27, 2005, or, if any such day is not a Trading
Day, the next succeeding Trading Day, unless there
is a Market Disruption Event on any such Trading
Day. If a Market Disruption Event occurs on any
such Trading Day, such Determination Date will be
the immediately succeeding Trading Day during
which no Market Disruption Event occurs; provided
that if a Market Disruption Event has occurred on
each of the five Trading Days immediately
succeeding March 30, 2004, December 30, 2004 and
September 27, 2005, then such fifth succeeding
Trading Day will be deemed to be the relevant
Determination Date, notwithstanding the occurrence
of a Market Disruption Event on such day.
DTC......................... The Depository Trust Company
Exercise Expiration Date ... September 27, 2005, or if such day is not a
Trading Day, the next succeeding Trading Day,
unless there is a Market Disruption Event on such
Trading Day. If a Market Disruption Event occurs
on any such Trading Day, the Exercise Expiration
Date will be the immediately succeeding Trading
Day during which no Market Disruption Event
occurs; provided that if a Market Disruption Event
has occurred on each of the five Trading Days
immediately succeeding September 27, 2005, then
such fifth succeeding Trading Day will be deemed
to be the Exercise Expiration Date,
notwithstanding the occurrence of a Market
Disruption Event on such day.
Final SPDR Value............ The average of the SPDR Closing Values, as
determined on each of the three Determination
Dates, as determined by the Calculation Agent.
Market Disruption Event...... With respect to the SPDRS:
(i) a suspension, absence or material limitation
of trading of 100 or more of the securities
included in the S&P 500 Index on the primary
market for such securities for more than two hours
of trading or during the one-half hour period
preceding the close of trading in such market; or
the suspension, absence or material limitation of
trading on the primary market for trading in
futures or options contracts related to the S&P
500 Index during the one-half hour period
preceding the close of trading in the applicable
market, in each case as determined by the
Calculation Agent in its sole discretion; and
(ii) a determination by the Calculation Agent in
its sole discretion that the event described in
clause (i) above materially interfered with the
ability of the Company or any of its affiliates to
unwind all or a material portion of the hedge with
respect to the Units.
For purposes of determining whether a Market
Disruption Event has occurred: (1) a limitation on
the hours or number of days of trading will not
constitute a Market Disruption Event if it results
from an announced change in the regular business
hours of the relevant exchange or market, (2) a
decision to permanently discontinue trading in the
relevant futures or options contract will not
constitute a Market Disruption Event, (3)
limitations pursuant to New York Stock Exchange
Rule 80A (or any applicable rule or regulation
enacted or promulgated by the NYSE, any other
self-regulatory organization or the Securities and
Exchange Commission of similar scope as determined
by the Calculation Agent) on trading during
significant market fluctuations will constitute a
suspension, absence or material limitation of
trading, (4) a suspension of trading in a futures
or options contract on the S&P 500 Index by the
primary securities market related to such contract
by reason of (a) a price change exceeding limits
set by such exchange or market, (b) an imbalance
of orders relating to such contracts or (c) a
disparity in bid and ask quotes relating to such
contracts will constitute a suspension, absence or
material limitation of trading in futures or
options contracts related to the S&P 500 Index and
(5) a suspension, absence or material limitation
of trading on the primary market on which futures
or options contracts related to the S&P 500 Index
are traded will not include any time when such
market is itself closed for trading under ordinary
circumstances.
Market Price................ If SPDRS (or any other security for which a Market
Price must be determined) is listed on a national
securities exchange, is a security of The Nasdaq
National Market ("NASDAQ NMS") or is included in
the OTC Bulletin Board Service ("OTC Bulletin
Board") operated by the National Association of
Securities Dealers, Inc. (the "NASD"), the Market
Price for one SPDR (or one unit of any such other
security) on any Trading Day means (i) the last
reported bid price on such day on the principal
United States securities exchange registered under
the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), on which SPDRS (or any such
other security) is listed or admitted to trading
or (ii) if not listed or admitted to trading on
any such securities exchange or if such last
reported sale price is not obtainable, the last
reported bid price on the over-the-counter market
as reported on the NASDAQ NMS or OTC Bulletin
Board on such day. If the last reported bid price
is not available pursuant to clause (i) or (ii) of
the preceding sentence, the Market Price for any
Trading Day shall be the mean, as determined by
the Calculation Agent, of the bid prices for SPDRS
(or any such other security) obtained from as many
dealers in SPDRS (or any such other security), but
not exceeding three, as will make such bid prices
available to the Calculation Agent. The term
"NASDAQ NMS" security shall include a security
included in any successor to such system and the
term "OTC Bulletin Board Service" shall include
any successor service thereto.
Put Price................... $
SPDR Closing Value.......... The product of the Market Price of one SPDRS and
the Adjustment Factor, each as determined by the
Calculation Agent on any Determination Date.
Trading Day................. A day on which trading is generally conducted on
the New York Stock Exchange ("NYSE"), the American
Stock Exchange, Inc. ("AMEX"), the NASDAQ National
Market ("NASDAQ NMS"), the Chicago Mercantile
Exchange and the Chicago Board of Options
Exchange, as determined by the Calculation Agent.
Unit Issue Price............ $
Warrant Agent's Window...... The window of the Warrant Agent maintained for
purposes of transfer and tender in the Borough of
Manhattan, The City of New York, which is, on the
date hereof, The Chase Manhattan Bank, Corporate
Trust Securities Window, 55 Water Street, Room
234, North Building, New York, New York 10041,
Attention: Tender Department.
Warrant Settlement Date..... The third Trading Day following the Exercise
Expiration Date (expected to be September 30,
2005).
ANNEX B
OFFICIAL NOTICE OF EXERCISE
---------------------------
Morgan Stanley, Dean Witter, Discover & Co.
PUT WARRANTS SETTLING SEPTEMBER 30, 2005
ORIGINALLY COMPRISED BY THE
SEPARABLE UNITS MANDATORILY EXCHANGEABLE FOR SPDRS
-----------------------
Dated: [On or after August 26, 2005 and on or
prior to the Exercise Expiration Date]
The Chase Manhattan Bank
Corporate Trust Securities Window
55 Water Street, Room 234
North Building
New York, New York 10041
(Attn: Tender Department)
Morgan Stanley & Co. Incorporated, as Calculation Agent
1585 Broadway
New York, New York 10036
(Via facsimile: 212-761-0674, Attn: Lily Lam)
Dear Sirs:
The undersigned is a holder of the Put Warrants Settling September 30, 2005
of Morgan Stanley, Dean Witter, Discover & Co. entitling the holder thereof to
receive from the Company, upon exercise and delivery of a number of SPDRS with a
value equal to the Final SPDR Value per Put Warrant, the Put Price. The
undersigned hereby irrevocably elects to exercise ____ [minimum of 1,000 Put
Warrants or any integral multiple thereof] of the Put Warrants, as of the date
hereof, provided that such day is on or prior to the Exercise Expiration Date,
all as described in the Prospectus Supplement dated , 1998 (the "Prospectus
Supplement") to the Prospectus dated June 2, 1997 related to Registration
Statement No. 333-27919; provided that this notice is subject to a limit order
so that such Put Warrants will not be exercised if the Final SPDR Value as
determined on the Exercise Expiration Date is equal to or greater than the Put
Price. Capitalized terms not defined herein have the meanings given to such
terms in the Prospectus Supplement. Please date and acknowledge receipt of this
notice in the place provided below on the date of receipt, and fax a copy to the
fax number indicated, whereupon the Company will pay the Put Price on the
Warrant Settlement Date in accordance with the terms of the Put Warrants, as
described in the Prospectus Supplement.
Very truly yours,
-------------------------------
[Name of Holder]
By:
Title:
---------------------------
[Fax No.]
Receipt of the above Official Notice of
Exercise is hereby acknowledged.
THE CHASE MANHATTAN BANK
By:
Title:
Date and time of acknowledgment:
