-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N4zqzJp16kQCjMlIrkaL4lwaDWSfD2ITWNXkjXAIEKHn690B5avlFZLCQlO512k1 r2xgL50xlE8ZUWUua1puVA== 0000950103-02-000636.txt : 20020627 0000950103-02-000636.hdr.sgml : 20020627 20020627154124 ACCESSION NUMBER: 0000950103-02-000636 CONFORMED SUBMISSION TYPE: 424B3 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 20020627 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGAN STANLEY DEAN WITTER & CO CENTRAL INDEX KEY: 0000895421 STANDARD INDUSTRIAL CLASSIFICATION: FINANCE SERVICES [6199] IRS NUMBER: 363145972 STATE OF INCORPORATION: DE FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 424B3 SEC ACT: 1933 Act SEC FILE NUMBER: 333-83616 FILM NUMBER: 02689290 BUSINESS ADDRESS: STREET 1: 1585 BROADWAY CITY: NEW YORK STATE: NY ZIP: 10036 BUSINESS PHONE: 2127614000 MAIL ADDRESS: STREET 1: 1221 SIXTH AVENUE STREET 2: 27TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10020 FORMER COMPANY: FORMER CONFORMED NAME: DEAN WITTER DISCOVER & CO DATE OF NAME CHANGE: 19960315 424B3 1 jun2602_424b3.txt PROSPECTUS Dated June 11, 2002 Pricing Supplement No. 1 to PROSPECTUS SUPPLEMENT Registration Statement No. 333-83616 Dated June 11, 2002 Dated June 21, 2002 Rule 424(b)(3) $12,000,000 [Morgan Stanley wordmark] MEDIUM-TERM NOTES, SERIES C Senior Fixed Rate Notes -------------------------- BRIDGES(SM) Due December 30, 2008 Based on the Value of the Amex Pharmaceutical Index(SM) The BRIDGES will pay the principal amount of $10 at maturity. In addition, the BRIDGES will also pay a supplemental amount if the average value of the Amex Pharmaceutical Index, which we refer to as the DRG Index, as determined on six specified determination dates during the life of the BRIDGES exceeds the benchmark index value, determined as specified below. o The principal amount and issue price of each BRIDGES is $10. o We will not pay interest on the BRIDGES. o At maturity, you will receive the principal amount of $10 per BRIDGES plus a supplemental redemption amount equal to the product of (i) $10 times (ii) the percentage increase, if any, in the final average index performance over the initial index value times (iii) 103%. o The initial index value equals 302.18, the closing value of the DRG Index on June 21, 2002, the day we offered the BRIDGES for initial sale to the public. o The final average index performance will equal the final average index value minus the benchmark index value. o The benchmark index value will equal the lesser of (i) the initial index value and (ii) the closing value of the DRG Index on December 30, 2002. o The final average index value will equal the arithmetic average of the closing values of the DRG Index on December 30, 2003, December 30, 2004, December 30, 2005, December 30, 2006, December 30, 2007 and December 26, 2008. o If the final average index value of the DRG Index is less than or equal to the benchmark index value, you will receive only the principal amount of the BRIDGES and will not receive any supplemental redemption amount. o Investing in the BRIDGES is not equivalent to investing in the DRG Index or its component stocks. o The BRIDGES have been approved for listing on the American Stock Exchange LLC, subject to official notice of issuance. The AMEX listing symbol for the BRIDGES is "DRU." You should read the more detailed description of the BRIDGES in this pricing supplement. In particular, you should review and understand the descriptions in "Summary of Pricing Supplement" and "Description of BRIDGES." The BRIDGES involve risks not associated with an investment in ordinary debt securities. See "Risk Factors" beginning on PS-5. -------------------------- PRICE $10 PER BRIDGES -------------------------- Price to Agent's Proceeds to Public Commissions Company ----------- ----------- ----------- Per BRIDGES................. $10.00 $.30 $9.70 Total....................... $12,000,000 $360,000 $11,640,000 If you purchase at least 100,000 BRIDGES 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 $9.80 per BRIDGES (98.0% of the issue price). In that case, the Agent's commissions will be $.10 per BRIDGES. MORGAN STANLEY (This page intentionally left blank) PS-2 SUMMARY OF PRICING SUPPLEMENT The following summary describes the BRIDGES 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 BRIDGES offered are medium-term debt securities of Morgan Stanley. The return on the BRIDGES is linked to the performance of Amex Pharmaceutical Index, which we refer to as the DRG Index. These BRIDGES combine features of debt and equity by offering at maturity 100% protection of the issue price with the opportunity to participate in the upside potential of the underlying DRG Index. "BRIDGES" is our service mark. "Amex Pharmaceutical Index" is sponsored by and is a service mark of the American Stock Exchange LLC, which we refer to as the AMEX, and has been licensed by Morgan Stanley. Each BRIDGES costs $10 We, Morgan Stanley, are offering you BRIDGES due December 30, 2008 Based on the Value of the Amex Pharmaceutical Index. The principal amount and issue price of each BRIDGES is $10. Payment at Maturity Unlike ordinary debt securities, the BRIDGES do not pay interest. Instead, at maturity, you will receive the principal amount of $10 per BRIDGES, plus a supplemental redemption amount if the final average index value of the DRG Index is greater than the benchmark index value. The benchmark index value is the lesser of (i) the initial index value and (ii) the closing value of the DRG Index on December 30, 2002. The initial index value is 302.18, the closing value of the DRG Index on June 21, 2002, the day we offered the BRIDGES for initial sale to the public. The final average index value is the arithmetic average of the closing values of the DRG Index on each of the six annual determination dates during the life of the BRIDGES. 100% Principal Protection We will pay you at least $10 at maturity, plus the supplemental redemption amount, if any. The Supplemental Redemption Amount The supplemental redemption amount will be equal to the product of (i) $10 times (ii) the percentage increase, if any, in the final average index performance over the initial index value times (iii) 103%. If the final average index value is greater than the benchmark index value, the supplemental redemption amount will be calculated as follows: Final Average Supplemental Index Performance Redemption = $10 x ------------------- x 103% Amount Initial Index Value where, Initial Index Value = 302.18 Final Average Index Performance = the Final Average Index Value minus the Benchmark Index Value PS-3 Benchmark Index Value = the lesser of (i) the Initial Index Value and (ii) the DRG Index closing value on December 30, 2002 Final Average Index Value = the arithmetic average of the DRG Index closing values on each of the Determination Dates as calculated by the Calculation Agent on the last Determination Date Determination Dates = December 30, 2003, December 30, 2004, December 30, 2005, December 30, 2006, December 30, 2007 and December 26, 2008, in each case subject to adjustment in the event of certain market disruption events However, if the final average index value is less than or equal to the benchmark index value, the supplemental redemption amount will be zero. In that case, you will receive only the principal amount at maturity and will not receive any supplemental redemption amount. The payment to you of the principal amount and the supplemental redemption amount, if any, upon maturity of the BRIDGES will be determined in U.S. Dollars. You can review the historical values of the DRG Index in the section of this pricing supplement called "Description of BRIDGES--Historical Information." The payment of dividends on the stocks that underlie the DRG Index is not reflected in the level of the DRG Index and, therefore, has no effect on the calculation of the payment at maturity. MS & Co. will be the We have appointed our affiliate, Morgan Stanley & calculation agent Co. Incorporated, which we refer to as MS & Co., to act as calculation agent for JPMorgan Chase Bank, the trustee for our senior notes. As calculation agent, MS & Co. will determine the initial index value, the benchmark index value, the final average index value, the percentage change in the DRG Index and the supplemental redemption amount, if any, you will receive at maturity. Where you can find The BRIDGES are senior notes issued as part of more information on our Series C medium-term note program. You can the BRIDGES find a general description of our Series C medium-term note program in the accompanying prospectus supplement dated June 11, 2002. We describe the basic features of this type of note in the sections of the prospectus supplement called "Description of Notes--Fixed Rate Notes" and "--Notes Linked to Commodity Prices, Single Securities, Baskets of Securities or Indices." Because this is a summary, it does not contain all the information that may be important to you. For a detailed description of the terms of the BRIDGES, you should read the "Description of BRIDGES" section in this pricing supplement. You should also read about some of the risks involved in investing in BRIDGES in the section called "Risk Factors." The tax treatment of investments in index- linked notes such as BRIDGES differs from that of investments in ordinary debt securities. We urge you to consult with your investment, legal, tax, accounting and other advisors with regard to any proposed or actual investment in the BRIDGES. How to reach us You may contact your local Morgan Stanley branch office or our principal executive offices at 1585 Broadway, New York, New York 10036 (telephone number (212) 761- 4000). PS-4 RISK FACTORS The BRIDGES are not secured debt and, unlike ordinary debt securities, the BRIDGES do not pay interest. Investing in the BRIDGES is not equivalent to investing directly in the DRG Index. This section describes the most significant risks relating to the BRIDGES. You should carefully consider whether the BRIDGES are suited to your particular circumstances before you decide to purchase them. BRIDGES are not The terms of the BRIDGES differ from those of ordinary senior notes ordinary debt securities in that we will not pay interest on the BRIDGES. Because the supplemental redemption amount due at maturity may be equal to zero, the return on your investment in the BRIDGES (the effective yield to maturity) may be less than the amount that would be paid on an ordinary debt security. The return of only the principal amount of each BRIDGES at maturity will not compensate you for the effects of inflation and other factors relating to the value of money over time. BRIDGES may not pay If the final average index value is less than or more than the principal equal to the benchmark index value, you will amount at maturity receive only the principal amount of $10 for each BRIDGES you hold at maturity. BRIDGES may not There may be little or no secondary market for be actively traded the BRIDGES. Although the BRIDGES have been approved for listing on the American Stock Exchange LLC, it is not possible to predict whether the BRIDGES 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 the BRIDGES, but it is not required to do so. Market price of the Several factors, many of which are beyond our BRIDGES influenced by control, will influence the value of the BRIDGES, many unpredictable factors including: o the value of the DRG Index at any time and on December 30, 2002 and the specific determination dates o interest and yield rates in the market o the volatility (frequency and magnitude of changes in price) of the DRG Index o economic, financial, political and regulatory or judicial events that affect the securities underlying the DRG Index or stock markets generally and which may affect the final average index value o the time remaining to the maturity of the BRIDGES o the dividend rate on the stocks underlying the DRG Index o our creditworthiness Some or all of these factors will influence the price that you will receive if you sell your BRIDGES prior to maturity. For example, you may have to sell your BRIDGES at a substantial discount from the principal amount if at the time of sale or on earlier determination dates the DRG Index is at, below, or not sufficiently above the benchmark index value or if market interest rates rise. You cannot predict the future performance of the DRG Index based on its historical performance. We cannot guarantee that the final average index value will be higher than the benchmark index value so that you will receive at maturity an amount in excess of the principal amount of the BRIDGES. PS-5 Investing in the BRIDGES Because the final average index value is based on is not equivalent to the closing value of the DRG Index on the six investing in the DRG Index annual determination dates during the term of the BRIDGES, it is possible for the final average index value to be lower than the benchmark index value even if the value of the DRG Index at maturity is higher than the benchmark index value. There are risks associated The BRIDGES are an investment that is dependent with a sector investment upon the performance of selected issuers in a particular sector of the economy--namely, the pharmaceutical industry. Consequently, the value of the BRIDGES may be subject to greater volatility and be more adversely affected by a single economic, political or regulatory occurrence than an investment in a more broadly diversified group of issuers. Pharmaceutical company The trading prices of pharmaceutical companies' stock prices are volatile common stocks have been and are likely to continue to be volatile. Fluctuations in the trading prices of the stocks included in the DRG Index may result in a significant disparity between the value of the DRG Index on any or all of the annual determination dates and the overall performance of the DRG Index over the term of the BRIDGES. Pharmaceutical companies Companies involved in the pharmaceutical industry face cost containment face a number of unique risks, including the pressures, extensive following: regulation and intense competition o The ability of many pharmaceutical companies to commercialize current and future products depends in part on the extent to which reimbursement for the cost of such products and related treatments is available from government health agencies, private health insurers and other third-party payors. The efforts of government entities and third party payors to contain healthcare costs may adversely affect pharmaceutical companies. o Pharmaceutical companies and products are subject to extensive and costly government regulation. The success of a company's products will depend, in part, upon obtaining and maintaining regulatory approval to market products. o Pharmaceutical companies face intense competition from new proprietary products and less costly generic products. o The success of many pharmaceutical companies is highly dependent on their ability to obtain patents, to defend existing patents and trade secrets and to operate in a manner that does not infringe the proprietary rights of other pharmaceutical companies. Pharmaceutical companies may be unable to protect their intellectual property rights or may be the subject of intellectual property infringement claims. We are not affiliated with We are not affiliated with any of the issuers of the issuers of the stocks the stocks underlying the DRG Index and have not underlying the DRG Index performed any due diligence investigation or and have not investigated review of any of them. You should undertake an them independent investigation of the issuers of the component stocks and of the DRG Index itself to the extent required in your judgment to allow you to make an informed decision with respect to an investment in the BRIDGES. PS-6 We or our subsidiaries may presently or from time to time engage in business with one or more of the issuers of the stocks underlying the DRG Index, including extending loans to, or making equity investments in, one or more of the issuers of the component stocks or their affiliates or subsidiaries or providing advisory services to one or more of the issuers of the component stocks, including merger and acquisition advisory services. In the course of our business, we or our affiliates may acquire non-public information about one or more of these issuers. We have no ability to control or predict the actions of the issuers of the component stocks, including any corporate actions of the type that would require the AMEX to adjust the DRG Index. We or our affiliates from time to time have published and in the future may publish research reports with respect to the component stocks. These research reports may or may not recommend that investors buy or hold any of the component stocks. The DRG Index was compiled independently of any research recommendations and may not be consistent with any such recommendations. The issuers of the component stocks are not involved in the offering of the BRIDGES in any way and have no obligation to consider your interest as an owner of the BRIDGES in taking any corporate actions that might affect the value of your BRIDGES. None of the money you pay for the BRIDGES will go to the issuers of the component stocks. Adjustments to the The AMEX is responsible for calculating and DRG Index could maintaining the DRG Index. The AMEX can add, adversely affect the delete or substitute the stocks underlying the value of the BRIDGES DRG Index or make other methodological changes that could change the value of the DRG Index. The AMEX may discontinue or suspend calculation or dissemination of the DRG Index. Any of these actions could adversely affect the value of the BRIDGES. You have no As an owner of BRIDGES, you will not have voting shareholder rights rights or rights to receive dividends or other distributions or any other rights with respect to the stocks that underlie the DRG Index. Adverse economic interests As calculation agent, our affiliate MS & Co. will of the calculation agent calculate the final average index value and the and its affiliates may supplemental amount, if any, we will pay to you influence determinations at maturity. We expect that MS & Co. and other affiliates will carry out hedging activities related to the BRIDGES (and possibly to other instruments linked to the DRG Index or its component stocks), including trading in the stocks underlying the DRG Index as well as in other instruments related to the DRG Index. Any of these hedging activities could influence MS & Co.'s determinations as calculation agent. MS & Co. and some of our other subsidiaries also trade the stocks underlying the DRG Index and other financial instruments related to the DRG Index on a regular basis as part of their general broker-dealer businesses. Any of these trading activities could potentially affect the value of the DRG Index and, accordingly, could affect the payout to you on the BRIDGES. PS-7 Tax treatment You should also consider the tax consequences of investing in the BRIDGES. The BRIDGES will be treated as "contingent payment debt instruments" for U.S. federal income tax purposes, as described in the section of this pricing supplement called "Description of BRIDGES--United States Federal Income Taxation." Under this treatment, if you are a U.S. taxable investor, you will be subject to annual income tax based on the comparable yield of the BRIDGES even though you will not receive any interest payments on the BRIDGES. In addition, any gain recognized by U.S. taxable investors on the sale or exchange of the BRIDGES generally will be treated as ordinary income. Please read carefully the section of this pricing supplement called "Description of BRIDGES--United States Federal Income Taxation" and the section called "United States Federal Taxation--Notes--Notes Linked to Commodity Prices, Single Securities, Baskets of Securities or Indices" in the accompanying prospectus supplement. You are urged to consult your own tax advisor regarding all aspects of the U.S. federal income tax consequences of investing in the BRIDGES. PS-8 DESCRIPTION OF BRIDGES Terms not defined herein have the meanings given to such terms in the accompanying prospectus supplement. The term "BRIDGES" refers to each $10 principal amount of our BRIDGES Due December 30, 2008 Based on the Value of the Amex Pharmaceutical Index. In this pricing supplement, the terms "we," "us" and "our" refer to Morgan Stanley (formerly known as Morgan Stanley Dean Witter & Co.). Principal Amount......................... $12,000,000 Original Issue Date (Settlement Date).... June 26, 2002 Maturity Date............................ December 30, 2008, subject to extension in the event of a Market Disruption Event on the sixth Determination Date for calculating the Final Average Index Value. If, due to a Market Disruption Event or otherwise, the sixth Determination Date is postponed so that it falls less than two scheduled Trading Days prior to the scheduled Maturity Date, the Maturity Date will be the second scheduled Trading Day following that sixth Determination Date as postponed. See "--Determination Dates" below. Specified Currency....................... U.S. Dollars CUSIP.................................... 61744Y322 Minimum Denominations.................... $10 Issue Price.............................. 100% Interest Rate............................ None Maturity Redemption Amount............... At maturity, you will receive for each BRIDGES $10 (the principal amount of the BRIDGES) plus the Supplemental Redemption Amount, if any. Supplemental Redemption Amount........... We will pay you a Supplemental Redemption Amount per BRIDGES at maturity equal to the greater of (i) zero and (ii) the product of $10 times the DRG Index Percent Change times the Participation Rate. The Calculation Agent will calculate the Supplemental Redemption Amount on the sixth Determination Date. The Calculation Agent will provide written notice to the Trustee at its New York office, on which notice the Trustee may conclusively rely, of the Supplemental Redemption Amount, on or prior to 11:00 a.m. on the Business Day preceding the Maturity Date. See "Discontinuance of the DRG Index; Alteration of Method of Calculation" below. DRG Index Percent Change................. The DRG Index Percent Change is a fraction, the numerator of which will be the Final Average Index Performance and the denominator of which will be the Initial Index Value. The DRG Index Percent Change is described by the following formula: Final Average Index Performance ------------------------------- Initial Index Value PS-9 Participation Rate....................... 103% Initial Index Value...................... 302.18, the Index Closing Value on June 21, 2002, the day we offered the BRIDGES for initial sale to the public. Final Average Index Performance.......... The Final Average Index Value minus the Benchmark Index Value. Benchmark Index Value.................... The lesser of (i) the Initial Index Value and (ii) the Index Closing Value on December 30, 2002, as determined by the Calculation Agent. Final Average Index Value................ The arithmetic average of the Index Closing Values on each of the Determination Dates, as determined by the Calculation Agent. Index Closing Value...................... The Index Closing Value on any Trading Day will equal the closing value of the DRG Index or any Successor Index (as defined under "--Discontinuance of the DRG Index; Alteration of Method of Calculation" below) at the regular official weekday close of the principal trading session of the AMEX on that Trading Day. In certain circumstances, the Index Closing Value will be based on the alternate calculation of the DRG Index described under "--Discontinuance of the DRG Index; Alteration of Method of Calculation." In this "Description of BRIDGES," references to the DRG Index will include any Successor Index, unless the context requires otherwise. Determination Dates...................... The Determination Dates will be December 30, 2003, December 30, 2004, December 30, 2005, December 30, 2006, December 30, 2007 and December 26, 2008, in each such case subject to adjustment for Market Disruption Events as described in the two following paragraphs. If any of the first five scheduled Determination Dates is not a Trading Day or if a Market Disruption Event occurs on any such date, such Determination Date will be the immediately succeeding Trading Day during which no Market Disruption Event shall have occurred; provided that if a Market Disruption Event has occurred on each of the five Trading Days immediately succeeding any of the first five scheduled Determination Dates, then (i) such fifth succeeding Trading Day will be deemed to be the relevant Determination Date, notwithstanding the occurrence of a Market Disruption Event on such day, and (ii) with respect to any such fifth Trading Day on which a Market Disruption Event occurs, the Calculation Agent will determine the value of the DRG Index on such fifth Trading Day in accordance with the formula for and method of calculating the value of the DRG Index last in effect prior to the commencement of the Market Disruption Event, using the closing price (or, if trading in the relevant securities has been materially suspended or materially limited, its good faith estimate of the closing price that would have prevailed but for such suspension or limitation) on such Trading Day of each security most recently comprising the DRG Index. PS-10 If December 26, 2008 (the sixth scheduled Determination Date) is not a Trading Day or if there is a Market Disruption Event on such day, the sixth Determination Date will be the immediately succeeding Trading Day during which no Market Disruption Event shall have occurred. 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. Book Entry Note or Certificated Note..... Book Entry Senior Note or Subordinated Note......... Senior Trustee.................................. JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank) Agent.................................... Morgan Stanley & Co. Incorporated and its successors ("MS & Co."). Market Disruption Event.................. "Market Disruption Event" means, with respect to the DRG Index, the occurrence or existence of a suspension, absence or material limitation of trading of stocks then constituting 20% or more of the level of the DRG Index (or the relevant Successor Index) on the Relevant Exchanges for such securities for more than two hours of trading or during the one-half hour period preceding the close of the principal trading session on such Relevant Exchange; or a breakdown or failure in the price and trade reporting systems of any Relevant Exchange as a result of which the reported trading prices for stocks then constituting 20% or more of the level of the DRG Index (or the relevant Successor Index) during the last one-half hour preceding the close of the principal trading session on such Relevant Exchange are materially inaccurate; or the suspension, material limitation or absence of trading on any major U.S. securities market for trading in futures or options contracts related to the DRG Index (or the relevant Successor Index) for more than two hours of trading or during the one-half hour period preceding the close of the principal trading session on such market, in each case as determined by the Calculation Agent in its sole discretion. For the purpose of determining whether a Market Disruption Event exists at any time, if trading in a security included in the DRG Index is materially suspended or materially limited at that time, then the relevant percentage contribution of that security to the level of the DRG Index shall be based on a comparison of (x) the portion of the level of the DRG Index attributable to that security relative to (y) the overall level of the DRG Index, in each case immediately before that suspension or limitation. For purposes of determining whether a Market Disruption Event has occurred: (1) a limitation on the hours or number of days of trading will not constitute a Market Disruption Event if it results from an announced change in the regular business hours of the relevant exchange or market, (2) a decision to permanently discontinue trading PS-11 in the relevant futures or options contract will not constitute a Market Disruption Event, (3) limitations pursuant to the rules of any Relevant Exchange similar to NYSE Rule 80A (or any applicable rule or regulation enacted or promulgated by any other self-regulatory organization or any government agency of scope similar to NYSE Rule 80A as determined by the Calculation Agent) on trading during significant market fluctuations will constitute a suspension, absence or material limitation of trading, (4) a suspension of trading in futures or options contracts on the DRG Index by the primary securities market trading in such contracts by reason of (a) a price change exceeding limits set by such exchange or market, (b) an imbalance of orders relating to such contracts or (c) a disparity in bid and ask quotes relating to such contracts will constitute a suspension, absence or material limitation of trading in futures or options contracts related to the DRG Index and (5) a "suspension, absence or material limitation of trading" on any Relevant Exchange or on the primary market on which futures or options contracts related to the DRG Index are traded will not include any time when such market is itself closed for trading under ordinary circumstances. Relevant Exchange........................ "Relevant Exchange" means the primary U.S. organized exchange or market of trading for any security then included in the DRG Index or any Successor Index. Alternate Exchange Calculation in Case of an Event of Default .......... In case an event of default with respect to the BRIDGES shall have occurred and be continuing, the amount declared due and payable for each BRIDGES upon any acceleration of the BRIDGES will be equal to $10 plus the Supplemental Redemption Amount, if any, determined as though the Index Closing Value for any Determination Date scheduled to occur on or after such date of acceleration (and for December 30, 2002 if acceleration occurs prior to that date) were the Index Closing Value on the date of acceleration. 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. All calculations with respect to the Final Average Index Value and the Supplemental Amount, if any, will be rounded to the nearest one hundred-thousandth, with five one-millionths rounded upward (e.g., .876545 would be rounded to .87655); all dollar amounts related to determination of the amount of cash payable per BRIDGES will be rounded to the nearest ten-thousandth, with five one hundred- thousandths rounded upward (e.g., .76545 would be rounded up to .7655); and all dollar amounts paid on the aggregate number of BRIDGES will be rounded to the nearest cent, with one-half cent rounded upward. Because the Calculation Agent is our affiliate, the economic interests of the Calculation Agent and its affiliates may be adverse to your interests as an owner of the BRIDGES, including with respect to PS-12 certain determinations and judgments that the Calculation Agent must make in determining any Index Closing Value, the Initial Index Value, the Benchmark Index Value, the Final Average Index Value, the DRG Index Percent Change, the Supplemental Redemption Amount or whether a Market Disruption Event has occurred. See "--Discontinuance of the DRG Index; Alteration of Method of Calculation" 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. The DRG Index............................ We have derived all information contained in this pricing supplement regarding the DRG Index, including, without limitation, its make-up, method of calculation and changes in its components, from publicly available information. Such information reflects the policies of, and is subject to change by, the AMEX. The DRG Index was developed by the AMEX and is calculated, maintained and published by the AMEX. We make no representation or warranty as to the accuracy or completeness of such information. The Amex Pharmaceutical Index, or DRG Index, is a market-capitalization weighted index designed to represent a cross section of widely held, highly capitalized companies involved in various phases of the pharmaceutical industry. The DRG Index was developed with a base value of 200.00 on July 31, 1991. The index value was split 2-for-1 on March 23, 1999. The following table lists, as of June 21, 2002, the stocks underlying the DRG Index, the ticker symbol for each component stock and the percentage of the value of the DRG Index represented by each component stock. Issuer Ticker Percent of Value Pfizer Inc. PFE 19.93% Johnson & Johnson JNJ 15.15% GlaxoSmithKline plc GSK 11.91% Merck & Co., Inc. MRK 10.59% AstraZeneca PLC (ADS) AZN 6.68% Wyeth WYE 6.34% Eli Lilly & Company LLY 6.12% Abbott Laboratories ABT 5.24% Pharmacia Corporation PHA 4.54% Bristol-Myers Squibb BMY 4.53% Company Amgen Inc. AMGN 3.95% Schering-Plough Corporation SGP 3.18% Forest Laboratories, Inc. FRX 1.16% King Pharmaceuticals, Inc. KG 0.47% Ivax Corporation IVX 0.22%
The value of the DRG Index is published every 15 seconds via the Consolidated Tape Association's Network B. The DRG Index values are also available on broker-dealer terminals and quotation systems. PS-13 If any change in the nature of any stock in the DRG Index occurs as a result of delisting, merger, acquisition or other similar event, the AMEX may delete that stock from the DRG Index and replace it with another stock which the AMEX believes is representative of the pharmaceutical sector. In making a replacement determination, the AMEX will ensure that at least 90% of the DRG Index's numerical value will be accounted for by stocks that are eligible for standard options trading. Discontinuance of the DRG Index; Alteration of Method of Calculation.... If the AMEX discontinues publication of the DRG Index and the AMEX or another entity publishes a successor or substitute index that MS & Co., as the Calculation Agent, determines, in its sole discretion, to be comparable to the discontinued DRG Index (such index being referred to herein as a "Successor Index"), then any subsequent Index Closing Value will be determined by reference to the value of such Successor Index at the close of trading on the NYSE, the AMEX, the Nasdaq National Market or the relevant exchange or market for the Successor Index on the date that any Index Closing Value is to be determined. Upon any selection by the Calculation Agent of a Successor Index, the Calculation Agent will cause written notice thereof to be furnished to the Trustee, to Morgan Stanley and to the holders of the BRIDGES within three Trading Days of such selection. If the AMEX discontinues publication of the DRG Index prior to, and such discontinuance is continuing on, any Determination Date or December 30, 2002 and MS & Co., as the Calculation Agent, determines, in its sole discretion, that no Successor Index is available at such time, then the Calculation Agent will determine the Index Closing Value for such date. The Index Closing Value will be computed by the Calculation Agent in accordance with the formula for and method of calculating the DRG Index last in effect prior to such discontinuance, using the closing price (or, if trading in the relevant securities has been materially suspended or materially limited, its good faith estimate of the closing price that would have prevailed but for such suspension or limitation) at the close of the principal trading session on such date of each security most recently comprising the DRG Index. Notwithstanding these alternative arrangements, discontinuance of the publication of the DRG Index may adversely affect the value of the BRIDGES. If at any time the method of calculating the DRG Index or a Successor Index, or the value thereof, is changed in a material respect, or if the DRG Index or a Successor Index is in any other way modified so that such index does not, in the opinion of MS & Co., as the Calculation Agent, fairly represent the value of the DRG Index or such Successor Index had such changes or modifications not been made, then, from and after such time, the Calculation Agent will, at the close of business in New York City on each date on which the Index Closing Value is to be determined, make such calculations and adjustments as, in the good faith judgment of the Calculation Agent, may be necessary in order to arrive at a value of a stock index comparable to the DRG Index or such Successor Index, as the case PS-14 may be, as if such changes or modifications had not been made, and the Calculation Agent will calculate the Final Average Index Value and the Benchmark Index Value, if necessary, with reference to the DRG Index or such Successor Index, as adjusted. Accordingly, if the method of calculating the DRG Index or a Successor Index is modified so that the value of such index is a fraction of what it would have been if it had not been modified (e.g., due to a split in the index), then the Calculation Agent will adjust such index in order to arrive at a value of the DRG Index or such Successor Index as if it had not been modified (e.g., as if such split had not occurred). Historical Information................... The following table sets forth the high and low Index Closing Values, as well as end-of-quarter Index Closing Values, of the DRG Index for each quarter in the period from January 1, 1997 through June 21, 2002. The Index Closing Value on June 21, 2002 was 302.18. We obtained the information in the table below from Bloomberg Financial Markets, and we believe such information to be accurate. The historical values of the DRG Index should not be taken as an indication of future performance, and no assurance can be given as to the level of the DRG Index as of December 30, 2002 or any Determination Date. The value of the DRG Index may be lower on the Determination Dates than on the date of this pricing supplement or December 30, 2002 so that you will receive only the principal amount of the BRIDGES at maturity. We cannot give you any assurance that the average value of the DRG Index on the Determination Dates will be higher than the Benchmark Index Value so that you will receive a payment in excess of the principal amount of the BRIDGES at maturity. High Low Period End -------- -------- ---------- 1997: First Quarter........... 212.83 178.73 191.61 Second Quarter.......... 243.39 188.54 242.25 Third Quarter........... 252.54 221.50 243.51 Fourth Quarter.......... 268.63 230.12 266.87 1998: First Quarter........... 315.17 262.61 312.94 Second Quarter.......... 340.30 305.31 335.61 Third Quarter........... 358.13 304.32 337.63 Fourth Quarter.......... 390.89 307.95 389.85 1999: First Quarter........... 414.70 368.89 405.72 Second Quarter.......... 424.94 347.72 373.09 Third Quarter........... 382.34 332.31 342.41 Fourth Quarter.......... 398.11 339.49 350.58 2000: First Quarter........... 374.85 292.33 347.39 Second Quarter ......... 421.19 358.90 421.19 Third Quarter........... 427.68 370.59 412.99 Fourth Quarter.......... 449.65 402.40 447.38 2001: First Quarter........... 441.07 354.60 385.11 Second Quarter ......... 413.51 368.79 379.17 Third Quarter........... 400.75 358.05 389.52 Fourth Quarter.......... 403.55 375.16 381.24
PS-15 High Low Period End -------- -------- ---------- 2002: First Quarter........... 391.68 367.28 377.30 Second Quarter (through June 21, 2002) .................. 379.42 302.18 302.18
Historical values have been adjusted for a 2-for-1 split in the level of the DRG Index on March 23, 1999. Use of Proceeds and Hedging.............. The net proceeds we receive from the sale of the BRIDGES 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 BRIDGES. 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 BRIDGES by taking positions in the stocks underlying the DRG Index, in futures or options contracts on the DRG Index or other instruments. Purchase activity could potentially have increased the value of the DRG Index, and therefore effectively have increased the level of the DRG Index that must prevail on the Determination Dates in order for you to receive at maturity a payment that exceeds the principal amount of the BRIDGES. Through our subsidiaries, we are likely to modify our hedge position throughout the life of the BRIDGES, including on December 30, 2002 and on the Determination Dates, by purchasing and selling the stocks underlying the DRG Index, futures or options contracts on the DRG Index or its component stocks 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 activities. Although we have no reason to believe that our hedging activity had, or will in the future have, a material impact on the value of the DRG Index, we cannot give any assurance that we did not, or in the future will not, affect such value as a result of our hedging activities. Supplemental Information Concerning Plan of Distribution..................... Under the terms and subject to conditions contained in the U.S. distribution agreement referred to in the prospectus supplement under "Plan of Distribution," the Agent, acting as principal for its own account, has agreed to purchase, and we have agreed to sell, the principal amount of BRIDGES set forth on the cover of this pricing supplement. The Agent proposes initially to offer the BRIDGES directly to the public at the public offering price set forth on the cover page of this pricing supplement; provided that the price will be $9.80 per BRIDGES for purchasers of 100,000 or more BRIDGES in any single transaction, subject to the holding period requirements described below. The Agent may allow a concession not in excess of 3.00% of the principal amount of the BRIDGES to other dealers. We expect to deliver the BRIDGES against payment therefor in New York, New York on June 26, 2002. After the initial offering, the Agent may vary the offering price and other selling terms from time to time. PS-16 Where an investor purchases 100,000 or more BRIDGES in a single transaction at the reduced price, approximately 98% of the BRIDGES purchased by the investor (the "Delivered BRIDGES") will be delivered on the Settlement Date. The balance of approximately 2% of the BRIDGES (the "Escrowed BRIDGES") purchased by the 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 BRIDGES have held all of the Delivered BRIDGES for 30 calendar days following the Original Issue Date 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 BRIDGES fails to satisfy the holding period requirement, as determined by the Agent, all of the investor's Escrowed BRIDGES will be forfeited by the investor and not delivered to it. The Escrowed BRIDGES will instead be delivered to the Agent for sale to investors. This forfeiture will have the effect of increasing the purchase price per BRIDGES for such investors to 100% of the principal amount of the BRIDGES. Should investors who are subject to the holding period requirement sell their BRIDGES once the holding period is no longer applicable, the market price of the BRIDGES may be adversely affected. See also "Plan of Distribution" in the accompanying prospectus supplement. In order to facilitate the offering of the BRIDGES, the Agent may engage in transactions that stabilize, maintain or otherwise affect the price of the BRIDGES. Specifically, the Agent may sell more BRIDGES than it is obligated to purchase in connection with the offering, creating a naked short position in the BRIDGES for its own account. The Agent must close out any naked short position by purchasing the BRIDGES 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 BRIDGES 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, BRIDGES in the open market to stabilize the price of the BRIDGES. Any of these activities may raise or maintain the market price of the BRIDGES above independent market levels or prevent or retard a decline in the market price of the BRIDGES. 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. License Agreement between the AMEX and Morgan Stanley....................... The AMEX and Morgan Stanley have entered into a non-exclusive license agreement providing for the license to Morgan Stanley, in exchange for a fee, of the right to use the DRG Index in connection with the BRIDGES. The DRG Index is sponsored by and is a service mark of the AMEX and is being used with the permission of the AMEX. The AMEX in no way sponsors, endorses or is otherwise involved in the BRIDGES and disclaims any liability to any party for any inaccuracy in the data on which the DRG Index is based, for any mistakes, errors or omissions in the calculation and/or dissemination of the DRG Index, PS-17 or for the manner in which the DRG Index is applied in connection with the BRIDGES. The AMEX has the right to make adjustments in the DRG Index, to change the composition of the stocks making up the DRG Index and to change the methods by which the DRG Index is computed. 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 BRIDGES. 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 Morgan Stanley DW Inc. (formerly Dean Witter Reynolds Inc.) ("MSDWI"), may each 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, as well as many individual retirement accounts and Keogh plans (also "Plans"). Unless an exemption applies, prohibited transactions within the meaning of ERISA or the Code could arise, for example, if the BRIDGES are acquired by or with the assets of a Plan with respect to which MS & Co., MSDWI or any of their affiliates is a service provider. We have obtained from the Department of Labor an exemption from the prohibited transaction rules that will in most cases cover the purchase and holding of BRIDGES by a Plan for whom we or one of our affiliates is a service provider. In order for this exemption to apply, the decision to invest in the BRIDGES must be made by a Plan fiduciary, or a Plan participant (in the case of Plans that provide for participant-directed investments), who is independent from us and from our affiliates. At the time of a Plan's acquisition of any BRIDGES, no more than 15% of the Plan's assets should be invested in BRIDGES. The exemption described above was issued by the Department of Labor pursuant to its "Expedited Exemption Procedure" under Prohibited Transaction Class Exemption 96-62. Copies of both the proposed and final exemption are available from us upon request. Purchasers of the BRIDGES have exclusive responsibility for ensuring that their purchase and holding of the BRIDGES do not violate the prohibited transaction or other rules of ERISA or the Code. United States Federal Income Taxation.... The BRIDGES will be treated as "contingent payment debt instruments" for U.S. federal income tax purposes. Investors should refer to the discussion under "United States Federal Taxation--Notes--Notes Linked to Commodity Prices, Single Securities, Baskets of Securities or Indices" in the accompanying PS-18 prospectus supplement for a description of the U.S. federal income tax consequences of ownership and disposition of the BRIDGES. In connection with the discussion thereunder, we have determined that the "comparable yield" is an annual rate of 4.76% compounded annually. Based on our determination of the comparable yield, the "projected payment schedule" for a BRIDGES (assuming a principal amount of $10) consists of a projected amount equal to $13.55 due at maturity. The following table states the amount of interest that will be deemed to have accrued with respect to a BRIDGES during each accrual period, based upon our determination of the comparable yield and the projected payment schedule: TOTAL INTEREST DEEMED TO INTEREST HAVE ACCRUED DEEMED TO FROM ORIGINAL ACCRUE ISSUE DATE (PER DURING BRIDGES) AS OF ACCRUAL END OF PERIOD (PER ACCRUAL ACCRUAL PERIOD BRIDGES) PERIOD -------------- ----------- --------------- Original Issue Date through December 31, 2002........... $ 0.24 $ 0.24 January 1, 2003 through December 31, 2003........... $ 0.49 $ 0.73 January 1, 2004 through December 31, 2004........... $ 0.51 $ 1.24 January 1, 2005 through December 31, 2005........... $ 0.54 $ 1.78 January 1, 2006 through December 31, 2006........... $ 0.56 $ 2.34 January 1, 2007 through December 31, 2007........... $ 0.59 $ 2.93 January 1, 2008 through December 30, 2008........... $ 0.62 $ 3.55
The comparable yield and the projected payment schedule are not provided for any purpose other than the determination of U.S. Holders' interest accruals and adjustments in respect of the BRIDGES, and we make no representation regarding the actual amounts of payments on a BRIDGES. PS-19 -----END PRIVACY-ENHANCED MESSAGE-----