Pricing Supplement No. 940 Dated March 19, 1996 Rule 424(b)(3)
(To Prospectus Dated October 12, 1994 and File No. 33-54929
Prospectus Supplement Dated October 12, 1994) and 33-51269
380,000 Equity-Linked Securities
Salomon Inc
Medium-Term Notes, Series D
(Registered Notes - Fixed Rate)
5.50% CPQ Common Equity-Linked Securities Due March 21, 1997
(Issue Price Based on the Per Share Price of Compaq Computer
Corporation Common Stock)
The 5.50% CPQ Common Equity-Linked Securities(SM) Due March 21, 1997
(each, an "ELK,"(SM) and in the aggregate, the "ELKS"(SM)) being
offered hereby are Medium-Term Notes, Series D of Salomon Inc
("Salomon" or the "Company"), as further described below and in the
Company's Prospectus dated October 12, 1994 (the "Prospectus") and its
Prospectus Supplement dated October 12, 1994 (the "Prospectus
Supplement").
The principal amount of each of the ELKS offered hereby will be $39.75
(the closing price of the common stock, par value $0.01 (the "CPQ
Common Stock"), of Compaq Computer Corporation ("Compaq") on March 15,
1996, as reported on the New York Stock Exchange) (the "Issue Price").
The ELKS will mature on March 21, 1997. Interest on the ELKS, at the
rate of 5.50% of the principal amount per annum (or $2.18625 per
annum), is payable quarterly on each March 21, June 21, September 21
and December 21, beginning June 21, 1996. The ELKS are not subject to
redemption or any sinking fund prior to maturity.
At maturity (including as a result of acceleration or otherwise), the
principal amount of each ELK will be mandatorily exchanged by the
Company into an amount of shares of CPQ Common Stock (or, at the
Company's option under the circumstances described herein, the cash
equivalent) with a value equal to the lesser of (A) 147.50% of the
Issue Price or (B) the Maturity Price. The "Maturity Price" means the
average Closing Price (as defined herein) of CPQ Common Stock, subject
to adjustment as a result of certain dilution events (see "Description
of the ELKS-Dilution Adjustments; Reorganization Events" herein), for
the 10 Trading Days (as defined herein) immediately prior to maturity.
Accordingly, the value of CPQ Common Stock to be received by holders of
the ELKS at maturity will not necessarily equal the Issue Price
thereof. If the Maturity Price is less than the Issue Price, the value
of CPQ Common Stock to be received at maturity will be less than the
price paid for the ELKS.
See "Risk Factors Relating to ELKS" beginning on page PS-2 for a
discussion of certain factors that should be carefully considered by
prospective purchasers.
For a discussion of certain United States federal income tax
consequences for holders of ELKS, see "Certain United States Federal
Income Tax Considerations."
"Compaq" is a trade name used by Compaq. Compaq is not affiliated with
the Company, is not involved in this offering of ELKS and will have no
obligations with respect to the ELKS. See "Risk Factors Relating to
ELKS-Lack of Affiliation Between Compaq and the Company."
"ELKS" and "Equity-Linked Securities" are service marks of Salomon
Brothers Inc.
- ------------------------------------------------------------------
Price to Agent's Proceeds to
Public(1) Commission Company(1)
--------- ---------- -----------
Per ELK . . . . . $39.75 $0.00 $39.75
Total . . . . . . $15,105,000 $0.00 $15,105,000
- ------------------------------------------------------------------
(1) Plus accrued interest, if any, from March 21, 1996 to the
date of delivery.
- --------------------
Salomon Brothers Inc
- -----------------------------------------------------------------------
<PAGE>
RISK FACTORS RELATING TO ELKS
As described in more detail below, the trading price of the
ELKS may vary considerably prior to maturity (including by
acceleration or otherwise, "Maturity") due to, among other
things, fluctuations in the market price of CPQ Common Stock and
other events that are difficult to predict and beyond the
Company's control.
Comparison to Other Debt Securities
The terms of the ELKS differ from those of ordinary debt
securities in that the amount of CPQ Common Stock (or cash
equivalent thereof) that a holder of the ELKS will receive upon
mandatory exchange of the principal amount thereof at Maturity
(the "Amount Receivable at Maturity") is not fixed, but is based
on the market price of CPQ Common Stock. There can be no
assurance that the Amount Receivable at Maturity will be equal to
or greater than the Issue Price and, if the price of CPQ Common
Stock at Maturity is less than the Issue Price, the Amount
Receivable at Maturity will be less, in which case an investment
in ELKS may result in a loss.
Relationship of the ELKS and CPQ Common Stock
It is impossible to predict whether the price of CPQ Common
Stock will rise or fall. Trading prices of CPQ Common Stock will
be influenced by Compaq's operational results and by complex and
interrelated political, economic, financial and other factors
that can affect the capital markets generally, the stock exchange
on which CPQ Common Stock is traded and the market segment of
which Compaq is a part. See "Compaq Computer Corporation"
herein. Trading prices of CPQ Common Stock also may be
influenced if the Company or another principal shareholder of
Compaq hereafter issues securities with terms similar to those of
the ELKS or otherwise transfers shares of CPQ Common Stock.
Holders of the ELKS will not be entitled to any rights with
respect to CPQ Common Stock (including, without limitation,
voting rights and the rights to receive any dividends or other
distributions in respect thereof) until such time, if any, as the
Company shall deliver shares of CPQ Common Stock to holders of
the ELKS at Maturity thereof and the applicable record date, if
any, for the exercise of such rights occurs after such date.
There can be no assurance that Compaq will continue to be
subject to the reporting requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and distribute
reports, proxy statements and other information required thereby
to its stockholders. In the event that Compaq ceases to be
subject to such reporting requirements and the ELKS continue to
be outstanding, pricing information for the ELKS may be more
difficult to obtain and the value and liquidity of the ELKS may
be adversely affected.
Dilution of CPQ Common Stock
The Amount Receivable at Maturity is subject to adjustment
for certain events arising from, among others, stock splits and
combinations, stock dividends, extraordinary cash dividends and
certain other actions of Compaq that modify its capital structure
as well as a merger or consolidation in which Compaq is not the
surviving or resulting corporation, a sale or transfer of all or
substantially all of the assets of Compaq and the liquidation,
dissolution, winding up or bankruptcy of Compaq. See
"Description of the ELKS-Dilution Adjustments; Reorganization
Events." Such Amount Receivable at Maturity may not be adjusted
for other events, such as offerings of CPQ Common Stock for cash
or in connection with acquisitions, that may adversely affect the
price of CPQ Common Stock and, because of the relationship of
such Amount Receivable at Maturity to the price of CPQ Common
Stock, such other events may adversely affect the trading price
of the ELKS. There can be no assurance that Compaq will not make
offerings of CPQ Common Stock or take such other action in the
future or as to the amount of such offerings, if any.
Lack of Affiliation Between the Company and Compaq
The Company is not affiliated with Compaq and, although the
Company has no knowledge that any of the events described in the
preceding subsection are currently being contemplated by Compaq
or of any that would have a material adverse effect on Compaq or
on the price of CPQ Common Stock, such events are beyond the
Company's ability to control and are difficult to predict.
Compaq is not involved in the offering of ELKS and has no
obligations with respect to the ELKS, including any obligation to
take the needs of the Company or of holders of ELKS into
consideration for any reason. Compaq will not receive any of the
proceeds of the offering of the ELKS made hereby and is not
responsible for, and has not participated in, the determination
of the timing of, prices for, or quantities of, the ELKS to be
issued or in the determination or calculation of the Amount
Receivable at Maturity. Compaq is not involved with the
administration, marketing or trading of the ELKS and has no
obligations with respect to the Amount Receivable at Maturity.
Possible Illiquidity of the Secondary Market
It is not possible to predict how the ELKS will trade in the
secondary market or whether such market will be liquid or
illiquid. ELKS are novel and innovative securities and there is
currently no secondary market for the ELKS. The ELKS will not be
listed or traded on any securities exchange or trading market.
Accordingly, pricing information for the ELKS may be difficult to
obtain and the liquidity of the ELKS may be limited. The Agent
currently intends, but is not obligated, to make a market in the
ELKS. There can be no assurance that a secondary market will
develop or, if a secondary market does develop, that it will
provide the holders of the ELKS with liquidity or that it will
continue for the life of the ELKS.
Uncertainty of Federal Income Tax Consequences
No statutory, judicial or administrative authority directly
addresses the characterization of the ELKS or instruments similar
to the ELKS for U.S. federal income tax purposes. As a result,
significant aspects of the U.S. federal income tax consequences
of an investment in the ELKS are not certain. No ruling is being
requested from the Internal Revenue Service with respect to the
ELKS and no assurance can be given that the Internal Revenue
Service will agree with the conclusions expressed under "Certain
United States Federal Income Tax Considerations."
USE OF PROCEEDS AND HEDGING
A portion of the proceeds to be received by the Company from
the sale of the ELKS is being used by the Company or one or more
of its subsidiaries before and immediately following the initial
offering of the ELKS to acquire CPQ Common Stock or listed or
over-the-counter options contracts in, or other derivative or
synthetic instruments related to, CPQ Common Stock in connection
with hedging the Company's obligations under the ELKS. The
balance of such proceeds will be used for general corporate
purposes. See "Use of Proceeds" in the Prospectus. From time to
time after the initial offering and prior to the maturity of the
ELKS, depending on market conditions (including the market price
of CPQ Common Stock), in connection with hedging with respect to
the ELKS, the Company expects that it or one or more of its
subsidiaries will increase or decrease their initial hedging
positions using dynamic hedging techniques and may take long or
short positions in CPQ Common Stock, in listed or over-the-
counter options contracts in, or other derivative or synthetic
instruments related to, CPQ Common Stock. In addition, the
Company or one or more of its subsidiaries may purchase or
otherwise acquire a long or short position in ELKS from time to
time and may, in their sole discretion, hold or resell such ELKS.
The Company or one or more of its subsidiaries may also take
positions in other types of appropriate financial instruments
that may become available in the future. To the extent that the
Company or one or more of its subsidiaries have a long hedge
position in CPQ Common Stock or options contracts in, or other
derivative or synthetic instruments related to, CPQ Common Stock,
the Company or one or more of its subsidiaries may liquidate a
portion of their holdings at or about the time of the maturity of
the ELKS. Depending, among other things, on future market
conditions, the aggregate amount and the composition of such
positions are likely to vary over time. Profits or losses from
any such position cannot be ascertained until such position is
closed out and any offsetting position or positions are taken
into account.
COMPAQ COMPUTER CORPORATION
According to publicly available documents, Compaq, a
Delaware corporation, designs, develops, manufactures and markets
a wide range of personal computing products, including desktop
personal computers, portable computers and tower PC servers and
peripheral products that store and manage data in network
environments. Compaq is subject to the informational
requirements of the Exchange Act. Accordingly, Compaq files
reports, proxy and information statements and other information
with the Securities and Exchange Commission (the "Commission").
Copies of such material can be inspected and copied at the public
reference facilities maintained by the Commission and at the
offices of the New York Stock Exchange, Inc. at the addresses
specified under "Available Information" in the Prospectus.
This Pricing Supplement relates only to the ELKS offered
hereby and does not relate to the CPQ Common Stock. All
disclosures contained in this Pricing Supplement regarding Compaq
are derived from the publicly available documents described in
the preceding paragraph. Neither the Company nor the Agent have
participated in the preparation of such documents or made any due
diligence inquiry with respect to the information provided
therein. Neither the Company nor the Agent makes any
representation that such publicly available documents or any of
the publicly available information regarding Compaq are accurate
or complete. There can be no 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 CPQ Common Stock (and therefore the Issue Price,
the Maturity Price and the Amount Receivable at Maturity) have
been publicly disclosed. Subsequent disclosure of any such
events or the disclosure or failure to disclose material future
events concerning Compaq could affect the Amount Receivable at
Maturity with respect to the ELKS and therefore the trading
prices of the ELKS. Neither the Company nor any of its
affiliates makes any representation to any purchaser of the ELKS
as to the performance of CPQ Common Stock.
The Company or its affiliates may presently or from time to
time engage in business with Compaq including extending loans to,
or making equity investments in, Compaq or providing advisory
services to Compaq, including merger and acquisitions advisory
services. In the course of such business, the Company or its
affiliates may acquire non-public information with respect to
Compaq and, in addition, one or more affiliates of the Company
may publish research reports with respect to Compaq. The Company
does not make any representation to any purchaser of ELKS with
respect to any matters whatsoever relating to Compaq. Any
prospective purchaser of ELKS should undertake an independent
investigation of Compaq as in its judgment is appropriate to make
an informed decision with respect to an investment in CPQ Common
Stock.
PRICE RANGE AND DIVIDEND HISTORY OF CPQ COMMON STOCK
CPQ Common Stock is traded and is quoted on the New York
Stock Exchange ("NYSE") under the symbol CPQ. The following
table sets forth, for the indicated periods, the reported high
and low sales prices of the shares of CPQ Common Stock as
reported on the New York Stock Exchange Composite Tape. No cash
dividends on CPQ Common Stock were paid for the indicated
periods.
Sales Prices(1)
-------------------------
High Low Dividends Paid
---------- ---------- --------------
1994
1st Quarter $34.953125 $24.078125 $0.00
2nd Quarter 39.875 30.750 0.00
3rd Quarter 39.375 29.500 0.00
4th Quarter 42.125 30.750 0.00
1995
1st Quarter $44.375 31.750 $0.00
2nd Quarter 46.250 31.125 0.00
3rd Quarter 54.750 42.750 0.00
4th Quarter 56.750 42.750 0.00
1996
1st Quarter
(through
March 15, 1996) $54.000 $37.000 $0.00
(1) Adjusted to account for a three to one split of shares of
CPQ Common Stock effective May 31, 1994.
For a recent sales price of CPQ Common Stock, see the cover
page of this Pricing Supplement.
The Company makes no representations as to the amount of
dividends, if any, that Compaq will pay in the future. In any
event, holders of ELKS will not be entitled to receive any
dividends that may be payable on CPQ Common Stock until such time
as the Company, if it so elects, delivers CPQ Common Stock at
maturity of the ELKS, and then only with respect to dividends
having a record date on or after the date of delivery of such CPQ
Common Stock. See "Description of the ELKS."
DESCRIPTION OF THE ELKS
The description in this Pricing Supplement of the terms of
the ELKS supplements, and to the extent inconsistent therewith
replaces, the descriptions of the general terms and provisions of
the Registered Notes set forth in the accompanying Prospectus and
Prospectus Supplement, to which descriptions reference is hereby
made.
General
The ELKS are Medium-Term Notes, Series D (as defined in the
Prospectus Supplement), to be issued under the Senior Debt
Indenture (as defined in the Prospectus) dated as of December 1,
1988, as supplemented from time to time, and as supplemented by
the Seventh Supplemental Indenture, dated as of February 1, 1996
(the Senior Debt Indenture, as supplemented from time to time,
the "Indenture"), between the Company and Citibank, N.A., a
national banking association, as Trustee (the "Trustee").
The aggregate number of ELKS to be issued will be 380,000.
The ELKS will mature on March 21, 1997. In the future the
Company may issue additional Debt Securities or other securities
with terms similar to those of the ELKS.
Each ELK, which will be issued with a principal amount of
$39.75, will bear interest at the annual rate of 5.50% of the
principal amount per annum (or $2.18625 per annum) from March 21,
1996, or from the most recent Interest Payment Date (as defined
below) to which interest has been paid or provided for until the
principal amount thereof is exchanged at Maturity pursuant to the
terms of the ELKS. Interest on the ELKS will be payable
quarterly in arrears on each March 21, June 21, September 21 and
December 21, commencing June 21, 1996 (each, an "Interest Payment
Date"), to the persons in whose names the ELKS are registered at
the close of business on the fifteenth day preceding such
Interest Payment Date, whether or not such day is a Business Day
(as defined below), provided that interest payable at Maturity
shall be payable to the person to whom the principal is payable.
Interest on the ELKS will be computed on the basis of a 360-day
year of twelve 30-day months. If an Interest Payment Date falls
on a day that is not a Business Day, the interest payment to be
made on such Interest Payment Date will be made on the next
succeeding Business Day with the same force and effect as if made
on such Interest Payment Date, and no additional interest will
accrue as a result of such delayed payment. "Business Day" means
any day that is not a Saturday, a Sunday or a day on which the
NYSE or banking institutions or trust companies in the City of
New York are authorized or obligated by law or executive order to
close.
At Maturity (including as a result of acceleration or
otherwise), the principal amount of each ELK will be mandatorily
exchanged by the Company into an amount of shares of CPQ Common
Stock having a value equal to the lesser of (A) 147.50% of the
Issue Price or (B) the Maturity Price (as defined below).
ACCORDINGLY, THE VALUE OF CPQ COMMON STOCK TO BE RECEIVED BY
HOLDERS OF THE ELKS (OR, AS DISCUSSED BELOW, THE CASH EQUIVALENT
TO BE RECEIVED IN LIEU OF SUCH SHARES) AT MATURITY WILL NOT
NECESSARILY EQUAL THE ISSUE PRICE OF SUCH ELKS. Any shares of CPQ
Common Stock delivered by the Company to the holders of the ELKS
that are not affiliated with Compaq shall be free of any transfer
restrictions and the holders of the ELKS will be responsible for
the payment of any and all brokerage costs upon the subsequent
sale of such shares. No fractional shares of CPQ Common Stock
will be issued at Maturity. See "-Fractional Shares" below.
Although it is the Company's current intention to deliver shares
of CPQ Common Stock at Maturity, the Company may at its option
deliver cash, in lieu of delivering such shares of CPQ Common
Stock, except where such delivery would violate applicable state
law. The amount of cash deliverable in respect of each ELK shall
be equal to the lesser of (A) 147.50% of the Issue Price or (B)
the Maturity Price. In the event the Company elects to deliver
cash in lieu of shares at Maturity, it will be obligated to
deliver cash to all holders of ELKS, except those holders with
respect to whom it has determined delivery of cash may violate
applicable state law and as to whom it will deliver shares of CPQ
Common Stock. On or prior to the fifteenth Business Day prior to
March 21, 1997, the Company will notify the Trustee, which will
notify The Depository Trust Company (which will notify the
holders of the ELKS), stating whether the principal amount of
each ELK will be exchanged for shares of CPQ Common Stock or
cash; provided, however, that if the Company intends to deliver
cash, the Company shall have the right, as a condition to
delivery of such cash, to require certification as to the
domicile and residency of each beneficial holder of ELKS.
Notwithstanding the foregoing, (i) in the case of certain
dilution events, the Maturity Price will be subject to adjustment
and (ii) in the case of certain reorganization events, the
consideration received by holders of ELKS at Maturity will be
cash or other property. See "-Dilution Adjustments;
Reorganization Events" below.
The "Maturity Price" is defined as the average Closing Price
per share of CPQ Common Stock for a Calculation Period (as
defined below) of 10 Trading Days occurring immediately prior to
(but not including) the date of Maturity; provided, however, that
if no Closing Price for CPQ Common Stock may be determined for
one or more (but not all) of such Trading Days, such Trading Days
shall be disregarded in the calculation of the Maturity Price
(but no additional Trading Days shall be added to the Calculation
Period). If no Closing Price for CPQ Common Stock may be
determined for any of such 10 Trading Days, "Maturity Price"
shall be defined as the market value per share of CPQ Common
Stock as of Maturity as determined by a nationally recognized
independent investment banking firm retained for this purpose by
the Company. The "Closing Price" of any security on any date of
determination means the closing sale price (or, if no closing
price is reported, the last reported sale price) of such security
(regular way) on the NYSE on such date or, if such security is
not listed for trading on the NYSE on any such date, as reported
in the composite transactions for the principal U.S. securities
exchange on which such security is so listed, or if such security
is not so listed on a U.S. national or regional securities
exchange, as reported by The NASDAQ National Market, or, if such
security is not so reported, the last quoted bid price for such
security in the over-the-counter market as reported by the
National Quotation Bureau or similar organization. A "Trading
Day" means, with respect to any security, a day on which the
principal market for such security is open for trading or
quotation. The "Calculation Period" means the relevant period
for which an average Closing Price must be determined.
Interest on the ELKS will be payable, and delivery of CPQ
Common Stock (or, at the option of the Company, its cash
equivalent) in exchange for the ELKS at Maturity will be made
upon surrender of such ELKS, at the office or agency of the
Company maintained for such purposes; provided, however, that
payment of interest may be made at the option of the Company by
check mailed to the persons in whose names the ELKS are
registered at the close of business on March 3, June 3, September
3 and December 3. See "Description of Registered Notes-Book-
Entry System" in the Prospectus Supplement. Initially such
office will be the principal corporate trust office of the
Trustee in the City of New York.
The ELKS will be transferable at any time or from time to
time at the aforementioned office. No service charge will be
made to the holder for any such transfer except for any tax or
governmental charge incidental thereto.
The Indenture does not contain any restriction on the
ability of the Company to sell, pledge or convey all or any
portion of CPQ Common Stock held by it or its subsidiaries, and
no such shares of CPQ Common Stock will be pledged or otherwise
held in escrow for use at Maturity of the ELKS. Consequently, in
the event of a bankruptcy, insolvency or liquidation of the
Company or its subsidiaries, the CPQ Common Stock, if any, owned
by the Company or its subsidiaries will be subject to the claims
of the creditors of the Company or its subsidiaries,
respectively. In addition, as described herein, the Company will
have the option, exercisable in its sole discretion, to satisfy
its obligations pursuant to the mandatory exchange for the
principal amount of each ELK at Maturity by delivering to holders
of the ELKS either the number of shares of CPQ Common Stock
specified above or cash in an amount equal to the product of such
number of shares multiplied by the Maturity Price. In the event
of such a sale, pledge or conveyance, a holder of the ELKS may be
more likely to receive cash in lieu of CPQ Common Stock. As a
result, there can be no assurance that the Company will elect at
Maturity to deliver CPQ Common Stock or, if it so elects, that it
will use all or any portion of its current holdings of CPQ Common
Stock to make such delivery. Consequently, holders of the ELKS
will not be entitled to any rights with respect to CPQ Common
Stock (including, without limitation, voting rights and rights to
receive any dividends or other distributions in respect thereof)
until such time, if any, as the Company shall have delivered
shares of CPQ Common Stock to holders of the ELKS at Maturity
thereof.
Dilution Adjustments; Reorganization Events
Dilution Adjustments. The Closing Price of CPQ Common Stock
on any of the 10 Trading Days used to calculate the Maturity
Price shall be subject to adjustment as described below to the
extent that any of the events requiring such adjustment occur
during the period commencing on the date hereof and ending at the
maturity of the ELKS:
(i) In the event that a dividend or other distribution is
declared (i) on any class of Compaq's capital stock payable
in shares of CPQ Common Stock or (ii) on CPQ Common Stock
payable in cash in an amount greater than 10% of the average
Closing Prices of CPQ Common Stock on the date fixed for the
determination of the shareholders of Compaq entitled to
receive such cash dividend (an "Extraordinary Cash
Dividend"), any Closing Price of CPQ Common Stock used to
calculate the Maturity Price on any Trading Day that follows
the date (the "Compaq Record Date") fixed for the
determination of the shareholders of Compaq entitled to
receive such distribution shall be increased by multiplying
such Closing Price by a fraction of which the numerator
shall be the number of shares of CPQ Common Stock
outstanding on the Compaq Record Date plus the number of
shares constituting such distribution or, in the case of an
Extraordinary Cash Dividend, plus the number of shares of
CPQ Common Stock that could be purchased with the amount of
such Extraordinary Cash Dividend at the Closing Price of CPQ
Common Stock on the Trading Day immediately subsequent to
such Compaq Record Date (if no Closing Price for CPQ Common
Stock may be determined for such Trading Day, such Closing
Price shall be defined as the market value per share of CPQ
Common Stock as of such date as determined by a nationally
recognized independent investment banking firm retained for
this purpose by the Company), and the denominator shall be
the number of shares of CPQ Common Stock outstanding on the
Compaq Record Date.
(ii) In the event that the outstanding shares of CPQ Common
Stock are subdivided into a greater number of shares, the
Closing Price of CPQ Common Stock used to calculate the
Maturity Price on any Trading Day that follows the date on
which such subdivision becomes effective will be
proportionately increased, and conversely, in the event that
the outstanding shares of CPQ Common Stock are combined into
a smaller number of shares, such Closing Price will be
proportionately reduced.
(iii) In the event that CPQ Common Stock is changed into
the same or a different number of shares of any class or
classes of stock, whether by capital reorganization,
reclassification or otherwise (except to the extent
otherwise provided in (i) or (ii) above or pursuant to a
Reorganization Event, as described in the following
paragraph), the Maturity Price shall be calculated by using
the Closing Prices of the shares of stock into which a share
of CPQ Common Stock was changed on any Trading Day that
follows the effectiveness of such change.
(iv) In the event that Compaq shall issue rights or
warrants to all holders of CPQ Common Stock entitling them
to subscribe for or purchase shares of CPQ Common Stock at a
price per share less than the market price of CPQ Common
Stock (other than rights to purchase CPQ Common Stock
pursuant to a plan for the reinvestment of dividends or
interest), any Closing Price of CPQ Common Stock used to
calculate the Maturity Price on any Trading Day that the
issuance of such rights or warrants shall be increased by
multiplying such Closing Price by a fraction, of which the
numerator shall be the number of shares of CPQ Common Stock
outstanding on the date of issuance of such rights or
warrants, immediately prior to such issuance, plus the
number of additional shares of CPQ Common Stock offered for
subscription or purchase pursuant to such rights or
warrants, and of which the denominator shall be the number
of shares of CPQ Common Stock outstanding on the date of
issuance of such rights or warrants, immediately prior to
such issuance, plus the number of additional shares of CPQ
Common Stock which the aggregate offering price of the total
number of shares of CPQ Common Stock so offered for
subscription or purchase pursuant to such rights or warrants
would purchase at the market price (determined as the
average Closing Price per share of CPQ Common Stock on the
10 Trading Days immediately prior to the date such rights or
warrants are issued; provided, however, that if no Closing
Price for CPQ Common Stock may be determined for one or more
(but not all) of such Trading Days, such Trading Days shall
be disregarded in the calculation of such market price (but
no additional Trading Days shall be added to the Calculation
Period); provided, further, that if no Closing Price for CPQ
Common Stock may be determined for any of such 10 Trading
Days, such market price shall be defined as the market value
per share of CPQ Common Stock as of such date as determined
by a nationally recognized independent investment banking
firm retained for this purpose by the Company), which shall
be determined by multiplying such total number of shares by
the exercise price of such rights or warrants and dividing
the product so obtained by such market price. To the extent
that shares of CPQ Common Stock are not delivered after the
expiration of such rights or warrants, such Closing Prices
shall be readjusted to the Closing Prices which would then
be in effect had such adjustments for the issuance of such
rights or warrants been made upon the basis of delivery of
only the number of shares of CPQ Common Stock actually
delivered.
(v) In the event that Compaq shall pay a dividend or make a
distribution to all holders of CPQ Common Stock of evidences
of its indebtedness or other assets (excluding any dividends
or distributions referred to in clause (i) above, any shares
of common stock issued pursuant to a reclassification
referred to in clause (iii) above) or issue to all holders
of CPQ Common Stock rights or warrants to subscribe for or
purchase any of its securities (other than those referred to
in clause (iv) above), any Closing Price of CPQ Common Stock
used to calculate the Maturity Price on any Trading Day that
follows the Compaq Record Date fixed for the determination
of the shareholders of Compaq entitled to receive such
dividend or distribution shall be increased by multiplying
such Closing Price by a fraction of which the numerator
shall be the market price per share of CPQ Common Stock on
such Compaq Record Date (such market price being determined
as the average Closing Price per share of CPQ Common Stock
on the 10 Trading Days immediately prior to such Compaq
Record Date; provided, however, that if no Closing Price for
CPQ Common Stock may be determined for one or more (but not
all) of such Trading Days, such Trading Days shall be
disregarded in the calculation of such market price (but no
additional Trading Days shall be added to the Calculation
Period); provided, further, that if no Closing Price for CPQ
Common Stock may be determined for any of such 10 Trading
Days, such market price shall be defined as the market value
per share of CPQ Common Stock as of such date as determined
by a nationally recognized independent investment banking
firm retained for this purpose by the Company), and of which
the denominator shall be such market price per share of CPQ
Common Stock less the fair market value (as determined by
the Board of Directors of the Company, whose determination
shall be conclusive, and described in a resolution adopted
with respect thereto) as of such Compaq Record Date of the
portion of the assets or evidences of indebtedness so
distributed or of such subscription rights or warrants
applicable to one share of CPQ Common Stock.
In the case of the reclassification of any shares of CPQ Common
Stock into any shares of any class or classes of stock other than
CPQ Common Stock, such shares of common stock shall be deemed
shares of CPQ Common Stock solely to determine the Maturity
Price. Each such adjustment to the Maturity Price shall be made
successively.
Reorganization Events. In the event of (A) any
consolidation or merger of Compaq, or any surviving entity or
subsequent surviving entity of Compaq (an "Compaq Successor"),
with or into another entity (other than a merger or consolidation
in which Compaq is the continuing corporation and in which CPQ
Common Stock outstanding immediately prior to the merger or
consolidation is not exchanged for cash, securities or other
property of Compaq or another corporation), (B) any sale,
transfer, lease or conveyance to another corporation of the
property of Compaq or any Compaq Successor as an entirety or
substantially as an entirety, (C) any statutory exchange of
securities of Compaq or any Compaq Successor with another
corporation (other than in connection with a merger or
acquisition) or (D) any liquidation, dissolution or winding up of
Compaq or any Compaq Successor (any such event, a "Reorganization
Event"), each holder of ELKS will receive at Maturity, in lieu of
shares of CPQ Common Stock, as described above, cash in an amount
equal to the lesser of (A) 147.50% of the Issue Price or (B) the
Transaction Value (as defined below). "Transaction Value" means
(i) for any cash received in any such Reorganization Event, the
amount of cash received per share of CPQ Common Stock, (ii) for
any property other than cash or securities received in any such
Reorganization Event, an amount equal to the market value at
Maturity of such property received per share of CPQ Common Stock
as determined by a nationally recognized independent investment
banking firm retained for this purpose by the Company and (iii)
for any securities received in any such Reorganization Event, an
amount equal to the average Closing Price per share of such
securities on the 10 Trading Days immediately prior to Maturity
multiplied by the number of such securities received for each
share of CPQ Common Stock; provided, however, that in the case of
clause (iii), (x) if no Closing Price for such securities may be
determined for one or more (but not all) of such Trading Days,
such Trading Days shall be disregarded in the calculation of such
market price (but no additional Trading Days shall be added to
the Calculation Period) or (y) if no Closing Price for such
securities may be determined for any of such 10 Trading Days,
Transaction Value shall be defined as the market value per share
of such securities as of Maturity as determined by a nationally
recognized independent investment banking firm retained for this
purpose by the Company multiplied by the number of shares of such
securities received for each share of CPQ Common Stock.
Notwithstanding the foregoing, in lieu of delivering cash as
provided above, the Company may at its option deliver an
equivalent value of securities or other property received in such
Reorganization Event, determined in accordance with clause (ii)
or (iii) above, as applicable. If the Company elects to deliver
securities or other property, holders of the ELKS will be
responsible for the payment of any and all brokerage and other
transaction costs upon the sale of such securities or other
property. The kind and amount of securities into which the ELKS
shall be exchangeable after consummation of such transaction
shall be subject to adjustment as described in the immediately
preceding paragraph following the date of consummation of such
transaction.
Notwithstanding the foregoing, the Amount Receivable at
Maturity for each ELK will not, under any circumstances, exceed
147.50% of the Issue Price (or $58.63125 per ELK).
No adjustments will be made for certain other events, such
as offerings of CPQ Common Stock by Compaq for cash or in
connection with acquisitions.
Fractional Shares
No fractional shares of CPQ Common Stock will be issued if
the Company exchanges the ELKS for shares of CPQ Common Stock.
If more than one ELK shall be surrendered for exchange at one
time by the same holder, the number of full shares of CPQ Common
Stock which shall be delivered upon exchange, in whole or in
part, as the case may be, shall be computed on the basis of the
aggregate number of ELKS so surrendered at Maturity. In lieu of
any fractional share otherwise issuable in respect of all ELKS of
any holder which are exchanged at Maturity, such holder shall be
entitled to receive an amount in cash equal to the value of such
fractional share at the Maturity Price.
Redemption
The ELKS are not subject to redemption prior to Maturity and
do not contain sinking fund or other mandatory redemption
provisions. The ELKS are not subject to payment prior to the
date of Maturity at the option of the holder.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary supplements, and to the extent
inconsistent therewith replaces, the discussion of United States
taxation set forth in the accompanying Prospectus Supplement
under the heading "United States Tax Considerations," to which
discussion reference is hereby made.
The following discussion is a summary of the principal U.S.
federal income tax consequences that may be relevant to a citizen
or resident of the United States, a corporation, partnership or
other entity created or organized under the laws of the United
States and an estate or trust the income of which is subject to
U.S. federal income taxation regardless of its source (any of the
foregoing, a "U.S. person") who is the beneficial owner of a ELKS
(a "U.S. Holder"). All references to "holders" (including U.S.
Holders) are to beneficial owners of the ELKS. This summary is
based on U.S. federal income tax laws, regulations, rulings and
decisions in effect as of the date of this Pricing Supplement (or
in the case of certain Treasury regulations now in proposed
form), all of which are subject to change at any time (possibly
with retroactive effect). As the law is technical and complex,
the discussion below necessarily represents only a general
summary. This summary addresses the U.S. federal income tax
consequences to holders who are initial holders of the ELKS and
who will hold the ELKS and, if applicable, CPQ Common Stock as
capital assets. This summary does not address all aspects of
federal income taxation that may be relevant to a particular
holder in light of his or its individual investment circumstances
or to certain types of holders subject to special treatment under
the U.S. federal income tax laws, such as dealers in securities
or foreign currency, financial institutions, insurance companies,
tax-exempt organizations and taxpayers holding the ELKS as part
of a "straddle," "hedge," "conversion transaction," "synthetic
security," or other integrated investment. Moreover, the effect
of any applicable state, local or foreign tax laws is not
discussed.
No statutory, judicial or administrative authority directly
addresses the characterization of the ELKS or instruments similar
to the ELKS for U.S. federal income tax purposes. As a result,
significant aspects of the U.S. federal income tax consequences
of an investment in the ELKS are not certain. No ruling is being
requested from the Internal Revenue Service (the "IRS") with
respect to the ELKS and no assurance can be given that the IRS
will agree with the conclusions expressed herein. ACCORDINGLY, A
PROSPECTIVE INVESTOR (INCLUDING A TAX-EXEMPT INVESTOR) IN THE
ELKS SHOULD CONSULT ITS TAX ADVISOR IN DETERMINING THE TAX
CONSEQUENCES OF AN INVESTMENT IN THE ELKS, INCLUDING THE
APPLICATION OF STATE, LOCAL OR OTHER TAX LAWS AND THE POSSIBLE
EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
The Company intends to treat an ELKS for U.S. federal income
tax purposes as a combination of a fixed loan in an amount equal
to the issue price of the ELKS (the "Exchange Note") and the
application of the principal repayment of that loan at maturity
to a capped forward purchase contract (the "Purchase Contract")
on CPQ Common Stock. Under this approach, the Company intends to
treat each payment of interest on an ELKS as ordinary interest
income to the holder of the ELK. Any such interest income would
be includable in income in accordance with the holder's regular
method of tax accounting.
Under the approach described above, a holder will be
required to allocate the purchase price of the ELKS between the
two components of the ELKS (the Exchange Note and the Purchase
Contract) on the basis of their relative fair market values. The
purchase price so allocated will generally constitute the tax
basis for each component. The Company expects that a holder may
choose to allocate the entire purchase price of the ELKS to the
Exchange Note. Upon the sale or other disposition of an ELKS, a
U.S. Holder generally will be required to allocate the amount
realized between the two components of the ELKS on the basis of
their then relative fair market values. A U.S. Holder will
recognize gain or loss with respect to each component equal to
the difference between the amount realized on the sale or other
disposition for each such component and the U.S. Holder's tax
basis in such component. Such gain or loss generally will be
long-term capital gain or loss if the U.S. Holder has held the
ELKS for more than one year at the time of disposition.
At maturity, on the repayment of the Exchange Note, a U.S.
Holder will recognize long-term capital gain or loss equal to any
differences between its tax basis and the principal amount of the
Exchange Note. (In general, an initial holder who purchases the
ELKS for the Initial Price and therefore has allocated all of its
purchase price to the Exchange Note should not have gain or loss
on repayment because its tax basis will equal the principal
amount.) If the Company delivers CPQ Common Stock, a U.S. Holder
will recognize no additional gain or loss on the exchange,
pursuant to the Purchase Contract, of the principal payment due
on the Exchange Note for CPQ Common Stock. However, a U.S.
Holder will recognize additional gain or loss (which will be
short-term capital gain or loss rather than long-term capital
gain or loss) with respect to cash received in lieu of fractional
shares. The amount of such gain or loss recognized by a U.S.
Holder will be equal to the difference between the cash received
and the portion of the principal amount of the Exchange Note
allocable to fractional shares. A U.S. Holder will have a tax
basis in stock delivered by the Company equal to the principal
amount of the Exchange Note less the amount of the portion of the
principal amount of the Exchange Note allocable to the fractional
shares and will realize capital gain or loss upon the sale or
disposition of such stock. Alternatively, at Maturity, if the
Company pays the ELKS in cash, a U.S. Holder will have capital
gain or loss equal to any difference between the principal amount
of the Exchange Note and the amount of cash received from the
Company.
Due to the absence of authority as to the proper
characterization of the ELKS, no assurance can be given that the
IRS will accept or that a court will uphold the characterization
and tax treatment described above. Proposed Treasury regulations
issued in 1994 with respect to "contingent payment" debt
instruments (the "Proposed Regulations") would provide for a
different tax result under some circumstances for instruments
with characteristics similar to the ELKS, but the Proposed
Regulations would be effective only for instruments issued 60
days or more after publication as final regulations. Under the
Proposed Regulations, the amount of interest included in a
holder's taxable income for any year would generally be
determined by projecting the amounts of contingent payments and
the yield on the instrument. Taxable interest income would be
measured with reference to the projected yield, which might be
less than or greater than the stated interest rate under the
instrument. In the event that the amount of an actual contingent
payment differed from the projected amount of that payment, the
difference would generally increase or reduce taxable interest
income, or create a loss. Because of their prospective effective
date, the Proposed Regulations, if finalized in their current
form, would not apply to the ELKS. In addition, it is unclear
whether the IRS would view a single instrument that has
"principal" that is entirely contingent as debt for U.S. federal
income tax purposes.
Even in the absence of regulations applicable to the ELKS,
the ELKS may be characterized in a manner that results in tax
consequences different from those reflected in the agreement and
described above, including treating the ELKS as a single
instrument or treating the Purchase Contract element of the ELKS
as itself the combination of a forward contract and one or more
options. Under alternative characterizations of the ELKS, it is
possible, for example, that (i) gain may be treated as ordinary
income, instead of capital gain, (ii) a U.S. Holder may be
taxable upon the receipt of CPQ Common Stock with a value in
excess of the principal amount of the Exchange Note, rather than
upon the sale of such stock, or (iii) all or part of the interest
income on the Exchange Note may be treated as nontaxable,
increasing the gain (or decreasing the loss) at Maturity or
disposition of the ELKS (or disposition of CPQ Common Stock).
Non-United States Persons
In the case of a holder of the ELKS that is not a U.S.
person, payments made with respect to the ELKS should not be
subject to U.S. withholding tax; PROVIDED that such holder
complies with applicable certification requirements. Any capital
gain realized upon the sale or other disposition of the ELKS by a
holder that is not a U.S. person will generally not be subject to
U.S. federal income tax if (i) such gain is not effectively
connected with a U.S. trade or business of such holder and (ii)
in the case of an individual, such individual is not present in
the United States for 183 days or more in the taxable year of the
sale or other disposition or the gain is not attributable to a
fixed place of business maintained by such individual in the
United States.
Backup Withholding and Information Reporting
A holder of the ELKS may be subject to information reporting
and to backup withholding at a rate of 31 percent of certain
amounts paid to the holder unless such holder provides proof of
an applicable exemption or a correct taxpayer identification
number, and otherwise complies with applicable requirements of
the backup withholding rules. Any 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.
