PROSPECTUS Dated May 5, 1999 Pricing Supplement No. 16 to
PROSPECTUS SUPPLEMENT Registration Statement No. 333-75289
Dated May 6, 1999 Dated July 14, 1999
Rule 424(b)(3)
$134,543,750
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 $6.53125, which
is one-tenth of the closing price of Cisco common stock on July 14, 1999, the
day we offered the Reset PERQS for initial sale to the public.
o We will pay 6% interest (equivalent to $0.391875 per year) on the $6.53125
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 $85.24, or 130.51% of the closing price of Cisco
common stock on July 14, 1999, the day we offered 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 July 14, 1999, we will
raise the cap price to 130.50% 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
$11.12 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 The Reset PERQS have been approved for listing on the American Stock
Exchange, Inc., subject to official notice of issuance. The AMEX listing
symbol for the Reset PERQS is "RCP."
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 $6.53125 PER RESET PERQS
-------------
Agent's Proceeds to
Price to Public Commissions the Company
----------------- ------------- -------------
Per Reset PERQS.... $6.53125 $0.09 $6.44125
Total.............. $134,543,750 $1,854,000 $132,689,750
MORGAN STANLEY DEAN WITTER
(This page intentionally left blank)
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.
Each Reset PERQS We, Morgan Stanley Dean Witter & Co., are offering 6%
costs $6.53125 Reset Performance Equity-linked 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 $6.53125, which is
one-tenth of the closing price of Cisco Stock on July
14, 1999, the day we offered the Reset PERQS for initial
sale to the public.
No guaranteed Unlike ordinary debt securities, the Reset PERQS do not
return of principal guarantee any return of principal at 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
principal amount 6% of the principal amount per year, 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
potential is capped limited in each year by the cap price. The cap price in
year one is $85.24, or 130.51% of the closing market
price of Cisco Stock on July 14, 1999, the day we
offered 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 130.50%
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 $11.12 per
Reset PERQS.
Payment at Maturity At maturity, for each $6.53125 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:
<TABLE>
<S> <C> <C>
New Exchange Initial Exchange First Year Cap Price
= x -------------------------------------------
Ratio Ratio Cisco Stock closing price on August 1, 2000
</TABLE>
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.
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:
<TABLE>
<S> <C> <C>
Final Exchange Existing Exchange Second Year Cap Price
= x ----------------------------------------
Ratio Ratio Cisco Stock closing price at maturity
</TABLE>
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
Cisco Systems, Inc. not involved with this offering in any 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
the Reset PERQS Series C medium-term note program. 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) 761-4000).
HYPOTHETICAL PAYMENTS ON THE RESET PERQS
Based on the Initial Cisco Price of $65.3125 per share of Cisco Stock, the
initial price per Reset PERQS of $6.53125, a first year cap of 130.51% and a
second year cap of 130.50%, 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 and the Payments at Maturity based on
Cisco Stock for each $6.53125 principal amount of Reset PERQS and the total
return including interest payments, based on the interest rate of 6% per annum
for each $6.53125 principal amount of Reset PERQS.
<TABLE>
Initial
Initial Price of Initial Cisco Exchange First Year First Year 8/1/00
Reset PERQS Price Ratio Cap Price Closing Price Exchange Ratio
- ---------------- ------------- -------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C>
$6.53125 $65.3125 0.10000 $85.24 $55.00 0.10000
$6.53125 $65.3125 0.10000 $85.24 $55.00 0.10000
$6.53125 $65.3125 0.10000 $85.24 $55.00 0.10000
$6.53125 $65.3125 0.10000 $85.24 $80.00 0.10000
$6.53125 $65.3125 0.10000 $85.24 $80.00 0.10000
$6.53125 $65.3125 0.10000 $85.24 $80.00 0.10000
$6.53125 $65.3125 0.10000 $85.24 $125.00 0.06819
$6.53125 $65.3125 0.10000 $85.24 $125.00 0.06819
$6.53125 $65.3125 0.10000 $85.24 $125.00 0.06819
$6.53125 $65.3125 0.10000 $85.24 $85.24 0.10000
130.51% of
Initial Cisco
Price
Reset PERQS
Reset PERQS Payment at Maturity
Payment at plus
Second Year Cisco Stock Exchange Ratio Maturity Based on 6% Coupon
Cap Price Maturity Price (1) at Maturity Cisco Stock Price ("Total Payment")
----------- ------------------ -------------- ----------------- -------------------
$85.24 $35.00 0.10000 $3.50 $4.30
$85.24 $80.00 0.10000 $8.00 $8.80
$85.24 $130.00 0.06557 $8.52 $9.32
$104.40 $65.00 0.10000 $6.50 $7.30
$104.40 $95.00 0.10000 $9.50 $10.30
$104.40 $150.00 0.06960 $10.44 $11.24
$163.13 $65.00 0.06819 $4.43 $5.23
$163.13 $150.00 0.06819 $10.23 $11.03
$163.13 $185.00 0.06013 $11.12 $11.92
$111.24 $111.24 0.10000 $11.12 $11.92
Greater of (x) Maturity Price
130.50% of First times Adjusted
Year Closing Exchange Ratio
Price and (y)
First Year Cap
Price
- ------------
(1) The Cisco Stock Maturity Price does not include any dividend payments that
may have been paid to holders of Cisco Stock.
</TABLE>
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.
Reset PERQS Are Not The Reset PERQS combine features of equity
Ordinary Senior Notes -- and debt. The terms of the Reset PERQS
No guaranteed return of differ from those of ordinary debt
principal securities in that we will not pay you a
fixed amount at maturity. Our payment to you
at maturity will be a number of 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
Potential Is Limited PERQS is limited because of the cap prices.
Even though the $6.53125 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 $11.12 as of such second scheduled
trading day prior to maturity.
Secondary Trading There may be little or no secondary market
May Be Limited for the Reset PERQS. Although the Reset
PERQS have been approved for listing on the
American Stock Exchange, Inc., it is not
possible to predict whether the Reset PERQS
will trade in the secondary market. 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
PERQS Influenced by Many our control, will influence the value of the
Unpredictable Factors Reset PERQS. We expect that generally the
market price of the Cisco 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:
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,
Cisco Systems, Inc. Inc. ("Cisco"). Although we do not 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
Shareholder Rights have voting rights or rights to receive
dividends or other distributions or any
other rights with respect to the Cisco
Stock.
Limited Antidilution MS & Co., as calculation agent, will adjust
Adjustments the amount payable at maturity for 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.
Potential Conflicts of Interest As calculation agent, MS & Co. will calculate
between You and the the payment to you at maturity of the Reset
Calculation Agent PERQS. MS & Co. and other affiliates may
also carry out hedging 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.
DESCRIPTION OF RESET PERQS
Terms not defined herein have the meanings given to such terms
in the accompanying prospectus supplement. The term "Reset PERQS" refers to
each $6.53125 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.............. $134,543,750
Maturity Date................. August 1, 2001
Interest Rate................. 6% per annum (equivalent to $0.391875 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................... $6.53125 per Reset PERQS
Initial Cisco Price........... $65.3125
Original Issue Date
(Settlement Date)........... July 19, 1999
CUSIP......................... 61744Y801
Denominations................. $6.53125 and integral multiples thereof
First Year Cap Price.......... $85.24 (130.51% 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) 130.50% 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 $6.53125
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 upon
delivery of the Reset PERQS at $11.12 per
Reset PERQS (170.26% 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) 130.50% 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 $6.53125 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.
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 of the Reset PERQS will be
deemed to be accelerated to such date, and we
will apply each $6.53125 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 may 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 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 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
$6.53125 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 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 value of
$11.12 as of such second scheduled Trading
Day.
The Calculation Agent shall be solely
responsible for the determination and
calculation of any adjustments to the Exchange
Factor or method of calculating the Exchange
Ratio and of any related determinations and
calculations with respect to any
distributions of stock, other securities or
other property or assets (including cash) in
connection with any corporate event described
in paragraph 5 above, and its determinations
and calculations with respect thereto shall
be conclusive.
The Calculation Agent will provide
information as to any adjustments to the
Exchange Factor or method of calculating the
Exchange Ratio upon written request by any
holder of the Reset PERQS.
Market Disruption Event....... "Market Disruption Event" means, with respect
to 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 or
adjust 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.
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.
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 14, 1999. The Market Price
on July 14, 1999 was $65.3125. 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.
Cisco High Low
---- ----
(CUSIP 17275R102)
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 14, 1999). 67 1/16 64 3/8
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 the date of this pricing supplement, we,
through our subsidiaries or others, hedged
our anticipated exposure in connection with
the Reset PERQS by taking positions in Cisco
Stock and other instruments. Purchase
activity could have potentially increased the
price of Cisco Stock, and therefore
effectively have increased 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. 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 Cisco Stock, options on Cisco Stock listed
on major securities markets or positions in
any other available securities or instruments
that we may wish to use in connection with
our hedging activity. Although we have no
reason to believe that our hedging activity
had or will have a material impact on the
price of Cisco Stock, we cannot give any
assurance that we did not, or in the future
will not, affect such price as a result of
our hedging activities.
Supplemental Information
Concerning Plan of
Distribution.................. In order to facilitate the offering of the
Reset PERQS, the Agent may engage in
transactions that stabilize, maintain or
otherwise affect the price of the Reset PERQS
or the 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.
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 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 $6.56 (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 6.18%
per annum. 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 on the Reset PERQS. The
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. Although the Deposit is
treated as bearing a yield (6.18% per annum,
as described above) that exceeds the stated
interest rate on the Reset PERQS, this excess
will give rise to de minimis "original issue
discount" only. Such de minimis original
issue discount is not subject to accrual on a
current basis (unless a U.S. Holder elects to
include all interest on a Reset PERQS using
the constant yield method; see "United States
Federal Taxation -- Notes -- Discount Notes"
in the accompanying prospectus supplement).
The excess of the yield on the Deposit over
the quarterly payments on a Reset PERQS
(which corresponds to the excess of the
Forward Price over the Issue Price), however,
would be deemed to be paid by us to you upon
the settlement of the Forward Contract and
would generally be treated as capital gain to
a U.S. Holder upon settlement of the Forward
Contract.
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 (except with respect
to the excess of the Forward Price over the
Issue Price, as discussed above). 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 any gain or loss
recognized upon the final settlement of the
Forward Contract would be capital gain or loss.
The distinction between capital gain or loss
and ordinary gain or loss is potentially
significant in several respects. For example,
limitations apply to a U.S. Holder's ability to
offset capital losses against ordinary income,
and certain U.S. Holders may be subject to
lower U.S. federal income tax rates with
respect to long-term capital gain than with
respect to ordinary gain. U.S. Holders should
consult their tax advisors with respect to the
treatment of capital gain or loss on a 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 on the Reset
PERQS" above.
Possible Alternative Tax Treatments of an
Investment in the Reset PERQS
Due to the absence of authorities that
directly address the proper characterization
of the Reset PERQS, no assurance can be given
that the IRS will accept, or that a court
will uphold, the characterization and tax
treatment described above. In particular,
the IRS could seek to analyze the U.S.
federal income tax consequences of owning a
Reset PERQS under Treasury regulations
governing contingent payment debt instruments
(the "Contingent Payment Regulations").
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 July 13, 1999, Chairman Archer introduced
legislation to be scheduled for markup by the
House Committee on Ways and Means (the
"Chairman's Mark") 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 ordinary
income. Although the Chairman's Mark, if
enacted as currently drafted, will not apply
to the Reset PERQS, the Chairman's Mark
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 Chairman's
Mark 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 ordinary income,
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 Chairman's Mark would impose an interest
charge on the gain that was recharacterized
on the sale or maturity of the Reset PERQS.
Backup Withholding and Information Reporting
A U.S. Holder of a Reset PERQS may be subject
to information reporting and to backup
withholding at a rate of 31 percent of the
amounts paid to the U.S. Holder, unless such
U.S. Holder provides proof of an applicable
exemption or a correct taxpayer identification
number, and otherwise complies with
applicable requirements of the backup
withholding rules. The amounts withheld
under the backup withholding rules are not an
additional tax and may be refunded, or
credited against the U.S. Holder's U.S.
federal income tax liability, provided the
required information is furnished to the IRS.
