PROSPECTUS Dated May 18, 2000 Pricing Supplement No. 32 to
PROSPECTUS SUPPLEMENT Registration Statement No. 333-34392
Dated May 18, 2000 Dated August 24, 2000
Rule 424(b)(3)
$135,388,897
Morgan Stanley Dean Witter & Co.
MEDIUM-TERM NOTES, SERIES C
Senior Fixed Rate Notes
-----------------------
8% Reset PERQS due October 30, 2002
Mandatorily Exchangeable For
Shares of Common Stock of YAHOO! INC.
Reset Performance Equity-linked Redemption Quarterly-pay Securities SM
("Reset PERQS SM")
The Reset PERQS will pay 8% 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 Yahoo! common stock based on the closing prices of Yahoo! common
stock on October 30, 2001 and at maturity, in each case subject to a cap price.
o The principal amount and issue price of each Reset PERQS is $27.9375,
which is just under one-fifth of the closing price of Yahoo! common stock
on August 24, 2000, the day we offered the Reset PERQS for initial sale to
the public.
o We will pay 8% interest (equivalent to $2.235 per year) on the $27.9375
principal amount of each Reset PERQS. Interest will be paid quarterly,
beginning October 30, 2000.
o At maturity you will receive shares of Yahoo! common stock in exchange for
each Reset PERQS at an exchange ratio. The initial exchange ratio is
one-fifth of a share of Yahoo! common stock per Reset PERQS. However, if
the price of Yahoo! common stock appreciates above the first year cap
price for October 30, 2001 or the second year cap price for October 28,
2002, the exchange ratio will be adjusted downward, and you will receive
an amount of Yahoo! common stock per Reset PERQS that is less than
one-fifth of a share.
o The first year cap price is $210.42, or 150.50% of the closing price of
Yahoo! common stock on August 24, 2000, the day we offered the Reset PERQS
for initial sale to the public. If on October 30, 2001, the price of
Yahoo! common stock is higher than the closing price of Yahoo! common
stock on August 24, 2000, we will raise the cap price to 150.50% of the
closing price of Yahoo! common stock on October 30, 2001. Otherwise the
cap price will remain unchanged in the second year. The maximum you can
receive at maturity is Yahoo! common stock worth $63.34 per Reset PERQS.
o Investing in Reset PERQS is not equivalent to investing in Yahoo! common
stock.
o Yahoo! Inc. is not involved in this offering of Reset PERQS in any way and
will have no obligation of any kind with respect to the Reset PERQS.
o The Reset PERQS have been approved for listing on the American Stock
Exchange LLC, subject to official notice of issuance. The AMEX listing
symbol for the Reset PERQS is "RYO."
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." "Performance Equity-linked Redemption Quarterly-pay Securities" and
"PERQS" are our service marks.
The Reset PERQS are riskier than ordinary debt securities. See "Risk Factors"
beginning on PS-6.
-----------------------
PRICE $27.9375 PER RESET PERQS
-----------------------
Price Agent's Proceeds to
to Public(1) Commissions the Company(1)
--------------- ------------- ----------------
Per Reset PERQS........... $27.9375 $0.42 $27.5175
Total..................... $135,388,896.56 $2,035,376.70 $133,353,519.86
------------------
(1) Plus accrued interest, if any, from the Original Issue Date.
If you purchase at least 100,000 Reset PERQS in any single transaction and you
comply with the holding period requirement described under "Supplemental
Information Concerning Plan of Distribution" in this pricing supplement, the
price will be $27.5184375 per Reset PERQS (98.50% of the Issue Price). In that
case, the underwriting discounts and commissions will be $.0009375 per Reset
PERQS.
MORGAN STANLEY DEAN WITTER
<PAGE>
(This page intentionally left blank)
<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
Yahoo! Inc. common stock, which we refer to as Yahoo! Stock. The Reset PERQS
also provide fixed quarterly payments at an annual rate of 8% 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 Yahoo! 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 8%
costs $27.9375 Reset Performance Equity- linked Redemption Quarterly-pay
Securities(sm) due October 30, 2002, which we refer to
as the Reset PERQS(sm). The principal amount and issue
price of each Reset PERQS is $27.9375, which is just
under one-fifth of the closing price of Yahoo! Stock on
August 24, 2000, 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 Yahoo! Stock based
on the market price of Yahoo! Stock, either up or down,
on October 30, 2001 and at maturity, in each case
subject to a cap price. Investing in Reset PERQS is not
equivalent to investing in Yahoo! Stock.
8% interest on the We will pay interest on the Reset PERQS, at the rate of
principal amount 8% of the per principal amount year, quarterly on each
January 30, April 30, July 30 and October 30, beginning
October 30, 2000. The interest rate we pay on the Reset
PERQS is more than the current dividend rate on Yahoo!
Stock. The Reset PERQS will mature on October 30, 2002.
Your appreciation The appreciation potential of each Reset PERQS is limited
potential is capped in each year by the cap price. The cap price through
October 30, 2001 is $210.42, or 150.50% of the closing
price of Yahoo! Stock on the day we offered the Reset
PERQS for initial sale to the public ("First Year Cap
Price"). The cap price thereafter until maturity
("Second Year Cap Price") will be the higher of 150.50%
of the closing price of Yahoo! Stock on October 30, 2001
and the First Year Cap Price. The maximum you can
receive at maturity is Yahoo! Stock worth $63.34 per
Reset PERQS.
Payout at maturity At maturity, for each $27.9375 principal amount of Reset
PERQS you hold, we will give to you a number of shares
of Yahoo! Stock equal to the exchange ratio. The initial
exchange ratio is one-fifth of a share of Yahoo! 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 Yahoo! Stock exceeds the First Year Cap
Price on October 30, 2001.
The adjusted exchange ratio will be calculated as
follows:
<TABLE>
<S> <C> <C>
New Exchange = Initial Exchange First Year Cap Price
Ratio Ratio x ----------------------------------------------
Yahoo! Stock closing price on October 30, 2001
</TABLE>
If the market price of Yahoo! Stock on October 30, 2001
is the same as or less than the First Year Cap Price, we
will not adjust the exchange ratio at that time.
PS-3
<PAGE>
Second Year Adjustment
The exchange ratio may be adjusted downward again at
maturity, but only if the market price of Yahoo! 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
Ratio = Ratio x --------------------------------------
Yahoo! Stock closing price at maturity
</TABLE>
If the market price of Yahoo! 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 Payouts 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 Yahoo! 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 Yahoo! 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 Yahoo! Stock that you will receive at
maturity.
No affiliation with Yahoo! Inc. is not an affiliate of ours and is not
Yahoo! Inc. 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 Yahoo! Inc. More
information on The Reset PERQS are senior notes issued
as part of our Series C medium-term note the Reset PERQS
program. You can find a general description of our
Series C medium-term note program in the accompanying
prospectus supplement dated May 18, 2000. 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." The tax and accounting treatment
of investments in equity- linked notes such as the Reset
PERQS may differ from that of investments in ordinary
debt securities or common stock. We urge you to consult
with your investment, legal, tax, accounting and other
advisors with regard to any proposed or actual
investment in the Reset PERQS.
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).
PS-4
<PAGE>
HYPOTHETICAL PAYOUTS ON THE RESET PERQS
For each Reset PERQS, the following table illustrates, for a range of
First Year Closing Prices and Maturity Prices, any adjustments we would make to
the Exchange Ratio and the Second Year Cap Price and the resulting payout at
maturity and total return on each Reset PERQS.
<TABLE>
Reset
PERQS
Payout at Reset
Maturity PERQS
Initial Initial Second Based on Payout at
Price Yahoo! Initial First Year 10/30/01 Year Exchange Yahoo! Maturity
Illustration of Reset Stock Exchange First Year Closing Exchange Cap Maturity Ratio at Stock plus 8%
Number PERQS Price Ratio Cap Price Price(1) Ratio Price Price(1) Maturity Price Coupon
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $27.93750 $139.8125 0.20000 $210.42 $100.0000 0.20000 $210.4200 $80.0000 0.20000 $16.00 $20.85
2 $27.93750 $139.8125 0.20000 $210.42 $100.0000 0.20000 $210.4200 $175.0000 0.20000 $35.00 $39.85
3 $27.93750 $139.8125 0.20000 $210.42 $100.0000 0.20000 $210.4200 $225.0000 0.18704 $42.08 $46.93
4 $27.93750 $139.8125 0.20000 $210.42 $175.0000 0.20000 $263.3750 $135.0000 0.20000 $27.00 $31.85
5 $27.93750 $139.8125 0.20000 $210.42 $175.0000 0.20000 $263.3750 $225.0000 0.20000 $45.00 $49.85
6 $27.93750 $139.8125 0.20000 $210.42 $175.0000 0.20000 $263.3750 $300.0000 0.17558 $52.67 $57.52
7 $27.93750 $139.8125 0.20000 $210.42 $275.0000 0.15303 $413.8750 $135.0000 0.15303 $20.66 $25.51
8 $27.93750 $139.8125 0.20000 $210.42 $275.0000 0.15303 $413.8750 $300.0000 0.15303 $45.91 $50.76
9 $27.93750 $139.8125 0.20000 $210.42 $275.0000 0.15303 $413.8750 $450.0000 0.14075 $63.34 $68.19
10 $27.93750 $139.8125 0.20000 $210.42 $210.4200 0.20000 $316.6821 $316.6821 0.20000 $63.34 $68.19
^ ^ ^
150.50% Greater of (x) Maturity Price
of Initial 150.50% of First times Adjusted
Yahoo! Year Closing Exchange Ratio
Stock Price Price and (y) First
Year Cap Price
</TABLE>
The above table illustrates an important feature of the Reset PERQS - the
payout at maturity is not determined merely by the price of Yahoo! Stock at
maturity, but will depend on the timing and magnitude of changes in Yahoo!
Stock price. For example, in both the fourth and seventh illustrations shown
above, the Maturity Price is $135.00, but in the seventh illustration the
Payout at Maturity is $25.51 compared to $31.85 in the fourth illustration. The
difference in the seventh illustration arises because the First Year Closing
Price exceeded the First Year Cap Price, resulting in a downward adjustment in
the Second Year Exchange Ratio. Similarly, in both the ninth and tenth
illustrations, the Payout at Maturity is $68.19, but in the ninth illustration,
the Maturity Price had to equal or exceed $450.00 to produce that payout, but
in the tenth illustration, a Maturity Price of only $316.6821 was required.
-------------------
1. The First Year Closing Price and the Maturity Price do not include any
dividend payments that may have been paid to holders of Yahoo! Stock.
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
Yahoo! Stock, there is no guaranteed return of principal. Investing in Reset
PERQS is not equivalent to investing directly in Yahoo! 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 and
Ordinary Senior Notes-- debt. The terms of the Reset PERQS differ from
No Guaranteed Return of those of ordinary debt securities in that we will
Principal not pay you a fixed amount at maturity. Our payout
to you at maturity will be a number of shares of
Yahoo! Stock based on the market price of Yahoo!
Stock on October 30, 2001 and at maturity. If the
final market price of Yahoo! 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 October 30, 2001, we
will pay you an amount of Yahoo! Stock with a
value less than the principal amount of the Reset
PERQS. See "Hypothetical Payouts on the Reset
PERQS" above.
Your Appreciation The appreciation potential of the Reset PERQS is
Potential Is Limited limited because of the cap prices. Even though
the $27.9375 issue price of one Reset PERQS is
just under today's market price of one share of
Yahoo! Stock multiplied by the initial exchange
ratio, you may receive a lesser fractional amount
of Yahoo! Stock per Reset PERQS at maturity if
the initial exchange ratio of one-fifth of a
share has been adjusted downwards. If the price
of Yahoo! Stock appreciates above both the cap
price for October 30, 2001 and the cap price for
October 28, 2002, the initial exchange ratio of
one-fifth of a share of Yahoo! Stock per Reset
PERQS will be reduced twice.
The exchange ratio and the final market price of
Yahoo! Stock at maturity will be determined on
October 28, 2002, which is two trading days prior
to maturity of the Reset PERQS. If the price of
Yahoo! Stock is lower on the actual maturity date
than it was on October 28, 2002, the value of any
Yahoo! Stock you receive will be less. Under no
circumstances will you receive an amount of
Yahoo! Stock for each Reset PERQS worth more than
$63.34 as of October 28, 2002.
Secondary Trading There may be little or no secondary market for the
May Be Limited Reset PERQS. Although the Reset PERQS have been
approved for listing on the American Stock
Exchange LLC, which we refer to as the AMEX, 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. MS & 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
PERQS Influenced by Many control, will influence the value of the Reset
Unpredictable Factors PERQS. We expect that generally the market price
of Yahoo! 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 Yahoo! Stock.
Other factors that may influence the value of the
Reset PERQS include:
o the volatility (frequency and magnitude of
changes in price) of Yahoo! Stock
o the dividend rate on Yahoo! Stock
PS-6
<PAGE>
o economic, financial, political and regulatory
or judicial events that affect stock markets
generally and which may affect the market
price of Yahoo! Stock
o interest and yield rates in the market
o the time remaining to the maturity of the
Reset PERQS
o our creditworthiness
Some or all of 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 Yahoo! Stock is at, below, or not
sufficiently above the initial market price.
You cannot predict the future performance of
Yahoo! Stock based on its historical performance.
The price of Yahoo! Stock may decrease so that
you will receive at maturity shares of Yahoo!
Stock worth less than the principal amount of the
Reset PERQS. We cannot guarantee that the price
of Yahoo! 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 Yahoo! Inc. Although
Yahoo! Inc. we do not have any non-public information about
Yahoo! as of the date of this pricing supplement,
we or our subsidiaries may presently or from time
to time engage in business with Yahoo!, including
extending loans to, or making equity investments
in, Yahoo! or providing advisory services to
Yahoo!, including merger and acquisition advisory
services. Moreover, we have no ability to control
or predict the actions of Yahoo!, including any
corporate actions of the type that would require
the calculation agent to adjust the payout to you
at maturity. Yahoo! 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 Yahoo!.
You Have No As an owner of Reset PERQS, you will not have
Shareholder Rights voting rights or rights to receive dividends or
other distributions or any other rights with
respect to Yahoo! Stock.
Limited Antidilution MS & Co., as calculation agent, will adjust the
Adjustments amount payable at maturity for certain events
affecting Yahoo! Stock, such as stock splits and
stock dividends, and certain other corporate
actions involving Yahoo!, such as mergers.
However, the calculation agent is not required to
make an adjustment for every corporate event that
can affect Yahoo! Stock. For example, the
calculation agent is not required to make any
adjustments if Yahoo! or anyone else makes a
partial tender or partial exchange offer for
Yahoo! Stock. If an event occurs that does not
require the calculation agent to adjust the
amount of Yahoo! Stock payable at maturity, the
market price of the Reset PERQS may be materially
and adversely affected.
PS-7
<PAGE>
Potential Conflicts of As calculation agent, MS & Co. will calculate the
Interest between You and payout to you at maturity of the Reset PERQS. MS
the Calculation Agent & Co. and other affiliates may also carry out
hedging activities related to the Reset PERQS or
to other instruments, including trading in Yahoo!
Stock as well as in other instruments related to
Yahoo! Stock. MS & Co. and some of our other
subsidiaries also trade Yahoo! Stock and other
financial instruments related to Yahoo! 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 the Reset
PERQS and any such trading activity could
potentially affect the price of Yahoo! Stock 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 (the "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.
PS-8
<PAGE>
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
$27.9375 principal amount of our 8% Reset PERQS due October 30, 2002,
Mandatorily Exchangeable For Shares of Common Stock of Yahoo! Inc. In this
pricing supplement, the terms "MSDW," "we," "us," and "our" refer to Morgan
Stanley Dean Witter & Co.
<TABLE>
<S> <C>
Principal Amount............................ $135,388,896.56
Maturity Date............................... October 30, 2002
Interest Rate............................... 8% per annum (equivalent to $2.235 per annum per Reset PERQS)
Interest Payment Dates...................... Each January 30, April 30, July 30 and October 30, beginning
October 30, 2000.
Record Date................................. The Record Date for each Interest Payment Date, including the
Maturity Date, will be the date 15 calendar days prior to such Interest
Payment Date, whether or not that date is a Business Day.
Specified Currency.......................... U.S. Dollars
Issue Price................................. $27.9375 per Reset PERQS
Initial Yahoo! Stock Price.................. $139.8125
Original Issue Date (Settlement Date)....... August 29, 2000
CUSIP....................................... 61744Y728
Denominations............................... $27.9375 and integral multiples thereof
First Year Cap Price........................ $210.42 (150.50% of the Initial Yahoo! Stock Price)
First Year Determination Date............... October 30, 2001 (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 Yahoo! 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) 150.50% 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 Yahoo! Stock and (ii) the Exchange Factor, each determined as of
the second scheduled Trading Day immediately prior to maturity.
Exchange at Maturity........................ At maturity, upon delivery of each Reset PERQS to the Trustee, we
will apply each $27.9375 principal amount of such Reset PERQS as
payment for a number of shares of Yahoo! Stock at the Exchange
Ratio. The initial Exchange Ratio, initially set at 0.20, is subject to
adjustment on the First Year Determination Date and at maturity in
order to cap the value of Yahoo! Stock to be received upon delivery
PS-9
<PAGE>
of the Reset PERQS at $63.34 per Reset PERQS (226.72% of the Issue
Price). Solely for purposes of adjustment upon the occurrence of certain
corporate events, the number of shares of Yahoo! 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) 150.50% 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
Payouts 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 payouts 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 Yahoo! Stock to be delivered with respect to each $27.9375
principal amount of each Reset PERQS and (ii) deliver such shares of
Yahoo! Stock (and cash in respect of interest and any fractional shares
of Yahoo! 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 Yahoo!
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
PS-10
<PAGE>
of Yahoo! Stock in an amount equal to the corresponding fractional Market
Price of such fraction of a share of Yahoo! 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
Yahoo! Stock through and including the second scheduled Trading
Day immediately prior to maturity. See "Antidilution Adjustments"
below.
Market Price................................ If Yahoo! 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 Yahoo! Stock (or one unit of any such other
security) on any Trading Day means (i) the last reported sale price,
regular way, of the principal trading session 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 Yahoo! 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 Yahoo! Stock (or any such other security) is listed
or admitted to trading on such securities exchange), the last reported
sale price of the principal trading session 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 of the principal
trading session 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 Yahoo!
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 Yahoo!
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 $27.9375 principal amount of each Reset PERQS
as payment for a number of shares of Yahoo! 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.
PS-11
<PAGE>
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.
All determinations made by the Calculation Agent will be at the sole
discretion of the Calculation Agent and will, in the absence of manifest
error, be conclusive for all purposes and binding on you and on us.
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 and functions as Calculation Agent
in good faith and using its reasonable judgment.
Antidilution Adjustments.................... The Exchange Factor will be adjusted as follows:
1. If Yahoo! 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 Yahoo! Stock.
2. If Yahoo! Stock is subject (i) to a stock dividend (issuance of
additional shares of Yahoo! Stock) that is given ratably to all holders
of shares of Yahoo! Stock or (ii) to a distribution of Yahoo! Stock as a
result of the triggering of any provision of the corporate charter of
Yahoo!, then once the dividend has become effective and Yahoo! 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 Yahoo! 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 Yahoo! 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 Yahoo! Stock will be deemed to be an
"Extraordinary Dividend" if such dividend or other distribution exceeds
the immediately preceding non- Extraordinary Dividend for Yahoo! Stock by
an amount equal to at least 10% of the Market Price of Yahoo! Stock (as
adjusted for any subsequent corporate event requiring an adjustment
hereunder, such
PS-12
<PAGE>
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
Yahoo! Stock, the Exchange Factor with respect to Yahoo! 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 Yahoo! 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 Yahoo! 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 Yahoo! Stock described in clause (i) or
clause (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 Yahoo! issues rights or warrants to all holders of Yahoo! Stock to
subscribe for or purchase Yahoo! Stock at an exercise price per share
less than the Market Price of Yahoo! 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 Yahoo! Stock outstanding immediately prior to the
issuance of such rights or warrants plus the number of additional shares
of Yahoo! Stock offered for subscription or purchase pursuant to such
rights or warrants and the denominator of which shall be the number of
shares of Yahoo! Stock outstanding immediately prior to the issuance of
such rights or warrants plus the number of additional shares of Yahoo!
Stock which the aggregate offering price of the total number of shares of
Yahoo! 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 Yahoo!
Stock, including, without limitation, as a result of the issuance of any
tracking stock by Yahoo!, (ii) Yahoo! or any surviving entity or
subsequent surviving entity of Yahoo! (a "Yahoo! Successor") has
been subject to a merger, combination or consolidation and is not the
surviving entity, (iii) any statutory exchange of securities of Yahoo!
or any Yahoo! Successor with another corporation occurs (other than
PS-13
<PAGE>
pursuant to clause (ii) above), (iv) Yahoo! is liquidated, (v) Yahoo!
issues to all of its shareholders equity securities of an issuer other
than Yahoo! (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 Yahoo! 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 $27.9375 principal amount of each Reset PERQS,
securities, cash or any other assets distributed to holders of Yahoo!
Stock in any such Reorganization Event, including, in the case of the
issuance of tracking stock, the reclassified share of Yahoo! Stock and,
in the case of a Spin-off Event, the share of Yahoo! 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 Yahoo! Stock and holders will receive in lieu of any Yahoo!
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 Yahoo! 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 Yahoo! 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 Yahoo! 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.
PS-14
<PAGE>
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 Yahoo! Stock, including, without limitation, a partial
tender or exchange offer for Yahoo! 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 Yahoo! Stock having a market value of $63.34 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 in the absence
of manifest error.
The Calculation Agent will provide information as to any adjustments to
the Exchange Factor or to the method of calculating the amount payable
upon exchange at maturity of the Reset PERQS in accordance with paragraph
5 above upon written request by any holder of the Reset PERQS.
Market Disruption Event..................... "Market Disruption Event" means, with respect to Yahoo! Stock:
(i) a suspension, absence or material limitation of trading of Yahoo!
Stock on the primary market for Yahoo! Stock for more than two hours of
trading or during the one-half hour period preceding the close of the
principal trading session in such market; or a breakdown or failure in
the price and trade reporting systems of the primary market for Yahoo!
Stock as a result of which the reported trading prices for Yahoo! Stock
during the last one-half hour preceding the closing of the principal
trading
PS-15
<PAGE>
session in such market are materially inaccurate; or the suspension,
absence or material limitation on the primary market for trading in
options contracts related to Yahoo! Stock, if available, during the
one-half hour period preceding the close of the principal trading session
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 Yahoo! 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 Yahoo! Stock and (5) a suspension, absence or
material limitation of trading on the primary securities market on which
options contracts related to Yahoo! Stock are traded will not include any
time when such securities market is itself closed for trading under
ordinary circumstances.
Alternate Exchange Calculation
in case of an Event of Default.............. In case an event of default with respect to the Reset PERQS shall
have occurred and be continuing, the amount declared due and
payable upon any acceleration of the Reset PERQS shall be
determined by the Calculation Agent and shall be equal to the product
of (i) the Market Price of Yahoo! Stock as of the date of such
acceleration and (ii) the then current Exchange Ratio adjusted as if
such date were the second scheduled Trading Day prior to maturity
and, if such date occurs prior to the First Year Determination Date,
the First Year Determination Date.
Yahoo! Stock; Public Information............ Yahoo! Inc. is a global Internet communications, commerce and
media company that offers a comprehensive branded network of
services to users each month worldwide. Yahoo! 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
PS-16
<PAGE>
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 Yahoo! pursuant to the Exchange Act can be located by reference to
Commission file number 0-28018. In addition, information regarding Yahoo!
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 information.
This pricing supplement relates only to the Reset PERQS offered hereby
and does not relate to Yahoo! Stock or other securities of Yahoo! We have
derived all disclosures contained in this pricing supplement regarding
Yahoo! 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
Yahoo! 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 Yahoo! is 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 Yahoo! Stock (and therefore the Initial Yahoo! Stock Price, the First
Year Cap Price, the Second 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 Yahoo! 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 Yahoo! Stock.
We and/or our subsidiaries may presently or from time to time engage in
business with Yahoo!, including extending loans to, or making equity
investments in, Yahoo! or providing advisory services to Yahoo!,
including merger and acquisition advisory services. In the course of such
business, we and/or our subsidiaries may acquire non- public information
with respect to Yahoo! and, in addition, one or more of our affiliates
may publish research reports with respect to Yahoo!. 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 Yahoo!
as in your
PS-17
<PAGE>
judgment is appropriate to make an informed decision with respect to
an investment in Yahoo! Stock.
Historical Information...................... The following table sets forth the high and low Market Price during
1997, 1998, 1999 and 2000 through August 24, 2000. The Market
Price on August 24, 2000 was $139.8125. 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 Yahoo! Stock as an indication of future
performance. The price of Yahoo! Stock may decrease so that you
will receive at maturity shares of Yahoo! Stock worth less than the
principal amount of the Reset PERQS. We cannot give you any
assurance that the price of Yahoo! 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 Yahoo! Stock on October 30, 2001 and October 28, 2002,
there is no guaranteed return of principal. To the extent that the
Maturity Price of Yahoo! Stock is less than the Initial Yahoo! Stock
Price or not sufficiently above the Initial Yahoo! Stock Price to
compensate for a downward adjustment of the Exchange Ratio, if any,
at October 30, 2001 and the shortfall is not offset by the coupon paid
on the Reset PERQS, you will lose money on your investment.
High Low
---- ----
(CUSIP 984332106)
1997
First Quarter................... 3 2/57 1 16/35
Second Quarter.................. 3 7/26 2 2/7
Third Quarter................... 6 59/64 2 23/29
Fourth Quarter.................. 8 7/8 4 3/4
1998
First Quarter................... 11 50/79 7 25/97
Second Quarter.................. 19 11/16 11 21/32
Third Quarter................... 32 7/8 17 1/4
Fourth Quarter.................. 68 7/8 26 13/64
1999
First Quarter................... 103 5/8 62
Second Quarter.................. 109 9/16 59 5/8
Third Quarter................... 92 11/32 60 1/2
Fourth Quarter.................. 216 11/32 83 25/32
2000
First Quarter................... 237 1/2 153 13/16
Second Quarter.................. 167 3/8 112 1/16
Third Quarter
( through August 24, 2000)..... 139 13/16 105 1/2
Historical prices have been adjusted for one 3 for 2 stock split which
became effective in the third quarter of 1997, and three 2 for 1 stock
splits, which became effective in the third quarter of 1998, the first
quarter of 1999 and the first quarter of 2000, respectively.
Yahoo! has not paid cash dividends on Yahoo! Stock to date. We
make no representation as to the amount of dividends, if any, that
Yahoo! 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 Yahoo! 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
PS-18
<PAGE>
or more of our subsidiaries 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 Yahoo! Stock and other instruments. Purchase
activity could potentially increase the price of Yahoo! Stock, and
therefore effectively increase the level to which Yahoo! Stock must rise
before you would receive at maturity an amount of Yahoo! Stock worth as
much 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 Yahoo! Stock, option contracts on Yahoo! Stock
listed on major securities markets or positions in any other available
securities or instruments that we may wish to use in connection with such
hedging activity. Although we have no reason to believe that our hedging
activity had or will have a material impact on the price of Yahoo! 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 Yahoo! 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 Yahoo! 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; provided
that the price will be $27.5184375 per Reset PERQS and the underwriting
discounts and commissions will be $.0009375 per Reset PERQS for
purchasers of greater than or equal to 100,000 Reset PERQS in any single
transaction, subject to the holding period requirements described below.
Delivery of approximately 98.50% of the Reset PERQS to a purchaser of
100,000 or more Reset PERQS at the reduced price (the "Delivered Reset
PERQS") will be made on the date of delivery of the Reset PERQS referred
to on the cover of this pricing supplement. The balance of approximately
1.50% of the Reset PERQS (the "Escrowed Reset PERQS") purchased by each
such investor will be held in escrow at MS & Co. for the benefit of the
investor and delivered to such investor if the investor and any accounts
in which the investor may have deposited any of its Delivered Reset PERQS
have held all of the Delivered Reset PERQS for 45 calendar days following
the date of the pricing supplement or any shorter period deemed
appropriate by the Agent. If an investor or any account in which the
investor has deposited any of its Delivered Reset PERQS fails to satisfy
the holding period requirement, as determined by the Agent, all of the
investor's Escrowed Reset PERQS will be forfeited
PS-19
<PAGE>
by the investor and not delivered to it. The Escrowed Reset PERQS will
instead be delivered to the Agent for sale to investors. This forfeiture
will have the effect of increasing the purchase price per Reset PERQS for
such investors to 100% of the principal amount of the Reset PERQS. Should
investors who are subject to the holding period requirement sell their
Reset PERQS once the holding period is no longer applicable, the market
price of the Reset PERQS may be adversely affected. See also "Plan of
Distribution" in the accompanying prospectus supplement.
ERISA Matters for Pension Plans
and Insurance Companies..................... Each fiduciary of a pension, profit-sharing or other employee benefit
plan subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA") (a "Plan"), should consider the
fiduciary standards of ERISA in the context of the Plan's particular
circumstances before authorizing an investment in the Reset PERQS.
Accordingly, among other factors, the fiduciary should consider
whether the investment would satisfy the prudence and diversification
requirements of ERISA and would be consistent with the documents
and instruments governing the Plan.
In addition, we and certain of our subsidiaries and affiliates, including
MS & Co. and Dean Witter Reynolds Inc. ("DWR"), are 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 Plans. Prohibited transactions within the
meaning of ERISA or the Code would likely arise, for example, if the
Reset PERQS are acquired by or with the assets of a 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. A violation of these "prohibited
transaction" rules may result in an excise tax or other liabilities under
ERISA and/or Section 4975 of the Code for such persons, unless exemptive
relief is available under an applicable statutory or administrative
exemption.
The U.S. Department of Labor has issued five prohibited transaction class
exemptions ("PTCEs") that may provide exemptive relief for direct or
indirect prohibited transactions resulting from the purchase or holding
of the Reset PERQS. Those class exemptions are PTCE 96-23 (for certain
transactions determined by in-house asset managers), PTCE 95-60 (for
certain transactions involving insurance company general accounts), PTCE
91-38 (for certain transactions involving bank collective investment
funds), PTCE 90-1 (for certain transactions involving insurance company
separate accounts), and PTCE 84-14 (for certain transactions determined
by independent qualified asset managers).
Because we are considered a party in interest with respect to many Plans,
the Reset PERQS may not be purchased or held by any Plan, any entity
whose underlying assets include "plan assets" by reason of any Plan's
investment in the entity (a "Plan Asset Entity") or any person investing
"plan assets" of any Plan, unless such purchaser or holder is eligible
for exemptive relief, including relief available under
PS-20
<PAGE>
PTCE 96-23, 95-60, 91-38, 90-1, or 84-14 or such purchase and holding is
otherwise not prohibited. Any purchaser, including any fiduciary
purchasing on behalf of a Plan, or holder of the Reset PERQS will be
deemed to have represented, in its corporate and fiduciary capacity, by
its purchase and holding thereof that it either (a) is not a Plan or a
Plan Asset Entity and is not purchasing such securities on behalf of or
with "plan assets" of any Plan or (b) is eligible for exemptive relief or
such purchase or holding is not prohibited by ERISA or Section 4975 of
the Code.
Under ERISA, assets of a 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.
Accordingly, insurance company general accounts that include assets of a
Plan must ensure that one of the foregoing exemptions is available. Due
to the complexity of these rules and the penalties that may be imposed
upon persons involved in non-exempt prohibited transactions, it is
particularly important that fiduciaries or other persons considering
purchasing the Reset PERQS on behalf of or with "plan assets" of any Plan
consult with their counsel regarding the availability of exemptive relief
under PTCE 96-23, 95-60, 91-38, 90-1 or 84-14.
Purchasers of the Reset PERQS have exclusive responsibility for ensuring
that their purchase and holding of the Reset PERQS do not violate the
prohibited transaction rules of ERISA or the Code.
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 initial holders of the Reset PERQS purchasing the
Reset PERQS at the Issue Price, 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.
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
PS-21
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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 $27.9375 (the "Forward Price"), Yahoo!
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 Yahoo!
Stock (the "Deposit"), which Deposit bears an annual yield of 6.962% per
annum, which yield is based on our cost of borrowing. Under this
characterization, less than the full quarterly payments on the Reset
PERQS will be attributable to the yield on the Deposit. Accordingly, the
excess of the quarterly payments on the Reset PERQS over the portion of
those payments attributable to the yield on the Deposit will 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
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.
U.S. HOLDERS
As used herein, the term "U.S. Holder" means an owner of a Reset PERQS
that is, for U.S. federal income tax purposes, (i) a citizen or resident
of the United States, (ii) a corporation created or organized under the
laws of the United States or any political subdivision thereof or (iii)
an estate or trust the income of which is subject to United States
federal income taxation regardless of its source.
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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. To the extent attributable to the
yield 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
the yield 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.
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 Yahoo!
Stock, and a U.S. Holder would not recognize any gain or loss with
respect to any Yahoo! 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 Yahoo! Stock received upon maturity, the U.S.
Holder would have an adjusted tax basis in such Yahoo! Stock equal
to the pro rata portion of the Forward Price allocable thereto. The
allocation of the Forward Price between cash and Yahoo! Stock
should be based on the amount of the cash received and the relative
fair market value, as of the maturity, of Yahoo! Stock. U.S. Holders
should note that the holding period of any Yahoo! 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 generally 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
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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 but unpaid interest payments on the
Deposit, which would be taxed as described under "--Quarterly Payments 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. In addition, a U.S. Holder would recognize income upon maturity of
the Reset PERQS to the extent that the value of Yahoo! Stock and cash (if
any) received exceeds the adjusted 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.
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Constructive Ownership
Section 1260 of the Code treats 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 or deemed to be recognized (as described below)
by such taxpayer with respect to the derivative position would be
recharacterized as ordinary income. Although Section 1260 in its current
form does not apply to the Reset PERQS, Section 1260 authorizes the
Treasury Department to promulgate regulations (possibly with retroactive
effect) to expand the application of the "constructive ownership" regime.
There is no assurance that the Treasury Department will not promulgate
regulations to apply the regime to the Reset PERQS. If Section 1260 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 (if any) 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 the underlying stock itself on the
issue date of the Reset PERQS and disposed of the underlying stock upon
disposition (including retirement) of the Reset PERQS. Section 1260, if
applicable, would require a U.S. Holder that receives shares of Yahoo!
Stock at maturity to recognize as ordinary income the amount that would
have been treated as ordinary income according to the rule described in
the preceding sentence, if the U.S. Holder had sold the Reset PERQS at
maturity for fair market value. In addition, Section 1260 would impose an
interest charge on the gain (or deemed 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.
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MORGAN STANLEY DEAN WITTER & CO.
