PROSPECTUS Dated March 26, 1998 Pricing Supplement No. 38 to
PROSPECTUS SUPPLEMENT Registration Statement No. 333-46935
Dated March 26, 1998 Dated July 23, 1998
Rule 424(b)(3)
$30,000,280
Morgan Stanley Dean Witter & Co.
MEDIUM-TERM NOTES, SERIES C
Senior Fixed Rate Notes
Reset Performance Equity-linked Redemption Quarterly-pay Securities[SM]
("Reset PERQS[SM]")
6.0% RESET PERQS DUE JULY 31, 2000
Reset PERQS Mandatorily Exchangeable For Shares of Common Stock of
CISCO SYSTEMS, INC.
The 6.0% Reset PERQS due July 31, 2000 (the "Reset PERQS") are
Medium-Term Notes, Series C (Senior Fixed Rate Notes) of Morgan Stanley Dean
Witter & Co. (the "Company"), as further described below and in the Prospectus
Supplement under "Description of Notes--Fixed Rate Notes" and "--Exchangeable
Notes."
The principal amount of each of the Reset PERQS being offered
hereby will be $99.125 (the Market Price of the common stock, without par
value, of Cisco Systems, Inc. ("Cisco") on July 23, 1998) (the "Initial Cisco
Price"). The Reset PERQS will mature on July 31, 2000. Interest on the Reset
PERQS, at the rate of 6.0% of the principal amount per annum (equivalent to
$5.9475 per annum per Reset PERQS), is payable quarterly in arrears on each
January 30, April 30, July 30 and October 30, beginning October 30, 1998.
At maturity upon delivery of each Reset PERQS to the Trustee,
each $99.125 principal amount of such Reset PERQS will be applied by the
Company as payment for a number of shares of the common stock of Cisco (the
"Cisco Stock") at the then applicable Exchange Ratio. The Exchange Ratio,
initially set at 1.0, is subject to adjustment on the First Year Determination
Date and at maturity in order to cap the value of the Cisco Stock to be
received upon delivery of the Reset PERQS at $154.89 per $99.125 principal
amount of each Reset PERQS (156.26% of the Issue Price). Solely for purposes
of adjustment upon the occurrence of certain corporate events, the number of
shares of Cisco Stock to be delivered will also be adjusted by an Exchange
Factor, initially set at 1.0. See "Exchange at Maturity," "Exchange Factor"
and "Antidilution Adjustments" in this Pricing Supplement.
If the Market Price per share of Cisco Stock on July 30, 1999
(as defined herein, the "First Year Closing Price") is less than or equal to
$123.91 (the "First Year Cap Price"), no adjustment to the Exchange Ratio will
be made at such time. If the First Year Closing Price exceeds the First Year
Cap Price, the Exchange Ratio will be adjusted so that the new Exchange Ratio
will equal the product of (i) the existing Exchange Ratio and (ii) a fraction
the numerator of which will be the First Year Cap Price and the denominator of
which will be the First Year Closing Price. In addition, on the First Year
Determination Date, the Calculation Agent will establish the "Second Year Cap
Price" that will be equal to the greater of (x) 125% of the First Year Closing
Price and (y) the First Year Cap Price. If the Market Price at maturity (as
defined herein, the "Maturity Price") is less than or equal to the Second Year
Cap Price, no further adjustment to the Exchange Ratio will be made. If the
Maturity Price exceeds the Second Year Cap Price, the existing Exchange Ratio
will be adjusted so that the final Exchange Ratio will equal the product of
(i) the existing Exchange Ratio and (ii) a fraction the numerator of which
will be the Second Year Cap Price and the denominator of which will be the
Maturity Price. See "Exchange at Maturity" and "Hypothetical Payments on the
Reset PERQS" in this Pricing Supplement.
The opportunity for appreciation afforded by an investment in
the Reset PERQS is less than that afforded by an investment in the Cisco Stock
because at maturity a holder may receive less than one share of Cisco Stock
per Reset PERQS if the Exchange Ratio has been adjusted to cap the value of
the Cisco Stock to be received upon delivery of the Reset PERQS. The value of
the Cisco Stock received by a holder of the Reset PERQS upon exchange at
maturity, determined as described herein, may be more or less than the
principal amount of the Reset PERQS. See "Hypothetical Payments on the Reset
PERQS" in this Pricing Supplement.
Cisco is not affiliated with the Company, is not involved in
this offering of Reset PERQS and will have no obligations with respect to the
Reset PERQS. See "Historical Information" in this Pricing Supplement for
information on the range of Market Prices for Cisco Stock.
The Company will cause the Market Price, any adjustments to the
Exchange Ratio, the Exchange Factor and any other antidilution adjustments to
be determined by the Calculation Agent for The Chase Manhattan Bank, as
Trustee under the Senior Debt Indenture.
An investment in the Reset PERQS entails risks not associated
with similar investments in a conventional debt security, as described under
"Risk Factors" on PS-6 through PS-8 herein.
-----------------
PRICE $99.125 PER RESET PERQS
-----------------
<TABLE>
<CAPTION>
Price to Public(1)(2) Agent's Commissions Proceeds to Company(1)
--------------------- ------------------- ----------------------
<S> <C> <C> <C>
Per Reset PERQS.......... $99.125 $0.25 $98.875
Total.................... $30,000,280 $75,662.75 $29,924,617.25
- ------------
(1) Plus accrued interest, if any, from July 30, 1998.
(2) The Company has agreed to indemnify the Agent against certain liabilities,
including liabilities under the Securities Act of 1933.
</TABLE>
MORGAN STANLEY DEAN WITTER
(This page intentionally left blank)
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE RESET PERQS OR THE
CISCO STOCK. SPECIFICALLY, THE AGENT MAY OVERALLOT IN CONNECTION WITH THE
OFFERING, AND MAY BID FOR, AND PURCHASE, THE RESET PERQS OR THE CISCO STOCK IN
THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "USE OF PROCEEDS
AND HEDGING" IN THIS PRICING SUPPLEMENT AND "PLAN OF DISTRIBUTION" IN THE
ACCOMPANYING PROSPECTUS SUPPLEMENT.
Capitalized terms not defined herein have the meanings given to such terms in
the accompanying Prospectus Supplement.
Principal Amount.............. $30,000,280
Maturity Date................. July 31, 2000
Interest Rate................. 6.0% per annum (equivalent to $5.9475 per
annum per Reset PERQS)
Interest Payment Dates........ Each January 30, April 30, July 30 and
October 30, beginning October 30, 1998.
Specified Currency............ U.S. Dollars
Issue Price................... $99.125 per Reset PERQS
Initial Cisco Price........... $99.125
Original Issue Date
(Settlement Date)............ July 30, 1998
CUSIP......................... 617446273
Book Entry Note or
Certificated Note............ Book Entry
Senior Note or Subordinated
Note......................... Senior
Denominations................. $99.125 and integral multiples thereof
Trustee....................... The Chase Manhattan Bank
Agent......................... Morgan Stanley & Co. Incorporated
First Year Cap Price.......... $123.91 (125% of the Initial Cisco Price)
First Year Determination Date. July 30, 1999 (or if such date is not a
Trading Day on which no Market Disruption
Event occurs, the immediately succeeding
Trading Day on which no Market Disruption
Event occurs)
First Year Closing Price...... First Year Closing Price means the product of
(i) the Market Price of one share of Cisco
Stock and (ii) the Exchange Factor, each
determined as of the First Year Determination
Date.
Second Year Cap Price......... Second Year Cap Price means the greater of
(x) 125% of the First Year Closing Price and
(y) the First Year Cap Price. See "Exchange
at Maturity" below.
Maturity Price................ Maturity Price means the product of (i) the
Market Price of one share of Cisco Stock and
(ii) the Exchange Factor, each determined as
of the second scheduled Trading Day
immediately prior to maturity.
Exchange at Maturity.......... At maturity (including as a result of
acceleration or otherwise), upon delivery of
each Reset PERQS to the Trustee, each $99.125
principal amount of such Reset PERQS will be
applied by the Company as payment for a
number of shares of Cisco Stock at the
Exchange Ratio. The Exchange Ratio,
initially set at 1.0, is subject to
adjustment on the First Year Determination
Date and at maturity in order to cap the
value of the Cisco Stock to be received upon
delivery of the Reset PERQS at $154.89 per
principal amount of each Reset PERQS (156.26%
of the Initial Cisco Price). Solely for
purposes of adjustment upon the occurrence of
certain corporate events, the number of
shares of Cisco Stock to be delivered at
maturity will also be adjusted by an Exchange
Factor, initially set at 1.0. See "Exchange
Factor" and "Antidilution Adjustments" below.
If the First Year Closing Price is less than
or equal to $123.91 (the "First Year Cap
Price"), no adjustment to the Exchange Ratio
will be made at such time. If the First Year
Closing Price exceeds the First Year Cap
Price, the Exchange Ratio will be adjusted so
that the new Exchange Ratio will equal the
product of (i) the existing Exchange Ratio
and (ii) a fraction the numerator of which
will be the First Year Cap Price and the
denominator of which will be the First Year
Closing Price. In addition, on the First
Year Determination Date, the Calculation
Agent will establish the "Second Year Cap
Price" that will be equal to the greater of
(x) 125% of the First Year Closing Price and
(y) the First Year Cap Price. Notice of the
Second Year Cap Price and of any such
adjustment to the Exchange Ratio shall
promptly be sent by first-class mail to The
Depository Trust Company, New York, New York
(the "Depositary"). If the Maturity Price is
less than or equal to the Second Year Cap
Price, no further adjustment to the Exchange
Ratio will be made. If the Maturity Price
exceeds the Second Year Cap Price, the
existing Exchange Ratio will be adjusted so
that the final Exchange Ratio will equal the
product of (i) the existing Exchange Ratio
and (ii) a fraction the numerator of which
will be the Second Year Cap Price and the
denominator of which will be the Maturity
Price. See "Hypothetical Payments on the
Reset PERQS" below.
All calculations with respect to the Exchange
Ratios for the Reset PERQS will be rounded to
the nearest one hundred-thousandth, with five
one-millionths rounded upwards (e.g. .876545
would be rounded to .87655); all calculations
with respect to the Second Year Cap Price
will be rounded to the nearest ten-
thousandth, with five one-hundred-
thousandths rounded upwards (e.g.
$12.34567 would be rounded to $12.3457);
and all dollar amounts related to payments
at maturity resulting from such
calculations will be rounded to the
nearest cent with one-half cent being
rounded upwards.
The Company shall, or shall cause the
Calculation Agent to, (i) provide written
notice to the Trustee and to the Depositary,
on or prior to 10:30 a.m. on the Trading Day
immediately prior to maturity of the Reset
PERQS, of the amount of Cisco Stock to be
delivered with respect to each $99.125
principal amount of each Reset PERQS and (ii)
deliver such shares of Cisco Stock (and cash
in respect of interest and any fractional
shares of Cisco Stock) to the Trustee for
delivery to the holders. The Calculation
Agent shall determine the Exchange Ratio
applicable at the maturity of the Reset PERQS
and calculate the Exchange Factor. References
to payment "per Reset PERQS" refer to each
$99.125 principal amount of any Reset PERQS.
No Fractional Shares.......... Upon delivery of the Reset PERQS to the
Trustee at maturity (including as a result of
acceleration or otherwise), the Company will
pay cash in lieu of issuing fractional shares
of Cisco Stock in an amount equal to the
corresponding fractional Market Price of such
fraction of a share of Cisco Stock as
determined by the Calculation Agent as of the
second scheduled Trading Day prior to
maturity of the Reset PERQS.
Exchange Factor............... The Exchange Factor will be set initially at
1.0, but will be subject to adjustment upon
the occurrence of certain corporate events
through and including the second scheduled
Trading Day immediately prior to maturity.
See "Antidilution Adjustments" below.
Market Price.................. If Cisco Stock (or any other security for
which a Market Price must be determined) is
listed on a national securities exchange, is a
security of The Nasdaq National Market
("NASDAQ NMS") or is included in the OTC
Bulletin Board Service ("OTC Bulletin Board")
operated by the National Association of
Securities Dealers, Inc. (the "NASD"), the
Market Price for one share of Cisco Stock (or
one unit of any such other security) on any
Trading Day means (i) the last reported sale
price, regular way, on such day on the
principal United States securities exchange
registered under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), on
which Cisco Stock (or such other security) is
listed or admitted to trading or (ii) if not
listed or admitted to trading on any such
securities exchange or if such last reported
sale price is not obtainable, the last
reported sale price on the over-the-counter
market as reported on the NASDAQ NMS or OTC
Bulletin Board on such day. If the last
reported sale price is not available pursuant
to clause (i) or (ii) of the preceding
sentence, the Market Price for any Trading
Day shall be the mean, as determined by the
Calculation Agent, of the bid prices for
Cisco Stock (or such other security) obtained
from as many dealers in such stock, but not
exceeding three, as will make such bid prices
available to the Calculation Agent. The term
"NASDAQ NMS security" shall include a
security included in any successor to such
system and the term "OTC Bulletin Board
Service" shall include any successor service
thereto.
Trading Day................... A day, as determined by the Calculation
Agent, on which trading is generally
conducted on the New York Stock Exchange
("NYSE"), the AMEX, the NASDAQ NMS, the
Chicago Mercantile Exchange, and the Chicago
Board of Options Exchange and in the over-
the-counter market for equity securities
in the United States.
Acceleration Event............ If on any date the product of the Market
Price per share of Cisco Stock and the
Exchange Factor is less than $2.00, the
maturity date of the Reset PERQS will be
deemed to be accelerated to such date, and
each $99.125 principal amount of each Reset
PERQS will be applied by the Company as
payment for a number of shares of Cisco Stock
at the then current Exchange Ratio, as
adjusted by the then current Exchange Factor.
See also "Antidilution Adjustments" below.
Calculation Agent............. Morgan Stanley & Co. Incorporated and its
successors ("MS & Co.")
Because the Calculation Agent is an affiliate
of the Company, potential conflicts of
interest may exist between the Calculation
Agent and the holders of the Reset PERQS,
including with respect to certain
determinations and judgments that the
Calculation Agent must make in making
adjustments to the Exchange Factor or other
antidilution adjustments or determining any
Market Price or whether a Market Disruption
Event has occurred. MS & Co. is obligated to
carry out its duties as Calculation Agent in
good faith using its reasonable judgment.
See "Antidilution Adjustments" and "Market
Disruption Event" below.
Risk Factors.................. An investment in the Reset PERQS entails
significant risks not associated with similar
investments in a conventional debt security,
including those set forth below.
The Reset PERQS combine features of equity
and debt instruments. For example, the terms
of the Reset PERQS differ from those of debt
securities in that the value of the Cisco
Stock that a holder of the Reset PERQS will
receive upon mandatory exchange of the
principal amount thereof at maturity is not
fixed, but is based on the price of the Cisco
Stock on the First Year Determination Date
and at maturity of the Reset PERQS. Because
the price of the Cisco Stock is subject to
market fluctuations and because the Exchange
Ratio will be adjusted to cap the value of
the Cisco Stock to be received upon delivery
of the Reset PERQS, the value of the Cisco
Stock received by a holder of Reset PERQS
upon exchange at maturity, determined as
described herein, may be more or less than
the principal amount of the Reset PERQS. The
amount receivable upon exchange will be less
than the principal amount of the Reset PERQS
if the Maturity Price of the Cisco Stock is
(x) less than the Initial Cisco Price or (y)
not sufficiently above the Initial Cisco
Price following any adjustment of the
Exchange Ratio on the First Year Determination
Date. In either case, an investment in the
Reset PERQS would result in a loss. See
"Hypothetical Payments on the Reset PERQS"
below.
The opportunity for capital appreciation
afforded by an investment in the Reset PERQS
is less than that afforded by an investment in
Cisco Stock because of the First and Second
Year Cap Prices and because at maturity a
holder may receive less than one share of
Cisco Stock per Reset PERQS if the Exchange
Ratio has been adjusted to cap the value of
the Cisco Stock to be received upon delivery
of the Reset PERQS. In addition, because the
Exchange Ratio and the Maturity Price are
determined as of the second scheduled Trading
Day prior to maturity of the Reset PERQS and
because the price of Cisco Stock may
fluctuate after such Trading Day and prior to
its delivery at maturity, the value of any
Cisco Stock delivered at maturity may be less
than the value of such Cisco Stock on such
Trading Day. The amount payable at maturity
with respect to each Reset PERQS, determined
as of the second scheduled Trading Day prior
to maturity, will not under any circumstances
exceed $154.89 per Reset PERQS.
Although the amount that holders of the Reset
PERQS are entitled to receive at maturity is
subject to adjustment for certain corporate
events, such adjustments do not cover all
events that could affect the Market Price of
the Cisco Stock, including, without
limitation, the occurrence of a partial
tender or exchange offer for the Cisco Stock
by Cisco or any third party. Such other
events may adversely affect the market value
of the Reset PERQS.
There can be no assurance as to whether there
will be a secondary market in the Reset PERQS
or, if there were to be such a secondary
market, how the Reset PERQS will trade in the
secondary market or whether such market will
be liquid or illiquid. Securities with
characteristics similar to the Reset PERQS
are novel securities, and there is currently
no secondary market for the Reset PERQS. The
market value for the Reset PERQS will be
affected by a number of factors in addition
to the creditworthiness of the Company and the
value of Cisco Stock, including, but not
limited to, the volatility of Cisco Stock,
the dividend rate on Cisco Stock, market
interest and yield rates and the time
remaining to the maturity of the Reset PERQS.
In addition, the value of Cisco Stock depends
on a number of interrelated factors,
including economic, financial and political
events, that can affect the capital markets
generally and the market segment of which
Cisco is a part and over which the Company has
no control. The market value of the Reset
PERQS is expected to depend primarily on
changes in the Market Price of Cisco Stock.
The price at which a holder will be able to
sell Reset PERQS prior to maturity may be at
a discount, which could be substantial, from
the principal amount thereof, if, at such
time, the Market Price of Cisco Stock is
below, equal to or not sufficiently above the
Initial Cisco Price. The historical Market
Prices of Cisco Stock should not be taken as
an indication of Cisco Stock's future
performance during the term of any Reset
PERQS.
The Company is not affiliated with Cisco and,
although the Company as of the date of this
Pricing Supplement does not have any material
non-public information concerning Cisco,
corporate events of Cisco, including those
described below in "Antidilution
Adjustments," are beyond the Company's
ability to control and are difficult to
predict.
Cisco is not involved in the offering of the
Reset PERQS and has no obligations with
respect to the Reset PERQS, including any
obligation to take the interests of the
Company or of holders of Reset PERQS into
consideration for any reason. Cisco will not
receive any of the proceeds of the offering
of the Reset PERQS made hereby and is not
responsible for, and has not participated in,
the determination of the timing of, prices
for or quantities of, the Reset PERQS offered
hereby.
Holders of the Reset PERQS will not be
entitled to any rights with respect to the
Cisco Stock (including, without limitation,
voting rights, the rights to receive any
dividends or other distributions in respect
thereof and the right to tender or exchange
Cisco Stock in any partial tender or exchange
offer by Cisco or any third party) until such
time as the Company shall deliver shares of
Cisco Stock to holders of the Reset PERQS at
maturity.
Because the Calculation Agent is an affiliate
of the Company, potential conflicts of
interest may exist between the Calculation
Agent and the holders of the Reset PERQS,
including with respect to certain adjustments
to the Exchange Factor and other antidilution
adjustments that may influence the
determination of the amount of Cisco Stock or
other property receivable at the maturity of
the Reset PERQS. See "Antidilution
Adjustments" and "Market Disruption Event."
It is suggested that prospective investors
who consider purchasing the Reset PERQS
should reach an investment decision only after
carefully considering the suitability of the
Reset PERQS in light of their particular
circumstances.
Investors should also consider the tax
consequences of investing in the Reset PERQS.
No statutory, judicial or administrative
authority definitively addresses the
characterization for United States federal
income tax purposes of the Reset PERQS or
instruments similar to the Reset PERQS. As a
result, significant aspects of the United
States federal income tax treatment of an
investment in the Reset PERQS are uncertain.
No ruling has been or will be requested from
the Internal Revenue Service ("IRS") with
respect to the Reset PERQS and no assurance
can be given that the IRS or a court will
agree with the analysis set forth herein.
See "United States Federal Income Taxation"
below.
Antidilution Adjustments...... The Exchange Factor will be adjusted as
follows:
1. If Cisco Stock is subject to a stock
split or reverse stock split, then once
such split has become effective, the
Exchange Factor will be adjusted to equal
the product of the prior Exchange Factor
and the number of shares issued in such
stock split or reverse stock split with
respect to one share of Cisco Stock.
2. If Cisco Stock is subject to a stock
dividend (issuance of additional shares of
Cisco Stock) that is given ratably to all
holders of shares of Cisco Stock, then
once the dividend has become effective and
Cisco Stock is trading ex-dividend, the
Exchange Factor will be adjusted so that
the new Exchange Factor shall equal the
prior Exchange Factor plus the product of
(i) the number of shares issued with
respect to one share of Cisco Stock and
(ii) the prior Exchange Factor.
3. There will be no adjustments to the
Exchange Factor to reflect cash dividends
or other distributions paid with respect
to Cisco Stock other than distributions
described in clause (v) of paragraph 5
below and Extraordinary Dividends as
described below. A cash dividend or other
distribution with respect to Cisco Stock
will be deemed to be an "Extraordinary
Dividend" if such dividend or other
distribution exceeds the immediately
preceding non-Extraordinary Dividend for
Cisco Stock by an amount equal to at least
10% of the Market Price of Cisco Stock on
the Trading Day preceding the ex-dividend
date for the payment of such Extraordinary
Dividend (the "ex-dividend date"). If an
Extraordinary Dividend occurs with respect
to Cisco Stock, the Exchange Factor with
respect to Cisco Stock will be adjusted on
the ex-dividend date with respect to such
Extraordinary Dividend so that the new
Exchange Factor will equal the product of
(i) the then current Exchange Factor and
(ii) a fraction, the numerator of which is
the Market Price on the Trading Day
preceding the ex-dividend date, and the
denominator of which is the amount by
which the Market Price on the Trading Day
preceding the ex-dividend date exceeds the
Extraordinary Dividend Amount. The
"Extraordinary Dividend Amount" with
respect to an Extraordinary Dividend for
Cisco Stock will equal (i) in the case of
cash dividends or other distributions that
constitute quarterly dividends, the amount
per share of such Extraordinary Dividend
minus the amount per share of the
immediately preceding non-Extraordinary
Dividend for Cisco Stock or (ii) in the
case of cash dividends or other
distributions that do not constitute
quarterly dividends, the amount per share
of such Extraordinary Dividend. To the
extent an Extraordinary Dividend is not
paid in cash, the value of the non-cash
component will be determined by the
Calculation Agent, whose determination
shall be conclusive. A distribution on
the Cisco Stock described in clause (v) of
paragraph 5 below that also constitutes an
Extraordinary Dividend shall cause an
adjustment to the Exchange Factor pursuant
only to clause (v) of paragraph 5.
4. If Cisco issues rights or warrants
to all holders of Cisco Stock to subscribe
for or purchase Cisco Stock at an exercise
price per share less than the Market Price
of the Cisco Stock on both (i) the date
the exercise price of such rights or
warrants is determined and (ii) the
expiration date of such rights or
warrants, and if the expiration date of
such rights or warrants precedes the
maturity of the Reset PERQS, then the
Exchange Factor will be adjusted to equal
the product of the prior Exchange Factor
and a fraction, the numerator of which
shall be the number of shares of Cisco
Stock outstanding immediately prior to the
issuance of such rights or warrants plus
the number of additional shares of Cisco
Stock offered for subscription or purchase
pursuant to such rights or warrants and
the denominator of which shall be the
number of shares of Cisco Stock
outstanding immediately prior to the
issuance of such rights or warrants plus
the number of additional shares of Cisco
Stock which the aggregate offering price
of the total number of shares of Cisco
Stock so offered for subscription or
purchase pursuant to such rights or
warrants would purchase at the Market
Price on the expiration date of such
rights or warrants, which shall be
determined by multiplying such total
number of shares offered by the exercise
price of such rights or warrants and
dividing the product so obtained by such
Market Price.
5. If (i) there occurs any
reclassification of Cisco Stock, (ii)
Cisco or any surviving entity or
subsequent surviving entity of Cisco (an
"Cisco Successor") has been subject to a
merger, combination or consolidation and
is not the surviving entity, (iii) any
statutory exchange of securities of Cisco
or any Cisco Successor with another
corporation occurs (other than pursuant to
clause (ii) above), (iv) Cisco is
liquidated, (v) Cisco issues to all of
its shareholders equity securities of an
issuer other than Cisco (other than in a
transaction described in clauses (ii),
(iii) or (iv) above) (a "Spin-off Event")
or (vi) a tender or exchange offer is
consummated for all the outstanding shares
of Cisco Stock (any such event in clauses
(i) through (vi) a "Reorganization
Event"), the method of determining the
amount payable upon exchange at maturity
for each Reset PERQS will be adjusted to
provide that each holder of Reset PERQS
will receive at maturity, in respect of
each $99.125 principal amount of each
Reset PERQS, securities, cash or any other
assets distributed in any such
Reorganization Event, including, in the
case of a Spin-off Event, the share of
Cisco Stock with respect to which the
spun-off security was issued
(collectively, the "Exchange Property") in
an amount with a value equal to (a) if the
Exchange Ratio has not been adjusted prior
to maturity, the Transaction Value or (b)
if the Exchange Ratio has been adjusted,
an amount equal to the product of the
final Exchange Ratio and the Transaction
Value. In addition, following a
Reorganization Event, the method of
determining the Maturity Price will be
adjusted so that the Maturity Price will
mean the Transaction Value as of the
second scheduled Trading Day immediately
prior to maturity, and if the
Reorganization Event occurs prior to the
First Year Determination Date, the First
Year Closing Price will mean the
Transaction Value determined as of the
First Year Determination Date.
Notwithstanding the above, if the Exchange
Property received in any such
Reorganization Event consists only of
cash, the maturity date of the Reset PERQS
will be deemed to be accelerated to the
date on which such cash is distributed to
holders of Cisco Stock and holders will
receive in lieu of any Cisco Stock and as
liquidated damages in full satisfaction of
the Company's obligations under the Reset
PERQS the product of (i) the Transaction
Value as of such date and (ii) the then
current Exchange Ratio adjusted as if such
date were the next to occur of either the
First Year Determination Date or the
second scheduled Trading Day prior to
maturity. If Exchange Property consists
of more than one type of property, holders
of Reset PERQS will receive at maturity a
pro rata share of each such type of
Exchange Property. "Transaction Value" at
any date means (i) for any cash received
in any such Reorganization Event, the
amount of cash received per share of Cisco
Stock, as adjusted by the Exchange Factor,
(ii) for any property other than cash or
securities received in any such
Reorganization Event, the market value, as
determined by the Calculation Agent, as of
the date of receipt, of such Exchange
Property received for each share of Cisco
Stock, as adjusted by the Exchange Factor
and (iii) for any security received in any
such Reorganization Event, an amount equal
to the Market Price, as of the date on
which the Transaction Value is determined,
per share of such security multiplied by
the quantity of such security received for
each share of Cisco Stock, as adjusted by
the Exchange Factor.
For purposes of paragraph 5 above, in the
case of a consummated tender or exchange
offer for all Exchange Property of a
particular type, Exchange Property shall be
deemed to include the amount of cash or other
property paid by the offeror in the tender or
exchange offer with respect to such Exchange
Property (in an amount determined on the
basis of the rate of exchange in such tender
or exchange offer). In the event of a tender
or exchange offer with respect to Exchange
Property in which an offeree may elect to
receive cash or other property, Exchange
Property shall be deemed to include the kind
and amount of cash and other property received
by offerees who elect to receive cash.
No adjustments to the Exchange Factor will be
required unless such adjustment would require
a change of at least 0.1% in the Exchange
Factor then in effect. The Exchange Factor
resulting from any of the adjustments
specified above will be rounded to the
nearest one hundred-thousandth with five
one-millionths being rounded upward.
No adjustments to the Exchange Factor or
method of calculating the Exchange Ratio will
be made other than those specified above. The
adjustments specified above do not cover all
events that could affect the Market Price of
the Cisco Stock, including, without
limitation, a partial tender or exchange
offer for the Cisco Stock.
NOTWITHSTANDING THE FOREGOING, THE AMOUNT
PAYABLE BY THE COMPANY AT MATURITY WITH
RESPECT TO EACH RESET PERQS, DETERMINED AS OF
THE SECOND SCHEDULED TRADING DAY PRIOR TO
MATURITY, WILL NOT UNDER ANY CIRCUMSTANCES
EXCEED $154.89 PER RESET PERQS OR AN AMOUNT
OF CISCO STOCK HAVING AN EQUIVALENT VALUE AS
OF SUCH SECOND SCHEDULED TRADING DAY.
The Calculation Agent shall be solely
responsible for the determination and
calculation of any adjustments to the Exchange
Factor or method of calculating the Exchange
Ratio and of any related determinations and
calculations with respect to any
distributions of stock, other securities or
other property or assets (including cash) in
connection with any corporate event described
in paragraph 5 above, and its determinations
and calculations with respect thereto shall
be conclusive.
The Calculation Agent will provide
information as to any adjustments to the
Exchange Factor or method of calculating the
Exchange Ratio upon written request by any
holder of the Reset PERQS.
Market Disruption Event....... "Market Disruption Event" means, with respect
to Cisco Stock:
(i) a suspension, absence or material
limitation of trading of Cisco Stock on
the primary market for Cisco Stock for more
than two hours of trading or during the
one-half hour period preceding the close
of trading in such market; or the
suspension or material limitation on the
primary market for trading in options
contracts related to Cisco Stock, if
available, during the one-half hour period
preceding the close of trading in the
applicable market, in each case as
determined by the Calculation Agent in its
sole discretion; and
(ii) a determination by the Calculation
Agent in its sole discretion that the
event described in clause (i) above
materially interfered with the ability of
the Company or any of its affiliates to
unwind all or a material portion of the
hedge with respect to the Reset PERQS.
For purposes of determining whether a Market
Disruption Event has occurred: (1) a
limitation on the hours or number of days of
trading will not constitute a Market
Disruption Event if it results from an
announced change in the regular business
hours of the relevant exchange, (2) a
decision to permanently discontinue trading
in the relevant option contract will not
constitute a Market Disruption Event, (3)
limitations pursuant to New York Stock
Exchange Rule 80A (or any applicable rule or
regulation enacted or promulgated by the New
York Stock Exchange, any other self-regulatory
organization or the Securities and Exchange
Commission of similar scope as determined by
the Calculation Agent) on trading during
significant market fluctuations shall
constitute a suspension, absence or material
limitation of trading, (4) a suspension of
trading in an options contract on Cisco Stock
by the primary securities market trading in
such options, if available, by reason of (x)
a price change exceeding limits set by such
securities exchange or market, (y) an
imbalance of orders relating to such
contracts or (z) a disparity in bid and ask
quotes relating to such contracts will
constitute a suspension or material
limitation of trading in options contracts
related to Cisco Stock and (5) a suspension,
absence or material limitation of trading on
the primary securities market on which
options contracts related to Cisco Stock are
traded will not include any time when such
securities market is itself closed for
trading under ordinary circumstances.
Cisco Stock;
Public Informaion............ Cisco develops, manufactures, markets and
supports multiprotocol internetworking
systems that link geographically dispersed
local-area and wide-area networks to form a
single information infrastructure. Cisco
Stock is registered under the Exchange Act.
Companies with securities registered under
the Exchange Act are required to file
periodically certain financial and other
information specified by the Securities and
Exchange Commission (the "Commission").
Information provided to or filed with the
Commission can be inspected and copied at the
public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549 or at its
Regional Offices located at Suite 1400,
Citicorp Center, 500 West Madison Street,
Chicago, Illinois 60661 and at Seven World
Trade Center, 13th Floor, New York, New York
10048, and copies of such material can be
obtained from the Public Reference Section of
the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates.
In addition, information provided to or filed
with the Commission electronically can be
accessed through a Website maintained by the
Commission. The address of the Commission's
Website is http:/www.sec.gov. Information
provided to or filed with the Commission by
Cisco pursuant to the Exchange Act of 1934
can be located by reference to Commission
file number 0-18225. In addition, information
regarding Cisco may be obtained from other
sources including, but not limited to, press
releases, newspaper articles and other
publicly disseminated documents. The Company
makes no representation or warranty as to the
accuracy or completeness of such reports.
THIS PRICING SUPPLEMENT RELATES ONLY TO THE
RESET PERQS OFFERED HEREBY AND DOES NOT
RELATE TO CISCO STOCK OR OTHER SECURITIES OF
CISCO. ALL DISCLOSURES CONTAINED IN THIS
PRICING SUPPLEMENT REGARDING CISCO ARE
DERIVED FROM THE PUBLICLY AVAILABLE DOCUMENTS
DESCRIBED IN THE PRECEDING PARAGRAPH.
NEITHER THE COMPANY NOR THE AGENT HAS
PARTICIPATED IN THE PREPARATION OF SUCH
DOCUMENTS OR MADE ANY DUE DILIGENCE INQUIRY
WITH RESPECT TO CISCO IN CONNECTION WITH THE
OFFERING OF THE RESET PERQS. NEITHER THE
COMPANY NOR THE AGENT MAKES ANY
REPRESENTATION THAT SUCH PUBLICLY AVAILABLE
DOCUMENTS OR ANY OTHER PUBLICLY AVAILABLE
INFORMATION REGARDING CISCO ARE ACCURATE OR
COMPLETE. FURTHERMORE, 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 CISCO STOCK (AND THEREFORE
THE INITIAL CISCO PRICE, THE FIRST YEAR CAP
PRICE AND THE MAXIMUM APPRECIATION AMOUNT)
HAVE BEEN PUBLICLY DISCLOSED. SUBSEQUENT
DISCLOSURE OF ANY SUCH EVENTS OR THE
DISCLOSURE OF OR FAILURE TO DISCLOSE MATERIAL
FUTURE EVENTS CONCERNING CISCO COULD AFFECT
THE VALUE RECEIVED AT MATURITY WITH RESPECT
TO THE RESET PERQS AND THEREFORE THE TRADING
PRICES OF THE RESET PERQS.
NEITHER THE COMPANY NOR ANY OF ITS AFFILIATES
MAKES ANY REPRESENTATION TO ANY PURCHASER OF
RESET PERQS AS TO THE PERFORMANCE OF CISCO
STOCK.
The Company or its affiliates may presently
or from time to time engage in business with
Cisco, including extending loans to, or
making equity investments in, Cisco or
providing advisory services to Cisco,
including merger and acquisition advisory
services. In the course of such business,
the Company or its affiliates may acquire
non-public information with respect to Cisco
and, in addition, one or more affiliates of
the Company may publish research reports with
respect to Cisco. The statement in the
preceding sentence is not intended to affect
the right of holders of the Reset PERQS under
the securities laws. Any prospective
purchaser of a Reset PERQS should undertake
an independent investigation of Cisco as in
its judgment is appropriate to make an
informed decision with respect to an
investment in Cisco Stock.
Historical Information........ The following table sets forth the high and
low Market Price during 1995, 1996, 1997 and
1998 through July 23, 1998. The Market Price
on July 23, 1998 was $99(1)/(8). The Market
Prices listed below were obtained from
Bloomberg Financial Markets and the Company
believes such information to be accurate.
The historical prices of Cisco Stock should
not be taken as an indication of future
performance, and no assurance can be given
that the price of Cisco Stock will not
decrease so that the beneficial owners of the
Reset PERQS will receive at maturity shares
of Cisco Stock worth less than the principal
amount of the Reset PERQS. Nor can assurance
be given that the price of Cisco Stock will
increase above the Initial Cisco Price so
that at maturity the beneficial owners of the
Reset PERQS will receive an amount in excess
of the principal amount of the Reset PERQS.
Cisco High Low
----- ---- ---
(CUSIP #17275R102)
1995
First Quarter.................... 13 3/64 10 55/64
Second Quarter................... 17 19/64 12 7/8
Third Quarter.................... 24 3/64 16 51/64
Fourth Quarter................... 29 19/64 21 31/64
1996
First Quarter.................... 33 21/64 21 51/64
Second Quarter................... 38 11/64 29 35/64
Third Quarter.................... 42 1/4 31 27/64
Fourth Quarter................... 45 3/4 38 27/64
1997
First Quarter.................... 49 59/64 31 27/64
Second Quarter................... 47 1/8 30 59/64
Third Quarter.................... 54 5/8 45 35/64
Fourth Quarter................... 60 19/64 48 35/64
1998
First Quarter.................... 69 9/16 54 1/4
Second Quarter................... 92 1/16 66 1/2
Third Quarter
(through July 23, 1998)........ 103 3/16 92 5/8
Historical prices have been adjusted for a 2
for 1 stock split of Cisco stock, which
became effective in the first quarter of 1996
and a 3 for 2 stock split of Cisco stock
which became effective in the fourth quarter
of 1997.
Cisco has not paid cash dividends on the
Cisco Stock to date. The Company makes no
representation as to the amount of dividends,
if any, that Cisco will pay in the future.
In any event, holders of the Reset PERQS will
not be entitled to receive dividends, if any,
that may be payable on Cisco Stock.
Use of Proceeds and Hedging... The net proceeds to be received by the
Company from the sale of the Reset PERQS will
be used for general corporate purposes and, in
part, by the Company or one or more of its
affiliates in connection with hedging the
Company's obligations under the Reset PERQS.
See also "Use of Proceeds" in the
accompanying Prospectus.
On the date of this Pricing Supplement, the
Company, through its subsidiaries or others,
hedged its anticipated exposure in connection
with the Reset PERQS by taking positions in
Cisco Stock. Purchase activity could
potentially have increased the price of Cisco
Stock, and therefore effectively have
increased the level to which Cisco Stock must
rise before a holder of a Reset PERQS would
receive at maturity an amount of Cisco Stock
worth as much as or more than the principal
amount of the Reset PERQS. The Company,
through its subsidiaries, is likely to modify
its hedge position throughout the life of the
Reset PERQS, including on the First Year
Determination Date, by purchasing and selling
Cisco Stock, options on Cisco Stock listed on
major securities markets or positions in any
other instruments that it may wish to use in
connection with such hedging. Although the
Company has no reason to believe that its
hedging activity had or will have a material
impact on the price of Cisco Stock, there can
be no assurance that the Company did not, or
in the future will not, affect such price as
a result of its hedging activities.
United States Federal Income
Taxation..................... The following summary is based on the
advice of Davis Polk & Wardwell, special tax
counsel to the Company ("Tax Counsel"), and
is a general discussion of the principal
potential United States federal income tax
consequences to holders who are initial
holders of the Reset PERQS purchasing the
Reset PERQS at the first price to the public
at which a substantial amount of the Reset
PERQS is sold for money (the "Issue Price"),
and who will hold the Reset PERQS as capital
assets within the meaning of Section 1221 of
the Internal Revenue Code of 1986, as amended
(the "Code"). This summary is based on the
Code, administrative pronouncements, judicial
decisions and existing and proposed Treasury
Regulations, changes to any of which
subsequent to the date of this Pricing
Supplement may affect the tax consequences
described herein. This summary does not
address all aspects of the United States
federal income taxation that may be relevant
to a particular holder in light of its
individual circumstances or to certain types
of holders subject to special treatment under
the United States federal income tax laws
(e.g., certain financial institutions,
tax-exempt organizations, dealers in options
or securities, or persons who hold a Reset
PERQS as a part of a hedging transaction,
straddle, conversion or other integrated
transaction). As the law applicable to the
United States federal income taxation of
instruments such as the Reset PERQS is
technical and complex, the discussion below
necessarily represents only a general
summary. Moreover, the effect of any
applicable state, local or foreign tax laws
is not discussed.
General
Pursuant to the terms of the Reset PERQS, the
Company and every holder of a Reset PERQS
agree (in the absence of an administrative
determination or judicial ruling to the
contrary) to characterize a Reset PERQS for
all tax purposes as an investment unit
consisting of the following components (the
"Components"): (i) a deposit with the Company
of an amount of cash to secure the holder's
obligation to purchase the Cisco Stock (the
"Deposit"), which Deposit provides for
quarterly interest payments (the "Deposit
Interest Payments") at a rate of 5.92% per
annum, and (ii) a contract (the "Forward
Contract") that requires the holder of the
Reset PERQS to purchase, and the Company to
sell, for an amount equal to $99.125 (the
"Forward Price"), the Cisco Stock at maturity
(or, alternatively, upon an earlier
redemption of the Reset PERQS). Based on the
Company's determination of the relative fair
market values of the Components at the time
of issuance of the Reset PERQS, the Company
will allocate 100% of the Issue Price of the
Reset PERQS to the Deposit and none to the
Forward Contract. The Company's allocation
of the Issue Price among the Components will
be binding on a holder of the Reset PERQS,
unless such holder timely and explicitly
discloses to the Internal Revenue Service
(the "IRS") that its allocation is different
from the Company's. The treatment of the
Reset PERQS described above and the Company's
allocation are not, however, binding on the
IRS or the courts. No statutory, judicial or
administrative authority directly addresses
the characterization of the Reset PERQS or
instruments similar to the Reset PERQS for
United States federal income tax purposes,
and no ruling is being requested from the IRS
with respect to the Reset PERQS. DUE TO THE
ABSENCE OF AUTHORITIES THAT DIRECTLY ADDRESS
INSTRUMENTS THAT ARE SIMILAR TO THE RESET
PERQS, TAX COUNSEL IS UNABLE TO RENDER AN
OPINION AS TO THE PROPER UNITED STATES FEDERAL
INCOME TAX CHARACTERIZATION OF THE RESET
PERQS. AS A RESULT, SIGNIFICANT ASPECTS OF
THE UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES OF AN INVESTMENT IN THE RESET
PERQS ARE NOT CERTAIN, AND NO ASSURANCE CAN BE
GIVEN THAT THE IRS OR THE COURTS WILL AGREE
WITH THE CHARACTERIZATION DESCRIBED ABOVE.
ACCORDINGLY, PROSPECTIVE PURCHASERS ARE URGED
TO CONSULT THEIR TAX ADVISORS REGARDING THE
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
OF AN INVESTMENT IN THE RESET PERQS
(INCLUDING ALTERNATIVE CHARACTERIZATIONS OF
THE RESET PERQS) AND WITH RESPECT TO ANY TAX
CONSEQUENCES ARISING UNDER THE LAWS OF ANY
STATE, LOCAL OR FOREIGN TAXING JURISDICTION.
UNLESS OTHERWISE STATED, THE FOLLOWING
DISCUSSIONS ARE BASED ON THE ASSUMPTION THAT
THE TREATMENT AND THE ALLOCATION DESCRIBED
ABOVE ARE ACCEPTED FOR UNITED STATES FEDERAL
INCOME TAX PURPOSES.
U.S. Holders
As used herein, the term "U.S. Holder" means
an owner of a Reset PERQS that is, for U.S.
federal income tax purposes, (i) a citizen or
resident of the United States, (ii) a
corporation created or organized under the
laws of the United States or any political
subdivision thereof or (iii) an estate or
trust the income of which is subject to
United States federal income taxation
regardless of its source.
Tax Treatment of the Reset PERQS
Assuming the characterization of the Reset
PERQS and the allocation of the Issue Price
as set forth above, Tax Counsel believes that
the following United States federal income
tax consequences should result.
Deposit Interest Payment. The Deposit
Interest Payment will generally be taxable to
a U.S. Holder as ordinary income at the time
it accrues or is received in accordance with
the U.S. Holder's method of accounting for
United States federal income tax purposes.
Tax Basis. Based on the Company's
determination set forth above, the U.S.
Holder's tax basis in the Forward Contract
will be zero, and the U.S. Holder's tax basis
in the Deposit would be 100% of the Issue
Price.
Settlement of the Forward Contract. Upon the
maturity of the Forward Contract, a U.S.
Holder would, pursuant to the Forward
Contract, be deemed to have applied the
Forward Price (which would equal the Issue
Price) toward the purchase of Cisco Stock,
and a U.S. Holder would not recognize any
gain or loss with respect to any Cisco Stock
received thereon. With respect to any cash
received upon maturity, a U.S. Holder would
recognize gain or loss. The amount of such
gain or loss would be the extent to which the
amount of such cash received differs from the
pro rata portion of the Forward Price
allocable to the cash. Any such gain or loss
would generally be capital gain or loss, as
the case may be. With respect to any Cisco
Stock received upon maturity, the U.S. Holder
would have an adjusted tax basis in such
Cisco Stock equal to the pro rata portion of
the Forward Price allocable thereto. The
allocation of the Forward Price between cash
and Cisco Stock should be based on the amount
of the cash received and the relative fair
market value, as of the maturity, of the
Cisco Stock. The U.S. Holder's holding
period of any Cisco Stock received would
start on the day after the maturity of the
Reset PERQS.
Sale or Exchange of the Components. Upon a
sale or exchange of a Reset PERQS prior to
the maturity of the Reset PERQS, a U.S.
Holder would recognize taxable gain or loss
equal to the difference between the amount
realized on such sale or exchange and such
U.S. Holder's tax basis in the Components so
sold or exchanged. Any such gain or loss
would generally be capital gain or loss, as
the case may be. For these purposes, the
amount realized does not include any amount
attributable to accrued but unpaid Deposit
Interest, which would be taxed as described
under "--Deposit Interest Payment" above.
Possible Alternative Tax Treatments of an
Investment in the Reset PERQS
Due to the absence of authorities that
directly address the proper characterization
of the Reset PERQS, no assurance can be given
that the IRS will accept, or that a court
will uphold, the characterization and tax
treatment described above. In particular,
the IRS could seek to analyze the United
States federal income tax consequences of
owning a Reset PERQS under Treasury
regulations governing contingent payment debt
instruments (the "Contingent Payment
Regulations").
The Company will take the position that the
Contingent Payment Regulations do not apply
to the Reset PERQS. If the IRS were
successful in asserting that the Contingent
Payment Regulations applied to the Reset
PERQS, the timing and character of income
thereon would be significantly affected.
Among other things, a U.S. Holder would be
required to accrue as original issue discount
income, subject to the adjustments described
below, at a "comparable yield" on the Issue
Price, which may be higher or lower than the
Deposit Interest. In addition, the
Contingent Payment Regulations require that a
projected payment schedule, which must result
in such a "comparable yield," be determined,
and that adjustments to income accruals be
made to account for differences between
actual payments and projected amounts.
Furthermore, any gain realized with respect
to the Reset PERQS will generally be treated
as ordinary income, and any loss realized
will generally be treated as ordinary loss to
the extent of the U.S. Holder's prior
ordinary income inclusion (which were not
previously reversed) with respect to the
Reset PERQS.
Even if the Contingent Payment Regulations do
not apply to the Reset PERQS, other
alternative United States federal income
characterizations or treatments of the Reset
PERQS are also possible, which may also
affect the timing and the character of the
income or loss with respect to the Reset
PERQS. It is possible, for example, that a
Reset PERQS could be treated as constituting
a pre-paid forward contract. Accordingly,
prospective purchasers are urged to consult
their tax advisors regarding the United
States federal income tax consequences of an
investment in the Reset PERQS.
Proposed Legislation
On February 4, 1998, Representative Barbara
Kennelly released H.R. 3170 (the "Kennelly
Bill"), which, if enacted, would treat a
taxpayer owning certain types of derivative
positions in property as having "constructive
ownership" in that property, with the result
that all or a portion of the long term
capital gain recognized by such taxpayer with
respect to the derivative position would be
recharacterized as short term capital gain.
It is unclear whether, if enacted in its
present form, the Kennelly Bill would apply
to a Reset PERQS. If the Kennelly Bill were
to apply to a Reset PERQS, the effect on a
U.S. Holder of a Reset PERQS would be to
treat any long term capital gain recognized
by such U.S. Holder on sale or exchange of the
Reset PERQS attributable to the Forward
Contract as short term capital gain, but only
to the extent such long term capital gain
exceeds the long term capital gain that would
have been recognized by such U.S. Holder if
the U.S. Holder had acquired Cisco Stock
itself on the issue date of the Reset PERQS
and disposed of the Cisco Stock upon
disposition of the Reset PERQS. In addition,
the Kennelly Bill would impose an interest
charge on the gain that was recharacterized
on the sale or exchange of the Reset PERQS.
As proposed, the Kennelly Bill would be
effective for gains recognized after the date
of enactment. U.S. Holders should consult
their tax advisors regarding the potential
application of the Kennelly Bill to the
purchase, ownership and disposition of a
Reset PERQS.
Backup Withholding and Information Reporting
A U.S. Holder of a Reset PERQS may be subject
to information reporting and to backup
withholding at a rate of 31 percent of the
amounts paid to the U.S. Holder, unless such
U.S. Holder provides proof of an applicable
exemption or a correct taxpayer identification
number, and otherwise complies with
applicable requirements of the backup
withholding rules. The amounts withheld
under the backup withholding rules are not an
additional tax and may be refunded, or
credited against the U.S. Holder's United
States federal income tax liability, provided
the required information is furnished to the
IRS.
HYPOTHETICAL PAYMENTS ON THE RESET PERQS
Based on an Initial Cisco Price of $99.125, a First Year Cap
Price of $123.91 and a Second Year Cap Price equal to the greater of (x) 125%
of the First Year Closing Price and (y) the First Year Cap Price, the
following table illustrates, for a range of First Year Closing Prices and
Maturity Prices, the consequent adjustments to the Exchange Ratio, Second Year
Cap Prices, the Payments at Maturity Based on Cisco Stock for each $99.125 per
principal amount of Reset PERQS and the total return including interest
payments, based on an interest rate of 6.0% per annum, for each $99.125 per
principal amount of Reset PERQS.
<TABLE>
<CAPTION>
Initial 7/30/1999
Initial Cisco Exchange First Year Cap First Year Adjusted Second Year Cap
Price Ratio Price Closing Price Exchange Ratio Price
- ------------- -------- -------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
$99.125 1 $123.91 $150.00 0.82607 $187.5000
$99.125 1 $123.91 $130.00 0.95315 $162.5000
$99.125 1 $123.91 $ 90.00 1.00000 $123.9100
$99.125 1 $123.91 $125.00 0.99128 $156.2500
$99.125 1 $123.91 $ 95.00 1.00000 $123.9100
$99.125 1 $123.91 $120.00 1.00000 $150.0000
$99.125 1 $123.91 $ 75.00 1.00000 $123.9100
$99.125 1 $123.91 $150.00 0.82607 $187.5000
$99.125 1 $123.91 $115.00 1.00000 $143.7500
$99.125 1 $123.91 $200.00 0.61955 $250.0000
125% of Greater of (x)
Initial Cisco 125% of First
Price Year Closing
Price and (y)
First Year Cap
Price
<CAPTION>
Payment at
Reset PERQS Maturity plus
7/31/2000 Payment at 6.0% interest
Initial Cisco Adjusted Maturity Based payment ("Total
Price Maturity Price Exchange Ratio on Cisco Stock Payment")
- ------------- -------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
$99.125 $200.00 0.77444 $154.89 $166.79
$99.125 $160.00 0.95315 $152.50 $164.40
$99.125 $125.00 0.99128 $123.91 $135.81
$99.125 $185.00 0.83723 $154.89 $166.79
$99.125 $150.00 0.82607 $123.91 $135.81
$99.125 $115.00 1.00000 $115.00 $126.90
$99.125 $130.00 0.95315 $123.91 $135.81
$99.125 $115.00 0.82607 $ 95.00 $106.90
$99.125 $ 75.00 1.00000 $ 75.00 $ 86.90
$99.125 $ 45.00 0.61955 $ 27.88 $ 39.78
Maturity Price
times Adjusted
Exchange
Ratio
</TABLE>
