The information in this pricing supplement is not complete and may be changed.
We may not deliver these securities until a final pricing supplement is
delivered. This pricing supplement and the accompanying prospectus and
prospectus supplement do not constitute an offer to sell these securities and we
are not soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
Subject to Completion, Pricing Supplement dated October 30, 2000
PROSPECTUS Dated May 18, 2000 Pricing Supplement No. 42 to
PROSPECTUS SUPPLEMENT Registration Statement No. 333-34392
Dated May 18, 2000 Dated , 2000
Rule 424(b)(3)
$25,000,000
Morgan Stanley Dean Witter & Co.
MEDIUM-TERM NOTES, SERIES C
Senior Fixed Rate Notes
9% Reset PERQS due December 30, 2002
Mandatorily Exchangeable for
Shares of Common Stock of XILINX, INC.
Reset Performance Equity-linked Redemption Quarterly-pay Securities(SM)
("Reset PERQS(SM)")
The Reset PERQS will pay 9% 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 Xilinx common stock based on the closing prices of Xilinx
common stock in December of 2001 and at maturity, in each case subject to a
cap price.
o The principal amount and issue price of each Reset PERQS is $ ,
which is one-fifth of the closing price of Xilinx common stock on the day
we offer the Reset PERQS for initial sale to the public.
o We will pay 9% interest (equivalent to $ per year) on the $
principal amount of each Reset PERQS. Interest will be paid quarterly,
beginning December 30, 2000.
o At maturity you will receive shares of Xilinx common stock in exchange for
each Reset PERQS at an exchange ratio. The initial exchange ratio is
one-fifth of a share of Xilinx common stock per Reset PERQS. However, if
the price of Xilinx common stock appreciates above the first year cap price
for December 28, 2001 or the second year cap price for December 26, 2002,
the exchange ratio will be adjusted downward, and you will receive an
amount of Xilinx common stock per Reset PERQS that is less than one-fifth
of a share.
o The first year cap price is $ , or % of the closing price of
Xilinx common stock on the day we offer the Reset PERQS for initial sale to
the public. If on December 28, 2001, the price of Xilinx common stock is
higher than the closing price of Xilinx common stock on the day we offer
the Reset PERQS for initial sale to the public, we will raise the cap price
to % of the closing price of Xilinx common stock on December 28, 2001.
Otherwise the cap price will remain unchanged in the second year. The
maximum you can receive at maturity is Xilinx common stock worth $
per Reset PERQS.
o Investing in Reset PERQS is not equivalent to investing in Xilinx common
stock.
o Xilinx, 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 We will apply to list the Reset PERQS to trade under the proposed symbol
"RPX" on the American Stock Exchange LLC.
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."
The Reset PERQS are riskier than ordinary debt securities. See "Risk Factors"
beginning on PS-6.
----------
PRICE $ PER RESET PERQS
----------
Price Agent's Proceeds to
to Public(1) Commissions the Company(1)
------------ ----------- --------------
Per Reset PERQS.... $ $ $
Total.............. $ $ $
----------
(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 $ per Reset PERQS (98.25% of the Issue Price). In that
case, the underwriting discounts and commissions will be $ per Reset
PERQS.
MORGAN STANLEY DEAN WITTER
<PAGE>
(This page intentionally left blank)
2
<PAGE>
SUMMARY OF PRICING SUPPLEMENT
The following summary describes the Reset PERQS we are offering
to you in general terms only. You should read the summary together with the
more detailed information that is contained in the rest of this pricing
supplement and in the accompanying prospectus and prospectus supplement. You
should carefully consider, among other things, the matters set forth in "Risk
Factors."
The Reset PERQS offered are medium-term debt securities of
Morgan Stanley Dean Witter & Co. The return on the Reset PERQS is linked to
the performance of Xilinx, Inc. common stock, which we refer to as Xilinx
Stock. The Reset PERQS also provide fixed quarterly payments at an annual
rate of 9% 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 Xilinx 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.
"Performance Equity-linked Redemption Quarterly-pay Securities"
and "PERQS" are our service marks.
<TABLE>
<S> <C>
Each Reset PERQS We, Morgan Stanley Dean Witter & Co., are offering 9% Reset Performance Equity-
costs $ linked Redemption Quarterly-pay Securities[SM] due December 30, 2002, which we refer
to as the Reset PERQS[SM]. The principal amount and issue price of each Reset PERQS
is $ , which is one-fifth of the closing price of Xilinx Stock on the day we offer the
Reset PERQS for initial sale to the public.
No guaranteed Unlike ordinary debt securities, the Reset PERQS do not guarantee any return of
return of principal principal at maturity. Instead the Reset PERQS will pay an amount of Xilinx Stock
based on the market price of Xilinx Stock, either up or down, on December 28, 2001
and at maturity, in each case subject to a cap price. Investing in Reset PERQS is not
equivalent to investing in Xilinx Stock.
9% interest on the We will pay interest on the Reset PERQS, at the rate of 9% of the principal amount per
principal amount year, quarterly on each March 30, June 30, September 30 and December 30, beginning
December 30, 2000. The interest rate we pay on the Reset PERQS is more than the
current dividend rate on Xilinx Stock. The Reset PERQS will mature on December 30,
2002.
Your appreciation The appreciation potential of each Reset PERQS is limited in each year by the cap price.
potential is capped The cap price through December 28, 2001 is $ , or % of the closing price of
Xilinx Stock on the day we offer 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 % of the closing price of Xilinx Stock on December 28, 2001
and the First Year Cap Price. The maximum you can receive at maturity is Xilinx Stock
worth $ per Reset PERQS.
Payout at maturity At maturity, for each $ principal amount of Reset PERQS you hold, we will give to
you a number of shares of Xilinx Stock equal to the exchange ratio. The initial
exchange ratio is one-fifth of a share of Xilinx 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 Xilinx Stock
exceeds the First Year Cap Price on December 28, 2001.
The adjusted exchange ratio will be calculated as follows:
New Exchange = Initial Exchange First Year Cap Price
Ratio Ratio x -----------------------------------------------
Xilinx Stock closing price on December 28, 2001
If the market price of Xilinx Stock on December 28, 2001 is the same as or less
than the First Year Cap Price, we will not adjust the exchange ratio at that time.
3
<PAGE>
Second Year Adjustment
The exchange ratio may be adjusted downward again at maturity, but only if the
market price of Xilinx Stock at maturity exceeds the Second Year Cap Price. The
final exchange ratio will then be calculated as follows:
Final Exchange = Existing Exchange Second Year Cap Price
Ratio Ratio x --------------------------------------
Xilinx Stock closing price at maturity
If the market price of Xilinx 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 Xilinx 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 Xilinx Stock. You should read about these
adjustments in the sections called "Description of Reset PERQS--Exchange at
Maturity," "--Exchange Factor" and "--Antidilution Adjustments."
MS&Co. will be the We have appointed our affiliate MS & Co. to act as calculation agent for The Chase
Calculation Agent 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 Xilinx
Stock that you will receive at maturity.
No affiliation with Xilinx, Inc. is not an affiliate of ours and is not involved with this offering in any way.
Xilinx, Inc. The obligations represented by the Reset PERQS are obligations of Morgan Stanley
Dean Witter & Co. and not of Xilinx, Inc.
Where you can find more The Reset PERQS are senior notes issued as part of our Series C medium-term note
information on the Reset program. You can find a general description of our Series C medium-term note program
PERQS 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).
</TABLE>
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. The
following assumptions were made:
o Initial Price of Reset PERQS: $14.00
o Initial Xilinx Stock Price: $70.00
o First Year Cap Price: 142.50% of the Initial Xilinx Stock
Price
o Second Year Cap Price: Greater of (x) 142.50% of the First Year
Closing Price and (y) First Year Cap
Price
o Interest Rate: 9% per year
o Maturity: 26 months
<TABLE>
<S> <C> <C> <C> <C> <C>
Initial Price Initial First Year
Illustration of Reset Initial Xilinx Exchange First Year Closing
Number PERQS Stock Price Ratio Cap Price Price(1)
1 $14.00 $70.00 0.20 $99.75 $65.00
2 $14.00 $70.00 0.20 $99.75 $65.00
3 $14.00 $70.00 0.20 $99.75 $65.00
4 $14.00 $70.00 0.20 $99.75 $85.00
5 $14.00 $70.00 0.20 $99.75 $85.00
6 $14.00 $70.00 0.20 $99.75 $85.00
7 $14.00 $70.00 0.20 $99.75 $120.00
8 $14.00 $70.00 0.20 $99.75 $120.00
9 $14.00 $70.00 0.20 $99.75 $120.00
10 $14.00 $70.00 0.20 $99.75 $99.75
^
|
|
142.50%
of Initial
Xilinx Stock
Price
<S> <C> <C> <C> <C> <C> <C>
Reset PERQS Reset PERQS
Exchange Payout at Maturity Payout at
Illustration 12/28/01 Second Year Maturity Ratio at Based on Xilinx Maturity plus
Number Exchange Ratio Cap Price Price(1) Maturity Stock Price 9% Coupon
------ -------------- --------- -------- -------- ----------- ---------
1 0.20000 $99.7500 $55.0000 0.20000 $11.00 $13.70
2 0.20000 $99.7500 $85.0000 0.20000 $17.00 $19.70
3 0.20000 $99.7500 $115.0000 0.17348 $19.95 $22.65
4 0.20000 $121.1250 $65.0000 0.20000 $13.00 $15.70
5 0.20000 $121.1250 $100.0000 0.20000 $20.00 $22.70
6 0.20000 $121.1250 $135.0000 0.17944 $24.22 $26.92
7 0.16625 $171.0000 $65.0000 0.16625 $10.81 $13.51
8 0.16625 $171.0000 $135.0000 0.16625 $22.44 $25.14
9 0.16625 $171.0000 $200.0000 0.14214 $28.43 $31.13
10 0.20000 $142.1438 $142.1438 0.20000 $28.43 $31.13
^ ^
| |
| |
Greater of (x) Maturity Price times
142.50% of First Adjusted Exchange
Year Closing Ratio
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 Xilinx
Stock at maturity, but will depend on the timing and magnitude of changes in
Xilinx Stock price. For example, in both the fourth and seventh illustrations
shown above, the Maturity Price is $65.00 but in the seventh illustration the
Payout at Maturity is $13.51 compared to $15.70 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 $31.13, but in the ninth
illustration, the Maturity Price had to equal or exceed $200.00 to produce
that payout, while in the tenth illustration, a Maturity Price of only
$142.1438 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 Xilinx Stock.
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 Xilinx Stock, there is no guaranteed return of principal.
Investing in Reset PERQS is not equivalent to investing directly in Xilinx
Stock. This section describes the most significant risks relating to the Reset
PERQS. You should carefully consider whether the Reset PERQS are suited to
your particular circumstances before you decide to purchase them.
<TABLE>
<S> <C>
Reset PERQS Are Not The Reset PERQS combine features of equity and debt. The terms of the Reset
Ordinary Senior Notes -- PERQS differ from those of ordinary debt securities in that we will not pay you a
No Guaranteed Return of fixed amount at maturity. Our payout to you at maturity will be a number of
Principal shares of Xilinx Stock based on the market price of Xilinx Stock on
December 28, 2001 and at maturity. If the final market price of Xilinx 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 December 28, 2001, we will pay you an amount of
Xilinx 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 limited because of the cap
Potential Is Limited prices. Even though the $ issue price of one Reset PERQS is equal to today's
market price of one share of Xilinx Stock multiplied by the initial exchange ratio,
you may receive a lesser fractional amount of Xilinx 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 Xilinx Stock appreciates above both the cap price for
December 28, 2001 and the cap price for December 26, 2002, the initial
exchange ratio of one-fifth of a share of Xilinx Stock per Reset PERQS will be
reduced twice.
The exchange ratio and the final market price of Xilinx Stock at maturity will be
determined on December 26, 2002, which is two trading days prior to maturity of
the Reset PERQS. If the price of Xilinx Stock is lower on the actual maturity
date than it was on December 26, 2002, the value of any Xilinx Stock you
receive will be less. Under no circumstances will you receive an amount of
Xilinx Stock for each Reset PERQS worth more than $ as of such second
scheduled trading day prior to maturity.
Secondary Trading There may be little or no secondary market for the Reset PERQS. Although we
May Be Limited will apply to list the Reset PERQS on the American Stock Exchange LLC, which
we refer to as the AMEX, we may not meet the requirements for listing. 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 control, will influence the value
PERQS Influenced by Many of the Reset PERQS. We expect that generally the market price of Xilinx
Unpredictable Factors Stock on any day will affect the value of the Reset PERQS more than any
other single factor. Because adjustments to the exchange ratio for the Reset
PERQS are tied to the closing stock prices on two specific days, however, the
Reset PERQS may trade differently from Xilinx Stock. Other factors that may
influence the value of the Reset PERQS include:
o the volatility (frequency and magnitude of changes in price) of Xilinx
Stock
o the dividend rate on Xilinx Stock
o economic, financial, political, regulatory or judicial events that affect
stock markets generally and which may affect the market price of Xilinx
Stock
6
<PAGE>
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 Xilinx Stock is at, below, or not sufficiently above the initial market
price.
You cannot predict the future performance of Xilinx Stock based on its historical
performance. The price of Xilinx Stock may decrease so that you will receive at
maturity shares of Xilinx Stock worth less than the principal amount of the Reset
PERQS. We cannot guarantee that the price of Xilinx 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 Xilinx, Inc. Although we do not have any non-public
Xilinx, Inc. information about Xilinx, Inc. as of the date of this pricing supplement, we or our
subsidiaries may presently or from time to time engage in business with Xilinx,
Inc., including extending loans to, or making equity investments in, Xilinx, Inc.
or providing advisory services to Xilinx, Inc., including merger and acquisition
advisory services. Moreover, we have no ability to control or predict the actions
of Xilinx, Inc., including any corporate actions of the type that would require the
calculation agent to adjust the payout to you at maturity. Xilinx, Inc. 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 Xilinx, Inc.
You Have No As an owner of Reset PERQS, you will not have voting rights or rights to receive
Shareholder Rights dividends or other distributions or any other rights with respect to Xilinx Stock.
The Antidilution MS & Co., as calculation agent, will adjust the amount payable at maturity for
Adjustments We Are certain events affecting Xilinx Stock, such as stock splits and stock dividends,
Required to Make Do Not and certain other corporate actions involving Xilinx, Inc., such as mergers.
Cover Every Corporate However, the calculation agent is not required to make an adjustment for every
Event that Can Affect Xilinx corporate event that can affect Xilinx Stock. For example, the calculation agent
Stock is not required to make any adjustments if Xilinx, Inc. or anyone else makes a
partial tender or partial exchange offer for Xilinx Stock. If an event occurs that
does not require the calculation agent to adjust the amount of Xilinx Stock
payable at maturity, the market price of the Reset PERQS may be materially and
adversely affected.
Potential Conflicts of Interest As calculation agent, our affiliate MS & Co. will calculate the payout to you at
Between You and the maturity of the Reset PERQS. MS & Co. and other affiliates may also carry out
Calculation Agent hedging activities related to the Reset PERQS or to other instruments, including
trading in Xilinx Stock as well as in other instruments related to Xilinx Stock.
MS & Co. and some of our other subsidiaries also trade Xilinx Stock and other
financial instruments related to Xilinx 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 Xilinx Stock
and, accordingly, could affect your payout on the Reset PERQS.
7
<PAGE>
Because the Characterization You should also consider the tax consequences of investing in the Reset PERQS.
of the Reset PERQS for There is no direct legal authority as to the proper tax treatment of the Reset
Federal Income Tax Purposes PERQS, and therefore significant aspects of the tax treatment of the Reset
Is Uncertain, the Material PERQS are uncertain. Pursuant to the terms of the Reset PERQS, MSDW and
Federal Income Tax you agree to treat a Reset PERQS as an investment unit consisting of (i) a
Consequences of an forward contract pursuant to which you agree to purchase Xilinx stock from us at
Investment in the Reset maturity and (ii) a deposit with us of a fixed amount of cash to secure your
PERQS Are Uncertain. obligation under the forward contract, as described in "Description of Reset
PERQS--United States Federal Income Taxation--General." If the Internal
Revenue Service were successful in asserting an alternative characterization for
the Reset PERQS, the timing and character of income on the Reset PERQS and
your basis for Xilinx Stock received in exchange for the Reset PERQS, may
differ. 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.
</TABLE>
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 $ principal amount of our 9% Reset PERQS due December 30, 2002,
Mandatorily Exchangeable for Shares of Common Stock of Xilinx, Inc. In this
pricing supplement, the terms "MSDW," "we," "us" and "our" refer to Morgan
Stanley Dean Witter & Co.
Principal Amount.............. $25,000,000
Maturity Date................. December 30, 2002
Interest Rate................. 9% per annum (equivalent to $ per annum
per Reset PERQS)
Interest Payment Dates........ Each March 30, June 30, September 30 and
December 30, beginning December 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................... $ per Reset PERQS
Initial Xilinx Stock Price.... $
Original Issue Date
(Settlement Date) .......... November , 2000
CUSIP......................... 61744Y694
Denominations................. $ and integral multiples thereof
First Year Cap Price.......... $ ( % of the Initial Xilinx
Stock Price)
First Year Determination Date. December 28, 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 Xilinx
Stock and (ii) the Exchange Factor, each
determined as of the First Year Determination
Date.
Second Year Cap Price......... Second Year Cap Price means the greater of
(x) % of the First Year Closing Price
and (y) the First Year Cap Price. See
"Exchange at Maturity" below.
Maturity Price................ Maturity Price means the product of (i) the
Market Price of one share of Xilinx 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 $
principal amount of such Reset PERQS as
payment for a number of shares of Xilinx
Stock at the Exchange Ratio. The 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 Xilinx Stock to be received upon
delivery of
9
<PAGE>
the Reset PERQS at $ per Reset PERQS
( % of the Issue Price). Solely for purposes
of adjustment upon the occurrence of certain
corporate events, the number of shares of
Xilinx 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," which will be equal to the greater of
(x) % of the First Year Closing Price and (y)
the First Year Cap Price. Notice of the Second
Year Cap Price and of any such adjustment to
the Exchange Ratio shall promptly be sent by
first- class mail to The Depository Trust
Company, New York, New York (the "Depositary").
If the Maturity Price is less than or equal to
the Second Year Cap Price, no further
adjustment to the Exchange Ratio will be made.
If the Maturity Price exceeds the Second Year
Cap Price, the then existing Exchange Ratio
will be adjusted so that the final Exchange
Ratio will equal the product of (i) the
existing Exchange Ratio and (ii) a fraction the
numerator of which will be the Second Year Cap
Price and the denominator of which will be the
Maturity Price. Please review each example in
the table called "Hypothetical 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., $12.34565 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 Xilinx Stock to be delivered with
respect to each $ principal amount of
the Reset PERQS and (ii) deliver such shares
of Xilinx Stock (and cash in respect of
interest and any fractional shares of Xilinx
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 Xilinx 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
10
<PAGE>
of Xilinx Stock in an amount equal to the
corresponding fractional Market Price of such
fraction of a share of Xilinx 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 Xilinx Stock through and including
the second scheduled Trading Day immediately
prior to maturity. See "Antidilution
Adjustments" below.
Market Price.................. If Xilinx 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 Xilinx 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 Xilinx 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 Xilinx 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 Xilinx 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 Xilinx 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 the $ principal amount of
each Reset PERQS as payment for a number of
shares of Xilinx 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.
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 Xilinx 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 Xilinx Stock.
2. If Xilinx Stock is subject
(i) to a stock dividend (issuance of
additional shares of Xilinx Stock) that is
given ratably to all holders of shares of
Xilinx Stock or (ii) to a distribution of
Xilinx Stock as a result of the triggering of
any provision of the corporate charter of
Xilinx, then once the dividend has become
effective and Xilinx 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 Xilinx
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 Xilinx
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 Xilinx Stock will be deemed to be an
"Extraordinary Dividend" if such dividend or
other distribution exceeds the immediately\
preceding non- Extraordinary Dividend for
Xilinx Stock by an amount equal to at least 10%
of the Market Price of Xilinx 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
12
<PAGE>
the ex-dividend date for the payment of such
Extraordinary Dividend (the "ex-dividend
date"). If an Extraordinary Dividend occurs
with respect to Xilinx Stock, the Exchange
Factor with respect to Xilinx 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 Xilinx 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 Xilinx 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 Xilinx 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 Xilinx issues rights or warrants
to all holders of Xilinx Stock to subscribe for
or purchase Xilinx Stock at an exercise price
per share less than the Market Price of Xilinx
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
Xilinx Stock outstanding immediately prior to
the issuance of such rights or warrants plus
the number of additional shares of Xilinx Stock
offered for subscription or purchase pursuant
to such rights or warrants and the denominator
of which shall be the number of shares of
Xilinx Stock outstanding immediately prior to
the issuance of such rights or warrants plus
the number of additional shares of Xilinx Stock
which the aggregate offering price of the total
number of shares of Xilinx 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 reclassifi-
cation or change of Xilinx Stock, including,
without limitation, as a result of the issuance
of any tracking stock by Xilinx, (ii) Xilinx or
any surviving entity or subsequent surviving
entity of Xilinx (a "Xilinx Successor") has
been subject to a merger, combination or
consolidation and is not the surviving entity,
(iii) any statutory exchange of securities of
Xilinx or any Xilinx Successor with another
corporation occurs (other than pursuant to
clause (ii) above), (iv) Xilinx is liquidated,
(v) Xilinx issues to all of its shareholders
equity securities of an issuer other than
13
<PAGE>
Xilinx (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
Xilinx Stock (any such event in clauses (i)
through (vi) a "Reorganization Event"), the
method of determining the amount payable upon
exchange at maturity for each Reset PERQS will
be adjusted to provide that each holder of
Reset PERQS will receive at maturity, in
respect of each $ principal amount of each
Reset PERQS, securities, cash or any other
assets distributed to holders of Xilinx Stock
in any such Reorganization Event, including, in
the case of the issuance of tracking stock, the
reclassified share of Xilinx Stock and, in the
case of a Spin-off Event, the share of Xilinx
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 Xilinx Stock
and holders will receive in lieu of any Xilinx
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 Xilinx 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 Xilinx 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 Xilinx 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
14
<PAGE>
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
Xilinx Stock, including, without limitation, a
partial tender or exchange offer for Xilinx
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
Xilinx Stock having a market value of $
as of such second scheduled Trading Day.
The Calculation Agent shall be solely
responsible for the determination and
calculation of any adjustments to the Exchange
Factor or method of calculating the Exchange
Ratio and of any related determinations and
calculations with respect to any
distributions of stock, other securities or
other property or assets (including cash) in
connection with any corporate event described
in paragraph 5 above, and its determinations
and calculations with respect thereto shall be
conclusive in the absence of manifest error.
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 Xilinx Stock:
(i) a suspension, absence or material
limitation of trading of Xilinx Stock on
the primary market for Xilinx 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 Xilinx Stock as a
result of which the reported trading
prices for Xilinx Stock during the last
one-half hour preceding the closing of the
principal trading 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 Xilinx Stock,
if available, during the one-half hour
period preceding the close of the
principal trading session in the
applicable market, in each
15
<PAGE>
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 Xilinx 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 Xilinx Stock and (5) a
suspension, absence or material limitation of
trading on the primary securities market on
which options contracts related to Xilinx
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 per Reset PERQS 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 Xilinx
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.
Xilinx Stock; Public
Information ................ Xilinx, Inc. designs, develops and markets
complete programmable logic solutions,
including advanced integrated circuits,
software design tools, predefined system
functions delivered as cores of logic and
field engineering support. Xilinx 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,
16
<PAGE>
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 Xilinx pursuant to
the Exchange Act can be located by reference to
Commission file number 0-18548. In addition,
information regarding Xilinx may be obtained
from other sources including, but not limited
to, press releases, newspaper articles and
other publicly disseminated documents.
This pricing supplement relates only to the
Reset PERQS offered hereby and does not
relate to Xilinx Stock or other securities of
Xilinx. We have derived all disclosures
contained in this pricing supplement
regarding Xilinx 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 Xilinx 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
Xilinx 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 Xilinx Stock (and therefore the
Initial Xilinx 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 Xilinx 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 Xilinx Stock.
We and/or our subsidiaries may presently or
from time to time engage in business with
Xilinx, including extending loans to, or
making equity investments in, Xilinx or
providing advisory services to Xilinx,
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 Xilinx and, in
addition, one or more of our affiliates may
publish research reports with respect to
Xilinx. The statement in the preceding
sentence is not intended to affect the rights
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 Xilinx as in
your judgment is appropriate to make an
informed decision with respect to an
investment in Xilinx Stock.
Historical Information........ The following table sets forth the high and
low Market Price during 1997, 1998, 1999 and
2000 through October 30, 2000. The Market
17
<PAGE>
Price on October 30, 2000 was 66 7/8. We
obtained the Market Prices listed below from
Bloomberg Financial Markets and we believe
such information to be accurate. You should
not take the historical prices of Xilinx
Stock as an indication of future performance.
The price of Xilinx Stock may decrease so
that you will receive at maturity shares of
Xilinx Stock worth less than the principal
amount of the Reset PERQS. We cannot give
you any assurance that the price of Xilinx
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
Xilinx Stock on December 28, 2001 and
December 26, 2002, there is no guaranteed
return of principal. To the extent that the
Maturity Price of Xilinx Stock is less than
the Initial Xilinx Stock Price or not
sufficiently above the Initial Xilinx Stock
Price to compensate for a downward adjustment
of the Exchange Ratio, if any, at December
28, 2001 and the shortfall is not offset by
the coupon paid on the Reset PERQS, you will
lose money on your investment.
<TABLE>
High Low
---- ---
<S> <C> <C>
(CUSIP 983919101)
1997
First Quarter........................ 12 23/32 9
Second Quarter....................... 14 3/8 11 5/16
Third Quarter........................ 14 3/32 11 19/64
Fourth Quarter....................... 12 3/32 7 27/64
1998
First Quarter........................ 11 21/32 8 33/64
Second Quarter....................... 11 13/16 8 1/32
Third Quarter........................ 10 3/4 7 5/8
Fourth Quarter....................... 16 9/32 7 31/32
1999
First Quarter........................ 20 7/8 16 1/4
Second Quarter....................... 28 5/8 20 9/32
Third Quarter........................ 37 17/32 29 1/4
Fourth Quarter....................... 47 13/16 33 1/4
2000
First Quarter........................ 86 13/16 40 13/16
Second Quarter....................... 97 15/16 55 3/4
Third Quarter........................ 96 5/8 69 7/8
Fourth Quarter through October
30, 2000............................ 89 5/8 61 3/4
</TABLE>
Historical prices have been adjusted for two
2 for 1 stock splits that became effective in
the first and fourth quarters of 1999.
Xilinx has not paid cash dividends on Xilinx
Stock to date. We make no representation as
to the amount of dividends, if any, that
Xilinx 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 Xilinx 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 subsidiaries in connection
with hedging our obligations under the Reset
PERQS. See also "Use of Proceeds" in the
accompanying prospectus.
On or prior to the date of this pricing
supplement, we, through our subsidiaries or
others, may hedge our anticipated exposure in
18
<PAGE>
connection with the Reset PERQS by taking
positions in Xilinx Stock, in options
contracts on Xilinx 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. In the event that we pursue such a
hedging strategy, the price at which we are
able to purchase such positions may be a
factor in determining the pricing of the
Reset PERQS. Purchase activity could
potentially increase the price of Xilinx
Stock, and therefore effectively increase the
level to which Xilinx Stock must rise before
you would receive at maturity an amount of
Xilinx Stock worth as much as or more than
the principal amount of the Reset PERQS.
Although we have no reason to believe that
our hedging activity will have a material
impact on the price of Xilinx Stock, we
cannot give any assurance that we will not
affect such price as a result of our hedging
activities. Through our subsidiaries, we are
likely to modify our hedge position throughout
the life of the Reset PERQS, including on the
First Year Determination Date, by purchasing
and selling Xilinx Stock, option contracts on
Xilinx 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.
Supplemental
Information Concerning
Plan of Distribution.......... 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 $ per Reset PERQS and
the underwriting discounts and commissions
will be $ 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 98.25% 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 1.75% 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 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 accompany-
ing prospectus supplement.
19
<PAGE>
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 Xilinx Stock. Specifically, the Agent may
sell more Reset PERQS than it is obligated to
purchase in connection with the offering or
may sell Xilinx Stock it does not own,
creating a naked short position in the Reset
PERQS or the Xilinx Stock, respectively, for
its own account. The Agent must close out
any naked short position by purchasing the
Reset PERQS or Xilinx Stock in the open
market. A naked short position is more
likely to be created if the Agent is
concerned that there may be downward pressure
on the price of the Reset PERQS or the Xilinx
Stock in the open market after pricing that
could adversely affect investors who purchase
in the offering. As an additional means of
facilitating the offering, the Agent may bid
for, and purchase, Reset PERQS or Xilinx
Stock in the open market to stabilize the
price of the Reset PERQS. Any of these
activities may raise or maintain the market
price of the Reset PERQS above independent
market levels or prevent or retard a decline
in the market price of the Reset PERQS. The
Agent is not required to engage in these
activities, and may end any of these
activities at any time. See "Use of
Proceeds and Hedging" above.
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 to be considered a "party in
interest" within the meaning of 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
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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 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
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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 Reset PERQS for
all tax purposes as an investment unit
consisting of the following components (the
"Components"): (i) a contract (the "Forward
Contract") that requires the holder of the
Reset PERQS to purchase, and us to sell, for
an amount equal to $ (the "Forward
Price"), Xilinx 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 Xilinx Stock (the "Deposit"), which
Deposit bears an annual yield of % per
annum, which yield is based on our cost of
borrowing. Under this characterization, it
is possible that less than the full quarterly
payments on the Reset PERQS will be
attributable to the yield on the Deposit. If
this is the case, the excess of the quarterly
payments on the Reset PERQS over the portion
of those payments attributable to the yield
on the Deposit would represent payments
attributable to the holders' entry into the
Forward Contract (the "Contract Fees").
Furthermore, based on our determination of
the relative fair market values of the
Components at the time of issuance of the
Reset PERQS, we will allocate 100% of the
Issue Price of the Reset PERQS to the Deposit
and none to the Forward Contract. Our
allocation of the Issue Price among the
Components will be binding on a holder of the
Reset PERQS, unless such holder timely and
explicitly discloses to the 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.
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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.
Tax Treatment of the Reset PERQS
Assuming the characterization of the Reset
PERQS and the allocation of the Issue Price
as set forth above, Tax Counsel believes that
the following U.S. federal income tax
consequences should result.
Quarterly Payments and Original Issue
Discount on the Reset PERQS. If the Forward
Price exceeds the Issue Price by at least
0.25% of the Forward Price multiplied by the
number of complete years to maturity, the
Deposit will be subject to the "original issue
discount" rules, and a U.S. Holder will
include "qualified stated interest" equal to
the stated interest on the Reset PERQS in
income in accordance with the U.S. Holder's
method of accounting for federal income tax
purposes. Additionally, each U.S. Holder,
including a taxpayer who otherwise uses the
cash method of accounting, will be required
to include original issue discount ("OID")
on the Deposit (in an aggregate amount equal
to the Forward Price less the Issue Price) in
income as it accrues, in accordance with a
constant yield method based on a compounding
of interest. Under these circumstances, the
amount of income recognized by a U.S. Holder
will generally be more than the stated
interest paid to the U.S. Holder and will
increase during the term of the Reset PERQS.
If the Forward Price of the Reset PERQS exceeds
the Issue Price by less than 0.25% of the
Forward Price multiplied by the number of
complete years to maturity, such excess will be
treated as de minimis OID, and will be taxable
to the holder at maturity as capital gain
(unless the holder elects to accrue such de
minimis OID on a current basis). 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.
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However, if the Forward Price does not exceed
the Issue Price, then 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. 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 Xilinx
Stock, and a U.S. Holder would not recognize
any gain or loss with respect to any Xilinx
Stock received thereon. However, as stated
above, any de minimis OID on the Deposit that
the holder has not previously included in
income will be taxable to the holder at the
maturity of the Deposit and the concurrent
settlement of the Forward Contract. 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 Xilinx Stock received
upon maturity, the U.S. Holder would have an
adjusted tax basis in such Xilinx Stock equal
to the pro rata portion of the Forward Price
allocable thereto. The allocation of the
Forward Price between cash and Xilinx Stock
should be based on the amount of the cash
received and the relative fair market value,
as of the maturity, of Xilinx Stock. U.S.
Holders should note that the holding period
of any Xilinx 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 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 and
Original Issue Discount on the Reset PERQS"
above. It is uncertain
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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 Xilinx 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.
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
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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
Xilinx 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.
