The information in this pricing supplement is not complete and may be changed.
We may not deliver these securities until a final pricing supplement is
delivered. This pricing supplement and the accompanying prospectus do not
constitute an offer to sell these securities and they are not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
Subject to Completion, Pricing Supplement dated July 1, 1999
PROSPECTUS Dated May 5, 1999 Pricing Supplement No. 16 to
PROSPECTUS SUPPLEMENT Registration Statement No. 333-75289
Dated May 6, 1999 Dated , 1999
Rule 424(b)(3)
$25,000,000
Morgan Stanley Dean Witter & Co.
MEDIUM-TERM NOTES, SERIES C
Senior Fixed Rate Notes
----------
6% Reset PERQS due August 1, 2001
Mandatorily Exchangeable For
Shares of Common Stock of CISCO SYSTEMS, INC.
Reset Performance Equity-linked Redemption Quarterly-pay Securities(SM)
("Reset PERQS(SM)")
The Reset PERQS will pay 6% interest per year but do not guarantee any return
of principal at maturity. Instead the Reset PERQS will pay at maturity a
number of shares of Cisco common stock based on the closing prices of Cisco
common stock after one year and at maturity, in each case subject to a cap
price.
o The principal amount and issue price of each Reset PERQS is $ ,
which is one-tenth of the closing price of Cisco common stock on the day we
offer the Reset PERQS for initial sale to the public.
o We will pay 6% interest (equivalent to $ per year) on the $
principal amount of each Reset PERQS. Interest will be paid quarterly,
beginning November 1, 1999.
o At maturity you will receive shares of Cisco common stock in exchange for
each Reset PERQS at an exchange ratio. The initial exchange ratio is
one-tenth of a share of Cisco common stock per Reset PERQS. However, if the
price of Cisco common stock appreciates above the first year cap price for
August 1, 2000 or the second year cap price for July 30, 2001, the exchange
ratio will be adjusted downward, and you will receive an amount of Cisco
common stock per Reset PERQS that is less than one-tenth of a share.
o The first year cap price is $ , or % of the closing price of
Cisco common stock on the day we offer the Reset PERQS for initial sale to
the public. If on August 1, 2000, the price of Cisco common stock is higher
than the closing price of Cisco common stock on the day we offer the Reset
PERQS for initial sale to the public, we will raise the cap price to % of
the closing price of Cisco common stock on August 1, 2000. Otherwise the cap
price will remain unchanged in the second year. The maximum you can receive
at maturity is Cisco common stock worth $ per Reset PERQS.
o Investing in Reset PERQS is not equivalent to investing in Cisco common
stock.
o Cisco Systems, Inc. is not involved in this offering of Reset PERQS in any
way and will have no financial obligation with respect to the Reset PERQS.
o We will apply to list the Reset PERQS to trade on the American Stock
Exchange, Inc. under the proposed AMEX symbol "RCP," but it is not possible
to predict whether the Reset PERQS will meet the AMEX listing requirements.
You should read the more detailed description of the Reset PERQS in this
Pricing Supplement. In particular, you should review and understand the
descriptions in"Summary of Pricing Supplement" and "Description of Reset
PERQS." "Reset Performance Equity-linked Redemption Quarterly-pay Securities"
and "Reset PERQS" are our service marks.
The Reset PERQS are riskier than ordinary debt securities. See "Risk Factors"
beginning on PS-6.
----------
PRICE $ PER RESET PERQS
----------
Agent's Proceeds to
Price to Public Commissions the Company
--------------- ----------- -----------
Per Reset PERQS.... $ $ $
Total.............. $ $ $
<PAGE>
(This page intentionally left blank)
PS-2
<PAGE>
SUMMARY OF PRICING SUPPLEMENT
The following summary describes the Reset PERQS we are offering to
you in general terms only. You should read the summary together with the more
detailed information that is contained in the rest of this pricing supplement
and in the accompanying prospectus and prospectus supplement. You should
carefully consider, among other things, the matters set forth in "Risk Factors."
The Reset PERQS offered are medium-term debt securities of Morgan
Stanley Dean Witter & Co. The return on the Reset PERQS is linked to the
performance of Cisco Systems, Inc. common stock, which we refer to as Cisco
Stock. The Reset PERQS also provide fixed quarterly payments at an annual rate
of 6% based on the principal amount of each Reset PERQS. Unlike ordinary debt
securities, Reset PERQS do not guarantee the return of principal at maturity.
Instead the Reset PERQS pay a number of shares of Cisco Stock at maturity based
on the performance of this stock, either up or down, subject to a maximum value
in each year. We may not redeem the Reset PERQS prior to maturity.
<TABLE>
<S> <C> <C>
Each Reset PERQS We, Morgan Stanley Dean Witter & Co., are offering 6% Reset Performance Equity-linked
costs $ Redemption Quarterly-pay Securities[SM] due August 1, 2001, which we refer to as the Reset
PERQS[SM]. The principal amount and issue price of each Reset PERQS is $ , which is
one-tenth of the closing price of Cisco Stock on the day we offer the Reset PERQS for initial
sale to the public.
No guaranteed Unlike ordinary debt securities, the Reset PERQS do not guarantee any return of principal at
return of principal maturity. Instead the Reset PERQS will pay an amount of Cisco Stock based on the market
price of Cisco Stock, either up or down, after one year and at maturity, in each case subject
to a cap price. Investing in Reset PERQS is not equivalent to investing in Cisco Stock.
6% interest on the We will pay interest on the Reset PERQS, at the rate of 6% of the principal amount per year,
principal amount quarterly on each February 1, May 1, August 1, and November 1, beginning November 1,
1999. The interest rate we pay on the Reset PERQS is more than the current dividend rate
on the Cisco Stock. The Reset PERQS will mature on August 1, 2001.
Your appreciation The appreciation potential of each Reset PERQS is limited in each year by the cap price. The
potential is capped cap price in year one is $ , or % of the closing market price of Cisco Stock on the day
we offer the Reset PERQS for initial sale to the public ("First Year Cap Price"). The cap
price in year two ("Second Year Cap Price") will be the higher of % of the closing market
price of Cisco Stock on August 1, 2000 and the First Year Cap Price. The maximum you can
receive at maturity is Cisco Stock worth $ per Reset PERQS.
Payment at Maturity At maturity, for each $ principal amount of Reset PERQS you hold, we will give to you
a number of shares of Cisco Stock equal to the exchange ratio. The initial exchange ratio is
one-tenth of a share of Cisco Stock per Reset PERQS and may be adjusted as follows:
First Year Adjustment
The exchange ratio will be adjusted downward if the market price of Cisco Stock exceeds
the First Year Cap Price on August 1, 2000.
The adjusted exchange ratio will be calculated as follows:
New Exchange = Initial Exchange First Year Cap Price
Ratio Ratio x -------------------------------------------
Cisco Stock closing price on August 1, 2000
If the market price of Cisco Stock on August 1, 2000 is the same as or less than the First
Year Cap Price, we will not adjust the exchange ratio at the end of the first year.
PS-3
<PAGE>
Second Year Adjustment
The exchange ratio may be adjusted downward again at maturity, but only if the market
price of Cisco Stock at maturity exceeds the Second Year Cap Price. The final exchange
ratio will then be calculated as follows:
Final Exchange = Existing Exchange Second Year Cap Price
Ratio Ratio x -------------------------------------
Cisco Stock closing price at maturity
If the market price of Cisco Stock at maturity is the same as or less than the Second Year
Cap Price, we will not adjust the Exchange Ratio at maturity.
On the next page, we have provided a table titled "Hypothetical Payments on the Reset
PERQS." The table demonstrates the effect of these adjustments to the exchange ratio under
a variety of hypothetical price scenarios. You should examine the table for examples of how
the payout on the Reset PERQS could be affected under these or other potential price
scenarios. This table does not show every situation that may occur.
You can review the prices of Cisco Stock for the last three years in the "Historical
Information" section of this pricing supplement.
During the life of the Reset PERQS, Morgan Stanley & Co. Incorporated or its successors,
which we refer to as MS & Co., acting as calculation agent, will also make adjustments to the
effective exchange ratio to reflect the occurrence of certain corporate events that could affect
the market price of Cisco Stock. You should read about these adjustments in the sections
called "Description of Reset PERQS--Exchange at Maturity," "--Exchange Factor" and
"--Antidilution Adjustments."
The Calculation Agent We have appointed MS & Co. to act as calculation agent for The Chase Manhattan Bank, the
trustee for our senior notes. As calculation agent, MS & Co. will determine the exchange
ratio and the cap prices and calculate the amount of Cisco Stock that you will receive at
maturity.
No affiliation with Cisco Systems, Inc. is not an affiliate of ours and is not involved with this offering in any
Cisco Systems, Inc. way. The obligations represented by the Reset PERQS are obligations of Morgan Stanley
Dean Witter & Co. and not of Cisco Systems, Inc.
More information on The Reset PERQS are senior notes issued as part of our Series C medium-term note program.
the Reset PERQS You can find a general description of our Series C medium-term note program in the
accompanying prospectus supplement dated May 6, 1999. We describe the basic features of
this type of note in the sections called "Description of Notes--Fixed Rate Notes" and
"--Exchangeable Notes."
For a detailed description of terms of the Reset PERQS including the specific mechanics
and timing of the exchange ratio adjustments, you should read the "Description of Reset
PERQS" section in this pricing supplement. You should also read about some of the
risks involved in investing in Reset PERQS in the section called "Risk Factors."
How to reach us You may contact your local Morgan Stanley Dean Witter branch office or our principal
executive offices at 1585 Broadway, New York, New York, 10036 (telephone number
(212) 762-4000).
PS-4
</TABLE>
<PAGE>
HYPOTHETICAL PAYMENTS ON THE RESET PERQS
Based on a hypothetical Initial Cisco Price of $65.00 per
share of Cisco Stock, a hypothetical initial price per Reset PERQS of $6.50,
and a first year cap of 131% and a second year cap of 131%, the following
table illustrates, for a range of First Year Closing Prices and Maturity
Prices, the adjustments we would make to the Exchange Ratio, Second Year Cap
Prices, the Payments at Maturity based on Cisco Stock for each $6.50 principal
amount of Reset PERQS and the total return including interest payments, based
on a hypothetical interest rate of 6% per annum and a maturity of two years,
for each $6.50 principal amount of Reset PERQS.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
(table continued below)
Initial
Initial Price of Initial Cisco Exchange First Year First Year Closing 8/1/00 Second Year
Reset PERQS Price Ratio Cap Price Price Exchange Ratio Cap Price
----------- ----- ----- --------- ----- -------------- ---------
$6.50 $65.00 0.10000 $85.15 $55.00 0.10000 $85.15
$6.50 $65.00 0.10000 $85.15 $55.00 0.10000 $85.15
$6.50 $65.00 0.10000 $85.15 $55.00 0.10000 $85.15
$6.50 $65.00 0.10000 $85.15 $80.00 0.10000 $104.80
$6.50 $65.00 0.10000 $85.15 $80.00 0.10000 $104.80
$6.50 $65.00 0.10000 $85.15 $80.00 0.10000 $104.80
$6.50 $65.00 0.10000 $85.15 $125.00 0.06812 $163.75
$6.50 $65.00 0.10000 $85.15 $125.00 0.06812 $163.75
$6.50 $65.00 0.10000 $85.15 $125.00 0.06812 $163.75
$6.50 $65.00 0.10000 $85.15 $85.15 0.10000 $111.55
131% of Greater of (x)
Initial Cisco 131% of First
Price Year Closing
Price and (y)
First Year Cap
Price
<S> <C> <C> <C>
Reset PERQS
Reset PERQS Payment at Maturity
Payment at plus
Cisco Stock Exchange Ratio Maturity Based on 6% Coupon
Maturity Price<F1> at Maturity Cisco Stock Price ("Total Payment")
------------------ ----------- ----------------- -----------------
$35.00 0.10000 $3.50 $4.28
$80.00 0.10000 $8.00 $8.78
$130.00 0.06550 $8.52 $9.30
$65.00 0.10000 $6.50 $7.28
$95.00 0.10000 $9.50 $10.28
$150.00 0.06987 $10.48 $11.26
$65.00 0.06812 $4.43 $5.21
$150.00 0.06812 $10.22 $11.00
$185.00 0.06030 $11.16 $11.94
$111.55 0.10000 $11.16 $11.94
Maturity Price
times Adjusted
Exchange Ratio
<FN>
<F1>
The Cisco Stock Maturity Price does not include any dividend payments that may
have been paid to holders of Cisco Stock.
</FN>
</TABLE>
PS-5
<PAGE>
RISK FACTORS
The Reset PERQS are not secured debt and are riskier than ordinary
debt securities. Because the return to investors is linked to the performance of
Cisco Stock, there is no guaranteed return of principal. To the extent that the
final market price of Cisco Stock at maturity is either less than today's market
price or not sufficiently above today's market price to compensate for a
downward adjustment of the exchange ratio, if any, at August 1, 2000, investors
will lose money on their investment. Investing in Reset PERQS is not equivalent
to investing directly in Cisco Stock. This section describes the most
significant risks relating to the Reset PERQS. You should carefully consider
whether the Reset PERQS are suited to your particular circumstances before you
decide to purchase them.
<TABLE>
<S> <C>
Reset PERQS Are Not The Reset PERQS combine features of equity and debt. The terms of the Reset
Ordinary Senior Notes -- PERQS differ from those of ordinary debt securities in that we will not pay you
No guaranteed return of a fixed amount at maturity. Our payment to you at maturity will be a number of
principal shares of Cisco Stock based on the market price of Cisco Stock on August 1,
2000 and at maturity. If the final market price of Cisco Stock at maturity is
either less than today's market price or not sufficiently above today's
market price to compensate for a downward adjustment of the exchange
ratio, if any, at August 1, 2000, we will pay you an amount of Cisco Stock
with a value less than the principal amount of the Reset PERQS. See
"Hypothetical Payments on the Reset PERQS" above.
Your Appreciation The appreciation potential of the Reset PERQS is limited because of the cap
Potential Is Limited prices. Even though the $ issue price of one Reset PERQS is equal to
today's market price of one share of Cisco Stock multiplied by the initial
exchange ratio, you may receive a lessor fractional amount of Cisco Stock per
Reset PERQS at maturity if the initial exchange ratio of one-tenth of a share has
been adjusted downwards. If the price of Cisco Stock appreciates above both
the cap price for August 1, 2000 and the cap price for July 30, 2001, the initial
exchange ratio of one-tenth of a share of Cisco Stock per Reset PERQS will be
reduced twice.
The exchange ratio and the final market price of Cisco Stock at maturity will be
determined on July 30, 2001, which is two trading days prior to maturity of the
Reset PERQS. If the price of Cisco Stock is lower on the actual maturity date
than it was on July 30, 2001, the value of any Cisco Stock you receive will be
less. Under no circumstances will you receive an amount of Cisco Stock for
each Reset PERQS worth more than $ as of such second scheduled trading
day prior to maturity.
Secondary Trading There may be little or no secondary market for the Reset PERQS. Although we
May Be Limited will apply to list the Reset PERQS on the American Stock Exchange, Inc., we
may not meet the requirements for listing. Even if there is a secondary market,
it may not provide significant liquidity. Morgan Stanley & Co. currently intends
to act as a market maker for Reset PERQS but is not required to do so.
Market Price of the Reset Several factors, many of which are beyond our control, will influence the value
PERQS Influenced by Many of the Reset PERQS. We expect that generally the market price of the Cisco
Unpredictable Factors Stock on any day will affect the value of the Reset PERQS more than any
other single factor. Because adjustments to the exchange ratio for the Reset
PERQS are tied to the closing stock prices on two specific days, however, the
Reset PERQS may trade differently from the underlying stock. Other factors
that may influence the value of the Reset PERQS include:
PS-6
<PAGE>
o the volatility (frequency and magnitude of changes in price) of the Cisco Stock
o the dividend rate on Cisco Stock
o economic, financial and political events that affect stock markets generally and
which may affect the market price of the Cisco Stock
o interest and yield rates in the market
o the time remaining to the maturity of the Reset PERQS
o our creditworthiness
These factors will influence the price you will receive if you sell your Reset
PERQS prior to maturity. For example, you may have to sell your Reset
PERQS at a substantial discount from the principal amount if the market price
of the Cisco Stock is at, below, or not sufficiently above the initial market price.
You cannot predict the future performance of Cisco Stock based on its historical
performance. The price of Cisco Stock may decrease so that you will receive at
maturity shares of Cisco Stock worth less than the principal amount of the Reset
PERQS. We cannot guarantee that the price of Cisco Stock will increase so that
you will receive at maturity an amount in excess of the principal amount of the
Reset PERQS.
No Affiliation with We are not affiliated with Cisco Systems, Inc. ("Cisco"). Although we do not
Cisco Systems, Inc. have any non-public information about Cisco as of the date of this pricing
supplement, we or our affiliates may presently or from time to time engage in
business with Cisco, including extending loans to, or making equity investments
in, Cisco or providing advisory services to Cisco, including merger and
acquisition advisory services. Moreover, we have no ability to control or predict
the actions of Cisco, including any corporate actions of the type that would
require the calculation agent to adjust the payment to you at maturity. Cisco is
not involved in the offering of the Reset PERQS in any way and has no
obligation to consider your interest as an owner of Reset PERQS in taking any
corporate actions that might affect the value of your Reset PERQS. None of the
money you pay for the Reset PERQS will go to Cisco.
You Have No As an owner of Reset PERQS, you will not have voting rights or rights to
Shareholder Rights receive dividends or other distributions or any other rights with respect to the
Cisco Stock.
Limited Antidilution MS & Co., as calculation agent, will adjust the amount payable at maturity for
Adjustments certain events affecting the Cisco Stock, such as stock splits and stock
dividends, and certain other corporate actions involving Cisco, such as mergers.
However, the calculation agent is not required to make an adjustment for every
corporate event that can affect the Cisco Stock. For example, the calculation
agent is not required to make any adjustments if Cisco or anyone else makes a
partial tender or partial exchange offer for the Cisco Stock. If an event occurs
that does not require the calculation agent to adjust the amount payable at
maturity, the market price of the Reset PERQS may be materially and adversely
affected.
PS-7
<PAGE>
Potential Conflicts of Interest As calculation agent, MS & Co. will calculate the payment to you at maturity of
between You and the the Reset PERQS. MS & Co. and other affiliates may also carry out hedging
Calculation Agent activities related to Reset PERQS or to other instruments, including trading in
Cisco Stock as well as in other instruments related to Cisco Stock. MS & Co.
and some of our other subsidiaries also trade Cisco Stock and other financial
instruments related to Cisco Stock on a regular basis as part of their general
broker dealer and other businesses. Any of these activities could influence MS
& Co.'s determination of adjustments made to Reset PERQS and, accordingly,
could affect your payout on the Reset PERQS.
Tax Treatment You should also consider the tax consequences of investing in the Reset
PERQS. There is no direct legal authority as to the proper tax treatment of the
Reset PERQS, and therefore significant aspects of the tax treatment of the Reset
PERQS are uncertain. We do not plan to request a ruling from the Internal
Revenue Service ("IRS") regarding the tax treatment of the Reset PERQS, and
the IRS or a court may not agree with the tax treatment described in this pricing
supplement. Please read carefully the section "Description of Reset
PERQS--United States Federal Income Taxation" in this pricing supplement.
</TABLE>
PS-8
<PAGE>
DESCRIPTION OF RESET PERQS
Capitalized terms not defined herein have the meanings given to such terms in
the accompanying prospectus supplement. The term "Reset PERQS" refers to each $
principal amount of our 6% Reset PERQS due August 1, 2001, Mandatorily
Exchangeable For Shares of Common Stock of Cisco Systems, Inc. In this pricing
supplement, the terms "MSDW," "we," "us," and "our" refer to Morgan Stanley Dean
Witter & Co.
Principal Amount.............. $25,000,000
Maturity Date................. August 1, 2001
Interest Rate................. 6% per annum (equivalent to $ per annum
per Reset PERQS)
Interest Payment Dates........ Each February 1, May 1, August 1, and
November 1, beginning November 1, 1999.
Specified Currency............ U.S. Dollars
Issue Price................... $ per Reset PERQS
Initial Cisco Price........... $
Original Issue Date
(Settlement Date)........... , 1999
CUSIP......................... 61744Y801
Denominations................. $ and integral multiples thereof
First Year Cap Price.......... $ ( % of the Initial Cisco Price)
First Year Determination Date. August 1, 2000 (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 Cisco
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 Cisco 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 under the terms of the senior
indenture), upon delivery of each Reset PERQS
to the Trustee, we will apply each $
principal amount of such Reset PERQS as
payment for a number of shares of Cisco Stock
at the Exchange Ratio. The initial Exchange
Ratio, initially set at 0.1, is subject to
adjustment on the First Year Determination
Date and at maturity in order to cap the
value of the Cisco Stock to be received
PS-9
<PAGE>
upon delivery of the Reset PERQS at $ per
Reset PERQS ( % of the Issue Price).
Solely for purposes of adjustment upon the
occurrence of certain corporate events, the
number of shares of Cisco 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 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 then 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. Please review each
example in the table called "Hypothetical
Payments on the Reset PERQS" on PS-5.
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.
We 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 Cisco Stock to be delivered with
respect to each $ principal amount of
each Reset PERQS and (ii) deliver such shares
of Cisco Stock (and cash in respect of
interest and any fractional shares of Cisco
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.
PS-10
<PAGE>
No Fractional Shares.......... Upon delivery of the Reset PERQS to the
Trustee at maturity (including as a result of
acceleration under the terms of the Senior
indenture), we will deliver the aggregate
number of shares of Cisco Stock due with
respect to all of such Reset PERQS, as
described above, but we will pay cash in lieu
of delivering any fractional share of Cisco
Stock in an amount equal to the corresponding
fractional Market Price of such fraction of a
share of Cisco 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
affecting the Cisco Stock through and
including the second scheduled Trading Day
immediately prior to maturity. See
"Antidilution Adjustments" below.
Market Price.................. If Cisco 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 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 Cisco 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 Cisco Stock (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 (even if Cisco Stock (or
any such other security) is listed or
admitted to trading on such securities
exchange), the last reported sale price on the
over-the- counter market as reported on the
Nasdaq National Market 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 because of a Market
Disruption Event or otherwise, the Market Price
for any Trading Day shall be the mean, as
determined by the Calculation Agent, of the bid
prices for Cisco Stock (or any such other
security) obtained from as many dealers in such
stock (which may include MS & Co. or any of our
other subsidiaries or affiliates), but not
exceeding three, as will make such bid prices
available to the Calculation Agent. A "security
of the Nasdaq National Market" 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 National
Market, 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 Cisco Stock and the
Exchange Factor is less than $4.00, the
maturity date
PS-11
<PAGE>
of the Reset PERQS will be deemed to be
accelerated to such date, and we will apply
each $ principal amount of each Reset PERQS as
payment for a number of shares of Cisco Stock
at the then current Exchange Ratio, as adjusted
by the then current Exchange Factor. See also
"Antidilution Adjustments" below.
Optional Redemption........... We will not redeem the Reset PERQS prior to the
Maturity Date.
Book Entry Note or
Certificated Note........... Book Entry
Senior Note or Subordinated
Note........................ Senior
Trustee....................... The Chase Manhattan Bank
Agent for the underwritten
offering of Reset PERQS..... MS & Co.
Calculation Agent............. MS & Co.
Because the Calculation Agent is our
affiliate, potential conflicts of interest
may exist between the Calculation Agent and
you as an owner 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. See
"Antidilution Adjustments" and "Market
Disruption Event" below. MS & Co. is
obligated to carry out its duties as
Calculation Agent in good faith using its
reasonable judgment.
Antidilution Adjustments...... The Exchange Factor will be adjusted as
follows:
1. If Cisco 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 Cisco Stock.
2. If Cisco Stock is subject (i) to a stock
dividend (issuance of additional shares of
Cisco Stock) that is given ratably to all
holders of shares of Cisco Stock or (ii) to a
distribution of Cisco Stock as a result of the
triggering of any provision of the corporate
charter of Cisco, then once the dividend has
become effective and Cisco 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 Cisco 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 Cisco
Stock other than distributions described in
clauses (i) and (v) of paragraph 5 below and
Extraordinary Dividends as described below. A
cash dividend or other distribution with
respect to Cisco
PS-12
<PAGE>
Stock will be deemed to be an "Extraordinary
Dividend" if such dividend or other
distribution exceeds the immediately preceding
non-Extraordinary Dividend for Cisco Stock by
an amount equal to at least 10% of the Market
Price of Cisco Stock (as adjusted for any
subsequent corporate event requiring an
adjustment hereunder, such as a stock split or
reverse stock split) 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 Cisco Stock,
the Exchange Factor with respect to Cisco 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 Cisco Stock will
equal (i) in the case of cash dividends or
other distributions that constitute regular
dividends, the amount per share of such
Extraordinary Dividend minus the amount per
share of the immediately preceding non-
Extraordinary Dividend for Cisco Stock or (ii)
in the case of cash dividends or other
distributions that do not constitute regular
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 Cisco Stock described in
clauses (i) and (v) of paragraph 5 below that
also constitutes an Extraordinary Dividend
shall cause an adjustment to the Exchange
Factor pursuant only to clause (i) or clause
(v) of paragraph 5, as applicable.
4. If Cisco issues rights or warrants to all
holders of Cisco Stock to subscribe for or
purchase Cisco Stock at an exercise price per
share less than the Market Price of the Cisco
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 Cisco
Stock outstanding immediately prior to the
issuance of such rights or warrants plus the
number of additional shares of Cisco Stock
offered for subscription or purchase pursuant
to such rights or warrants and the denominator
of which shall be the number of shares of Cisco
Stock outstanding immediately prior to the
issuance of such rights or warrants plus the
number of additional shares of Cisco Stock
which the aggregate offering price of the total
number of shares of Cisco 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
PS-13
<PAGE>
of such rights or warrants and dividing the
product so obtained by such Market Price.
5. If (i) there occurs any reclassification
or change of Cisco Stock, including, without
limitation, as a result of the issuance of any
tracking stock by Cisco, (ii) Cisco or any
surviving entity or subsequent surviving entity
of Cisco (a "Cisco Successor") has been subject
to a merger, combination or consolidation and
is not the surviving entity, (iii) any
statutory exchange of securities of Cisco or
any Cisco Successor with another corporation
occurs (other than pursuant to clause (ii)
above), (iv) Cisco is liquidated, (v) Cisco
issues to all of its shareholders equity
securities of an issuer other than Cisco (other
than in a transaction described in clauses
(ii), (iii) or (iv) above) (a "Spin-off Event")
or (vi) a tender or exchange offer or
going-private transaction is consummated for
all the outstanding shares of Cisco 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 to holders of Cisco Stock in any
such Reorganization Event, including, in the
case of the issuance of tracking stock, the
reclassified share of Cisco Stock and, in the
case of a Spin-off Event, the share of Cisco
Stock with respect to which the spun-off
security was issued (collectively, the
"Exchange Property") in an amount with a value
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 Cisco Stock
and holders will receive in lieu of any Cisco
Stock and as liquidated damages in full
satisfaction of MSDW'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. If Exchange Property
includes a cash component, holders will not
receive any interest accrued on such cash
component. "Transaction Value" at any date
means (i) for any cash received in any such
Reorganization Event, the amount of cash
received per share of Cisco Stock, as adjusted
by the Exchange Factor at the time of such
Reorganization Event, (ii) for any property
other than cash or securities received in any
such Reorganization Event, the market value, as
determined by
PS-14
<PAGE>
the Calculation Agent, as of the date of
receipt, of such Exchange Property received for
each share of Cisco Stock, as adjusted by the
Exchange Factor at the time of such
Reorganization Event 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 Cisco Stock, as
adjusted by the Exchange Factor at the time of
such Reorganization Event. In the event
Exchange Property consists of securities, those
securities will, in turn, be subject to the
antidilution adjustments set forth in
paragraphs 1 through 5.
For purposes of paragraph 5 above, in the case
of a consummated tender or exchange offer or
going-private transaction involving 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 or going-private
transaction). In the event of a tender or
exchange offer or a going- private transaction
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 Cisco Stock, including, without
limitation, a partial tender or exchange
offer for the Cisco Stock.
Notwithstanding the foregoing, the amount
payable by us 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 an amount
of Cisco Stock having a market price of $
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.
PS-15
<PAGE>
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 Cisco Stock:
(i) a suspension, absence or material
limitation of trading of Cisco Stock on
the primary market for Cisco Stock for more
than two hours of trading or during the
one-half hour period preceding the close
of trading in such market; or a breakdown
or failure in the price and trade
reporting systems of the primary market
for Cisco Stock as a result of which the
reported trading prices for Cisco Stock
during the last one-half hour preceding
the closing of trading in such market are
materially inaccurate; or the suspension,
absence or material limitation on the
primary market for trading in options
contracts related to Cisco 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 any
event described in clause (i) above
materially interfered with the ability of
MSDW 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 NYSE 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 shall constitute a suspension,
absence or material limitation of trading,
(4) a suspension of trading in an options
contract on Cisco 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 Cisco Stock and (5) a
suspension, absence or material limitation of
trading on the primary securities market on
which options contracts related to Cisco
Stock are traded will not include any time
when such securities market is itself closed
for trading under ordinary circumstances.
PS-16
<PAGE>
Cisco Stock; Public
Information................. Cisco Systems, Inc., is a leader in
networking for the Internet and creates
hardware and software solutions that link
computer networks. Cisco 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
Cisco pursuant to the Exchange Act can be
located by reference to Commission file
number 0-18225. In addition, information
regarding Cisco may be obtained from other
sources including, but not limited to, press
releases, newspaper articles and other
publicly disseminated documents. We make 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 Cisco Stock or other securities of
Cisco. We have derived all disclosures
contained in this pricing supplement
regarding Cisco from the publicly available
documents described in the preceding
paragraph. Neither we nor the Agent has
participated in the preparation of such
documents or made any due diligence inquiry
with respect to Cisco in connection with the
offering of the Reset PERQS. Neither we nor
the Agent makes any representation that such
publicly available documents or any other
publicly available information regarding
Cisco are accurate or complete. Furthermore,
we cannot give any 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 Cisco Stock (and therefore the
Initial Cisco 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 Cisco could affect
the value received at maturity with respect
to the Reset PERQS and therefore the trading
prices of the Reset PERQS.
Neither we nor any of our affiliates makes
any representation to you as to the
performance of Cisco Stock.
PS-17
<PAGE>
We, or our affiliates, may presently or from
time to time engage in business with Cisco,
including extending loans to, or making equity
investments in, Cisco or providing advisory
services to Cisco, including merger and
acquisition advisory services. In the course
of such business, we, or our affiliates, may
acquire non-public information with respect
to Cisco and, in addition, one or more of our
affiliates may publish research reports with
respect to Cisco. The statement in the
preceding sentence is not intended to affect
the right of holders of the Reset PERQS under
the securities laws. As a prospective
purchaser of a Reset PERQS, you should
undertake an independent investigation of
Cisco as in your judgment is appropriate to
make an informed decision with respect to an
investment in Cisco Stock.
Historical Information........ The following table sets forth the high and
low Market Price during 1996, 1997, 1998 and
1999 through July 1, 1999. The Market Price
on July 1, 1999 was $64 3/8. We obtained the
Market Prices listed below from Bloomberg
Financial Markets and we believe such
information to be accurate. You should not
take the historical prices of Cisco Stock as
an indication of future performance. The
price of Cisco Stock may decrease so that you
will receive at maturity shares of Cisco
Stock worth less than the principal amount of
the Reset PERQS. We cannot give you any
assurance that the price of Cisco Stock will
increase so that at maturity you will receive
an amount in excess of the principal amount
of the Reset PERQS. Because your return is
linked to the Market Price of Cisco Stock on
August 1, 2000 and July 30, 2001, there is no
guaranteed return of principal. To the extent
that the Maturity Price of Cisco Stock is
less than the Initial Cisco Price or not
sufficiently above the Initial Cisco Price to
compensate for a downward adjustment of the
Exchange Ratio, if any, at August 1, 2000 and
the shortfall is not offset by the coupon
paid on the Reset PERQS, you will lose money
on your investment.
<TABLE>
<CAPTION>
Cisco High Low
(CUSIP 17275R102)
<S> <C> <C>
1996
First Quarter.................... 11 7/64 7 17/64
Second Quarter................... 12 23/32 9 27/32
Third Quarter.................... 14 5/64 10 15/32
Fourth Quarter................... 15 1/4 12 13/16
1997
First Quarter.................... 16 41/64 10 15/32
Second Quarter................... 15 45/64 10 5/16
Third Quarter.................... 18 13/64 15 3/16
Fourth Quarter................... 20 3/32 16 3/16
1998
First Quarter.................... 23 3/16 18 5/64
Second Quarter................... 30 11/16 22 11/64
Third Quarter.................... 34 41/64 27 19/64
Fourth Quarter................... 48 1/4 21 15/16
1999
First Quarter.................... 57 1/2 47 9/16
Second Quarter................... 64 7/16 50
Third Quarter
through July 1, 1999......... 64 3/8 64 3/8
</TABLE>
PS-18
<PAGE>
Historical prices have been adjusted for two
2 for 1 stock splits of Cisco Stock, which
became effective in the first quarter of 1996
and the second quarter of 1999, respectively,
and two 3 for 2 stock splits of Cisco Stock,
which became effective in the fourth quarter
of 1997 and the third quarter of 1998,
respectively.
Cisco has not paid cash dividends on Cisco
Stock to date. We make no representation as
to the amount of dividends, if any, that Cisco
will pay in the future. In any event, as a
holder of the Reset PERQS, you will not be
entitled to receive dividends, if any, that
may be payable on Cisco Stock.
Use of Proceeds and Hedging... The net proceeds we receive from the sale of
the Reset PERQS will be used for general
corporate purposes and, in part, by us or by
one or more of our affiliates in connection
with hedging our obligations under the Reset
PERQS. See also "Use of Proceeds" in the
accompanying prospectus.
On or prior to the date of this pricing
supplement, we, through our subsidiaries or
others, may hedge our anticipated exposure in
connection with the Reset PERQS by taking
positions in Cisco Stock, in options
contracts on Cisco Stock listed on major
securities markets or positions in any other
instruments that we may wish to use in
connection with such hedging. In the event
that we pursue such a hedging strategy, the
price at which we are 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 Cisco Stock, and therefore effectively
increase the level to which Cisco Stock must
rise before you would receive at maturity an
amount of Cisco Stock worth as much as or
more than the principal amount of the Reset
PERQS. Although we have no reason to believe
that our hedging activity will have a
material impact on the price of Cisco Stock,
we cannot give any assurance that we will not
affect such price as a result of our hedging
activities. Through our subsidiaries, we are
likely to modify our hedge position throughout
the life of the Reset PERQS, including on the
First Year Determination Date, by purchasing
and selling the securities and instruments
listed above and any other available
securities and instruments that we may wish
to use in connection with such hedging.
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 Cisco 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 Cisco Stock in
the open market. See "Use of Proceeds and
Hedging" above.
PS-19
<PAGE>
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 plus accrued interest, if any,
from the Original Issue Date.
ERISA Matters for Pension
Plans and Insurance
Companies................... We and certain of our affiliates, including MS
& Co. and Dean Witter Reynolds Inc. ("DWR"),
may each be considered a "party in interest"
within the meaning of the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), or a "disqualified person" within
the meaning of the Internal Revenue Code of
1986, as amended (the "Code") with respect to
many employee benefit plans. Prohibited
transactions within the meaning of ERISA or the
Code may arise, for example, if the Reset PERQS
are acquired by or with the assets of a pension
or other employee benefit plan with respect to
which MS & Co., DWR or any of their affiliates
is a service provider, unless the Reset PERQS
are acquired pursuant to an exemption from the
prohibited transaction rules.
The acquisition of the Reset PERQS may be
eligible for one of the exemptions noted
below if such acquisition:
(a) (i) is made solely with the assets of a
bank collective investment fund and (ii)
satisfies the requirements and conditions of
Prohibited Transaction Class Exemption
("PTCE") 91-38 issued by the Department of
Labor ("DOL");
(b) (i) is made solely with assets of an
insurance company pooled separate account and
(ii) satisfies the requirements and
conditions of PTCE 90-1 issued by the DOL;
(c) (i) is made solely with assets managed
by a qualified professional asset manager and
(ii) satisfies the requirements and
conditions of PTCE 84-14 issued by the DOL;
(d) is made solely with assets of a
governmental plan (as defined in Section
3(32) of ERISA) which is not subject to the
provisions of Section 401 of the Code;
(e) (i) is made solely with assets of an
insurance company general account and (ii)
satisfies the requirements and conditions of
PTCE 95-60 issued by the DOL; or
(f) (i) is made solely with assets managed
by an in-house asset manager and (ii)
satisfies the requirements and conditions of
PTCE 96-23 issued by the DOL.
Under ERISA the assets of a pension or other
employee benefit plan may include assets held
in the general account of an insurance
company which has issued an insurance policy
to such plan or assets of an entity in which
the plan has invested. In addition to
considering the consequences of owning the
Reset PERQS, employee benefit plans subject
to ERISA (or insurance companies deemed to be
investing ERISA plan assets) purchasing Reset
PERQS
PS-20
<PAGE>
should consider the possible implications of
owning the Cisco Stock. Thus, any insurance
company, pension or employee benefit plan or
entity holding assets of such a plan proposing
to invest in the Reset PERQS should consult
with its legal counsel prior to such
investment.
United States Federal Income
Taxation.................... The following summary is based on the advice of
Davis Polk & Wardwell, our special tax counsel
("Tax Counsel"), and is a general discussion of
the principal potential U.S. federal income tax
consequences to U.S. Holders (as defined below)
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 is based on the Code,
administrative pronouncements, judicial
decisions and currently effective 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,
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.
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
United States federal income taxation
regardless of its source.
General
Pursuant to the terms of the Reset PERQS, we
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 contract (the "Forward
Contract") that requires the holder of the
Reset PERQS to purchase, and us to sell, for
an amount equal to $ (the "Forward
Price"), the Cisco Stock at maturity (or,
alternatively, upon an earlier redemption of
the Reset PERQS), and (ii) a deposit with us
of a fixed amount of cash, equal to the Issue
Price, to secure the holder's obligation to
purchase the Cisco Stock (the "Deposit"),
which Deposit bears an annual yield of %
per annum. Under this characterization, it
is possible that, based on our normal
borrowing cost and the value of the Forward
Contract, less than the full quarterly
payments on the Reset PERQS will be
attributable to interest on the Deposit. If
this is the case, the excess of the quarterly
payments on the Reset PERQS over the portion
of those payments attributable to interest on
the
PS-21
<PAGE>
Deposit would represent payments attributable
to the holders' entry into the Forward Contract
(the "Contract Fees"). Furthermore, based on
our determination of the relative fair market
values of the Components at the time of
issuance of the Reset PERQS, we will allocate
100% of the Issue Price of the Reset PERQS to
the Deposit and none to the Forward Contract.
Our 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 ours. The treatment of the Reset
PERQS described above and our 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
herein. Accordingly, you are urged to consult
your tax advisor 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.
Quarterly Payments and Original Issue
Discount on the Reset PERQS. If the Forward
Price exceeds the Issue Price by at least
0.50% of the Forward Price, the Deposit will
be subject to the "original issue discount"
rules, and a U.S. Holder will include
"qualified stated interest" equal to the
stated interest on the Reset PERQS in income
in accordance with the U.S. Holder's method of
accounting for federal income tax purposes.
Additionally, each U.S. Holder, including a
taxpayer who otherwise uses the cash method of
accounting, will be required to include
original issue discount ("OID") on the
Deposit in income as it accrues, in
accordance with a constant yield method based
on a compounding of interest. Under these
circumstances, the amount of income
recognized by a U.S. Holder will generally be
more than the stated interest paid to the U.S.
Holder and will increase during the term of
the Reset PERQS.
PS-22
<PAGE>
If the Forward Price of the Reset PERQS exceeds
the Issue Price by less than 0.50% of the
Forward Price, such excess will be treated as
de minimis OID, and the Deposit will not be
subject to the OID rules discussed above.
However, if the yield on the Deposit does not
exceed the stated interest rate on the Reset
PERQS, then to the extent attributable to the
interest on the Deposit, quarterly payments on
the Reset PERQS will generally be taxable to a
U.S. Holder as ordinary income at the time
accrued or received in accordance with the U.S.
Holder's method of accounting for U.S. federal
income tax purposes. As discussed above, any
excess of the quarterly payments over the
portion thereof attributable to interest on the
Deposit will be treated as Contract Fees.
Although the federal income tax treatment of
Contract Fees is uncertain, we intend to take
the position that any Contract Fees with
respect to the Reset PERQS constitute taxable
income to a U.S. Holder at the time accrued or
received in accordance with the U.S. Holder's
method of accounting for U.S. federal income
tax purposes.
Tax Basis. Based on our determination set
forth above, the U.S. Holder's tax basis in
the Forward Contract will be zero, and the
U.S. Holder's tax basis in the Deposit will
be 100% of the Issue Price. The U.S.
Holder's tax basis in the Deposit will be
subsequently increased by any OID accrued
with respect thereto.
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 toward the purchase of Cisco
Stock, and a U.S. Holder would not recognize
any gain or loss with respect to any Cisco
Stock received thereon. With respect to any
cash received upon maturity, a U.S. Holder
would recognize gain or loss. The amount of
such gain or loss would be the extent to
which the amount of such cash received
differs from the pro rata portion of the
Forward Price allocable to the cash. Any such
gain or loss would generally be capital gain
or loss, as the case may be. With respect to
any Cisco Stock received upon maturity, the
U.S. Holder would have an adjusted tax basis
in such Cisco Stock equal to the pro rata
portion of the Forward Price allocable
thereto. The allocation of the Forward Price
between cash and Cisco Stock should be based
on the amount of the cash received and the
relative fair market value, as of the
maturity, of the Cisco Stock. The U.S.
Holder's holding period of any Cisco Stock
received would start on the day after the
maturity of the Reset PERQS.
U.S. Holders should note that while any accrued
but unpaid interest on the Deposit and any
Contract Fees would be taxable as ordinary
income, any gain or loss recognized upon the
final settlement of the Forward Contract would
be capital gain or loss. The distinction
between capital gain or loss and ordinary gain
or loss is potentially significant in several
respects. For example, limitations apply to a
U.S. Holder's ability to offset capital losses
against ordinary income, and certain U.S.
Holders may be subject to lower U.S. federal
income tax rates with respect to long-term
capital gain than with respect to
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ordinary gain. U.S. Holders should consult
their tax advisors with respect to the
treatment of capital gain or loss on a Reset
PERQS.
Sale or Exchange of the Reset PERQS. 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 Reset PERQS so
sold or exchanged. Any such gain or loss
would generally be capital gain or loss, as
the case may be. Such U.S. Holder's tax
basis in the Reset PERQS would generally
equal the U.S. Holder's tax basis in the
Deposit. For these purposes, the amount
realized does not include any amount
attributable to accrued interest on the
Deposit, which would be taxed as described
under "--Quarterly Payments and Original Issue
Discount on the Reset PERQS" above. It is
uncertain whether the amount realized
includes any amount attributable to accrued
but unpaid Contract Fees. U.S. Holders
should consult their tax advisors regarding
the treatment of accrued but unpaid Contract
Fees upon the sale or exchange of a Reset
PERQS.
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").
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 adjustments, at a
"comparable yield" on the Issue Price.
Furthermore, any gain realized with respect
to the Reset PERQS would generally be treated
as ordinary income.
Even if the Contingent Payment Regulations do
not apply to the Reset PERQS, other
alternative federal income tax
characterizations or treatments of the Reset
PERQS are also possible, and if applied could
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 prepaid forward contract. Other alternative
characterizations are also possible.
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 May 5, 1999, Representative Richard Neal
introduced legislation (the "Neal Bill")
which, if enacted, would treat a taxpayer
owning
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<PAGE>
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. Although the Neal
Bill, if enacted as currently drafted, will not
apply to the Reset PERQS, the Neal Bill
authorizes the Treasury Department to
promulgate regulations (possibly with
retroactive effect) to expand the application
of the "constructive ownership" rule. There is
no assurance that the Treasury Department will
not promulgate regulations to apply the rule to
the Reset PERQS. If the Neal Bill were to apply
to the Reset PERQS, the effect on a U.S. Holder
would be to treat all or a portion of the long
term capital gain recognized by such U.S.
Holder on sale or maturity of a Reset PERQS 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 Cisco Stock itself on the
issue date of the Reset PERQS and disposed of
the Cisco Stock upon disposition of the Reset
PERQS. In addition, the Neal Bill would impose
an interest charge on the gain that was
recharacterized on the sale or maturity of the
Reset PERQS. As proposed, the Neal Bill would
be effective for gains recognized after the
date of enactment with respect to transactions
entered into on or after February 5, 1998.
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.
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