SUBJECT TO COMPLETION, DATED OCTOBER 22, 1997
PRELIMINARY PRICING SUPPLEMENT
PRICING SUPPLEMENT NO. 4
dated
October , 1997
to the
Prospectus
dated
December 28, 1995
and
Prospectus Supplement
dated
January 3, 1996
------------------------
[ ]
GS FINANCIAL PRODUCTS U.S., L.P.
MEDIUM-TERM NOTES, SERIES B
-----------------
6% MANDATORILY EXCHANGEABLE NOTES
DUE NOVEMBER [ ], 1999
(SUBJECT TO MANDATORY EXCHANGE INTO SHARES OF
COMMON STOCK OF COMPAQ COMPUTER CORPORATION.)
-----------------
AN INVESTMENT IN THE NOTES TO WHICH THIS PRICING SUPPLEMENT RELATES
PRESENTS CERTAIN RISKS THAT SHOULD BE CAREFULLY CONSIDERED BY INVESTORS.
SEE "RISK FACTORS" BEGINNING ON PAGE 10. THE NOTES TO WHICH THIS
PRICING SUPPLEMENT RELATES ARE NOT PRINCIPAL PROTECTED AND, ACCORDINGLY,
INVESTORS IN THE NOTES MAY LOSE THEIR ENTIRE INVESTMENT.
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<PAGE>
See "RISK FACTORS" IN THIS PRICING SUPPLEMENT AND "CERTAIN FACTORS" AND
"RISKS RELATED TO INDEXED SECURITIES" IN THE ACCOMPANYING PROSPECTUS, DATED
DECEMBER 28, 1995 (THE "PROSPECTUS"), FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY POTENTIAL INVESTORS IN THE NOTES, INCLUDING THAT THE
VALUE AND/OR THE NUMBER OF SHARES DELIVERED IN EXCHANGE FOR THE NOTES WILL
DEPEND UPON FLUCTUATIONS IN THE VALUE OF THE COMMON STOCK, PAR VALUE $0.01 PER
SHARE (THE "COMMON STOCK"), OF COMPAQ COMPUTER CORPORATION ("COMPAQ").
CAPITALIZED TERMS USED HEREIN BUT NOT OTHERWISE DEFINED SHALL HAVE THE MEANINGS
ASSIGNED TO THEM IN THE PROSPECTUS OR THE PROSPECTUS SUPPLEMENT, DATED JANUARY
3, 1996.
THE FOLLOWING SUMMARY OF CERTAIN TERMS OF THE NOTES IS SUBJECT TO THE MORE
DETAILED TERMS OF THE NOTES INCLUDED ELSEWHERE IN THIS PRICING SUPPLEMENT.
Issuer: GS Financial Products U.S., L.P.
Securities Offered: 6% Mandatorily Exchangeable Notes due
November O, 1999 (Subject to Mandatory
Exchange into Shares of Common Stock of
Compaq Computer Corporation) (the "Notes").
The Notes are a series of the Issuer's
Medium-Term Notes, Series B.
Face Amount or Initial Price: $[ |X| ] per Note.
Issue Price: [100] % of the Face Amount.
Denominations: $[ |X| ], equal to [|X|] Notes or any
integral multiple thereof (i.e., each
beneficial owner of the Notes must own and
trade in integral multiples of [|X|] Notes,
having an aggregate face amount of
approximately $100,000).
Common Stock: Common Stock, par value $0.01 per share, of
Compaq Computer Corporation.
Trade Date: October |X|, 1997.
Settlement Date: November |X|, 1997
Stated Maturity Date: November [|X|], 1999 (subject to extension as
herein described, the "Maturity Date") or, if
not a Business Day, the next succeeding
Business Day; provided,
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however, that if the fifth Business Day
immediately preceding November [|X|], 1999
(or if such day is not a Business Day, the
next succeeding Business Day) is not the
Determination Date, the Maturity Date will be
the fifth Business Day following the
Determination Date; provided, further,
however, that in no event will the Maturity
Date be later than November |X|, 1999.
Interest Rate: 6% per annum (equivalent to $____ per annum
per Note) from and including the Settlement
Date to but excluding the Maturity Date.
Interest Payment Dates: February |X|, May |X| August |X| and November
|X| of each year and on the Maturity Date,
commencing February |X|,1998, or, if any such
day is not a Business Day, the next
succeeding Business Day. See "Description of
Notes--Interest".
Cap Rate: [1.57 TO 1.59]
Threshold Appreciation Price: The product of the Cap Rate and the Initial
Price.
Principal Amount and On the Maturity Date, the Face Amount of each
Mandatory Exchange at Maturity: Note will be mandatorily exchanged for Common
Stock at the Exchange Rate (the "Principal
Amount"). The "Exchange Rate" is equal to (i)
if the Final Closing Price per share of
Common Stock is greater than or equal to the
Threshold Appreciation Price, a number of
shares of Common Stock per Note equal to the
product of (A) the Cap Rate and (B) the
quotient of the Initial Price of such Note
and the Final Closing Price, and (ii) if the
Final Closing Price is less than the
Threshold Appreciation Price, one share of
Common Stock per Note. See "Description of
Notes--Principal Amount and Mandatory
Exchange at Maturity". The Exchange Rate is
subject to adjustment as a result of certain
dilution events, and an investor may receive
cash on the Maturity Date upon the occurrence
of certain events. See
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<PAGE>
"Description of Notes--Anti-Dilution
Adjustments."
Determination Date: The fifth Business Day immediately preceding
the Stated Maturity Date, provided, however,
that if a Market Disruption Event (as defined
under "Description of Notes--Definitions")
has occurred on such Business Day, the
Determination Date will be the first
following Business Day on which a Market
Disruption Event has not occurred, but in no
event later than the fifth Business Day
immediately preceding November [|X|], 1999.
Final Closing Price: The Closing Price of the Common Stock on the
Determination Date. Depending upon the
offering size, the Final Closing Price may be
based on an average of the Closing Prices
over a specified period.
Specified Currency -
Principal and Interest: U.S. Dollars
Events of Default and The Principal Amount payable upon an
Acceleration: acceleration of the Notes prior to the
Determination Date is described under
"Description of Notes--Events of Default and
Acceleration; Default Amount".
Defeasance: The provisions described in the Prospectus
under "Description of Notes--Defeasance and
Covenant Defeasance" do not apply to the
Notes.
Tax Considerations: Pursuant to the terms of the Indenture, the
Issuer and every holder of Notes will be
obligated (in the absence of an
administrative determination or judicial
ruling to the contrary) to characterize the
Notes for all tax purposes as a forward
contract to purchase shares of Common Stock
on the Maturity Date, under the terms of
which contract a holder will irrevocably
deposit with the Issuer an amount of cash
equal to the purchase price of the Notes to
assure fulfillment of the holder's purchase
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<PAGE>
obligation. See "United States Federal Income
Tax Considerations".
Redemption: The Notes are redeemable, in whole and not in
part, at the option of the Issuer, if the
Issuer has determined that it will no longer
maintain its public registrant status with
the Securities and Exchange Commission (the
"Commission"). The amount payable upon any
such redemption will be 105% of the average
of the Closing Values (as defined under
"Description of Notes--Redemption of Notes")
of the Notes on the 10 trading days
immediately preceding the date of the mailing
of the notice of redemption, together with
any accrued and unpaid interest up to but not
including the Redemption Date. See
"Description of Notes--Redemption".
Calculation Agent: Goldman, Sachs & Co ("GS&Co."). The
Calculation Agent is an affiliate of the
Issuer, and will have no liability to the
Issuer or any holder of the Notes for any
action taken or omitted to be taken by it as
Calculation Agent in good faith. See "Risk
Factors--Discretion of GS&Co. as Calculation
Agent" for a discussion of certain conflicts
of interest that may arise with respect to
GS&Co.'s responsibilities as Calculation
Agent.
Form of Note: Global Note.
Commission: None. The Issuer will pay GS&Co. a fee of
$[O] pursuant to the Origination Agreement
between the Issuer and GS&Co., which is
described in the Issuer's Annual Report on
Form 10-K for the fiscal year ended November
29, 1996. See "Incorporation of Certain
Documents by Reference" in the Prospectus.
Net Proceeds to the Issuer: [100]% of the Face Amount.
Use of Proceeds: The Issuer expects to use all of the proceeds
from the issuance of the Notes to purchase
shares of Common Stock (although the Issuer
will not be
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required to retain such Common Stock). The
Issuer will also write over-the-counter call
options and enter into interest rate swaps
with GS&Co. or Goldman Sachs Capital Markets,
L.P. ("GSCM"), an affiliate of the Issuer.
Any remaining proceeds from the offering of
the Notes, together with the premium received
from the writing of the call options, will be
added to the Issuer's working capital to
support its Derivative Transaction
activities. See "Use of Proceeds and Hedging"
in this Pricing Supplement and "Use of
Proceeds" in the Prospectus.
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<PAGE>
HYPOTHETICAL RETURNS OF THE NOTES
The table below compares the total return to the Stated Maturity Date
of owning Common Stock (which trades on the New York Stock Exchange, Inc. (the
"NYSE")) to the total return of owning Notes assuming an Initial Price of
$73.875, a Threshold Appreciation Price of $116.7225 and a Cap Rate of 1.58. It
should be noted that the total return on the Notes will never exceed 70%.
THE FOLLOWING TABLE IS PROVIDED FOR PURPOSES OF ILLUSTRATION ONLY. IT
SHOULD NOT BE TAKEN AS AN INDICATION OR PREDICTION OF FUTURE INVESTMENT RESULTS,
AND IS MERELY INTENDED TO ILLUSTRATE THE IMPACT OF VARIOUS ASSUMED COMMON STOCK
PRICES AT THE END OF THE INDICATED PERIOD ON THE PRICE OF THE NOTES, ASSUMING
ALL OTHER VARIABLES ARE HELD CONSTANT.
ASSUMPTIONS: Common Stock Price on Trade Date in Dollars $73.875
Assumed Common Stock Dividend Yield 0.16%
Initial Price $73.875
Cap Rate 1.58
Threshold Appreciation Price $116.7225
No exercise by Issuer of
Redemption right.
No antidilution adjustments.
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<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
AT STATED MATURITY DATE
- ---------------------------------------------------------------------------------------------------------------
COMMON STOCK NOTES
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSUMED
COMMON STOCK
ASSUMED PRICE AT STATED
COMMON(1) MATURITY DATE NUMBER OF
STOCK PRICE AS % OF PRICE TOTAL VALUE OF SHARES OF
AT STATED OF COMMON RETURN(2) OF NOTE TOTAL COMMON
MATURITY STOCK ON COMMON (PRINCIPAL RETURN(2)OF STOCK PER
DATE TRADE DATE STOCK PAYMENT)(3) NOTES NOTE
- ---------------------------------------------------------------------------------------------------------------
$147.750 200.00% 100.32% $116.72 70.00% 0.7900
140.362 190.00 90.32 116.72 70.00 0.8316
132.975 180.00 80.32 116.72 70.00 0.8778
125.587 170.00 70.32 116.72 70.00 0.9294
118.200 160.00 60.32 116.72 70.00 0.9875
110.812 150.00 50.32 110.81 62.00 1.0000
103.425 140.00 40.32 103.43 52.00 1.0000
96.037 130.00 30.32 96.04 42.00 1.0000
88.650 120.00 20.32 88.65 32.00 1.0000
81.262 110.00 10.32 81.26 22.00 1.0000
- ---------------------------------------------------------------------------------------------------------------
73.875 100.00 0.32 73.88 12.00 1.0000
- ---------------------------------------------------------------------------------------------------------------
66.487 90.00 -9.68 66.49 2.00 1.0000
59.100 80.00 -19.68 59.10 -8.00 1.0000
51.712 70.00 -29.68 51.71 -18.00 1.0000
44.325 60.00 -39.68 44.33 -28.00 1.0000
36.937 50.00 -49.68 36.94 -38.00 1.0000
29.550 40.00 -59.68 29.55 -48.00 1.0000
22.162 30.00 -69.68 22.16 -58.00 1.0000
14.775 20.00 -79.68 14.78 -68.00 1.0000
7.387 10.00 -89.68 7.39 -78.00 1.0000
0.000 0.00 -99.68 0.00 -88.00 1.0000
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Assumes Common Stock price is unchanged from the Determination Date until
the Maturity Date.
(2) Total Return represents the percentage change in the price of the Common
Stock and the Notes, respectively, over a two-year period. The total
return calculation uses the value of such security at the end of the
specified period and includes any dividends or interest paid on such
security over the specified period but does not assume the reinvestment
thereof.
(3) There can be no assurance that the Notes will trade prior to the Maturity
Date at the price bearing that relationship to the price of the Common
Stock.
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<PAGE>
THE ISSUER
The Issuer was formed as a Cayman Islands exempted limited partnership
on February 5, 1992. All the partnership interests in the Issuer are owned by
subsidiaries of The Goldman Sachs Group, L.P. ("Group").
The Issuer is a derivative products company engaged in the business of
entering into, as principal or guarantor, a variety of types of transactions,
principally interest rate swaps, interest rate options (e.g., interest rate
caps, interest rate floors and options on interest rate swaps), currency swaps
and options, commodity swaps and options, index swaps and forward contracts
(collectively, "Derivative Transactions"). Generally, the Issuer enters into or
guarantees Derivative Transactions in situations where two or more
counterparties (typically including a related party) wish to enter into one or
more Derivative Transactions between themselves, but want the Issuer to
substitute its credit for that of one or more of the counterparties. Market
practice for such transactions is that the Issuer typically substitutes its own
credit for that of one or more of the counterparties by entering into each of
such transactions directly as principal.
Because of the nature of its business, the Issuer does not intend to
incur any payment or delivery obligation unless it is entitled to receive an
equal or greater payment or delivery from one or more third parties (which may
be affiliates of Group). In general, the Issuer refers to transactions where all
of the payment obligations or delivery obligations can be met from cash flows or
delivery obligations from one or more other transactions in its portfolio as
being "hedged", and as not having "market risk".
At August 29, 1997, the Issuer had entered into or guaranteed $23
billion notional amount of interest rate swaps and options, $8 billion notional
amount of currency options, forwards and swaps and $0.05 billion notional amount
of other swaps and options with a total of 77 counterparties. As of August 29,
1997, the Issuer had partners' capital of approximately $146 million, which
exceeded the Issuer's exposure to any single obligor.
See "Certain Factors--Credit Risk" in the Prospectus.
The Issuer is not registered as a "broker-dealer" under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or as an "investment
company" under the Investment Company Act of 1940, as amended.
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<PAGE>
RISK FACTORS
Prior to making an investment decision with respect to the Notes,
potential investors are urged to consider those factors presented below and in
the Prospectus under "Certain Factors" and "Risks Relating to Indexed
Securities".
PAYMENT AT MATURITY; LACK OF PRINCIPAL PROTECTION; LIMITED APPRECIATION
The terms of the Notes differ from those of ordinary debt securities in
that the Face Amount of the Notes are mandatorily exchangeable for shares of
Common Stock and the value of the Common Stock that Holders will receive at the
Maturity Date is not fixed, but is based on the price of the Common Stock. See
"Description of Notes --Principal Amount and Mandatory Exchange at Maturity".
There can be no assurance that the value of the Common Stock received by the
Holders upon exchange will be equal to or greater than the Face Amount of the
Notes because the price of the Common Stock is subject to market fluctuations.
The Notes are not principal protected and, accordingly, investors in the Notes
may lose their entire investment.
As described below under "Description of Notes--Principal Amount and
Mandatory Exchange at Maturity", a Holder of a Note will be entitled to receive
a number of shares of Common Stock (or fractional number) on the Maturity Date
at the Exchange Rate. The "Exchange Rate" is equal to, subject to adjustment as
a result of certain dilution events, (i) if the Final Closing Price per share of
Common Stock is greater than or equal to the Threshold Appreciation Price, a
number of shares of Common Stock per Note equal to the product of (A) the Cap
Rate and (B) the quotient of the Initial Price and the Final Closing Price, and
(ii) if the Final Closing Price is less than the Threshold Appreciation Price,
one share of Common Stock per Note.
The ability of the Holders of the Notes to participate in the
appreciation of the Common Stock is limited. For example, if the Final Closing
Price exceeds the Threshold Appreciation Price, a Holder will receive a fraction
of a share of Common Stock per Note. The Notes are structured so that in no
event will a Holder of Notes receive cash, property or securities (valued as of
the Determination Date) in excess of $ [ O ] per Note.
The Exchange Rate is subject to adjustment as a result of certain
dilution events, as described under "Description of Notes--Anti-Dilution
Adjustments".
Any amount payable on a Note will be independent of any returns on the
securities transactions discussed under "--Effect of Trading and Other
Transactions by the Issuer in the Common Stock" below. Therefore, it is possible
that affiliates of the Issuer could realize significant gains on their hedging
transactions during the period the Notes are outstanding, but that a Holder
of a Note may lose all or a portion of his or her investment.
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If a bankruptcy proceeding is commenced in respect of the Issuer, the
claim of the holder of a Note may, under Section 502(b)(2) of Title 11 of the
United States Code, be less than the amount of the Note that would be due if the
Stated Maturity Date of the Notes were the date of the commencement of the
proceeding.
RELATIONSHIP OF NOTES AND THE COMMON STOCK
The market price of the Notes is expected to be affected principally by
changes in the price of the Common Stock, interest rates and estimates of future
volatility in the Common Stock. As indicated under "Compaq Computer
Corporation--Historical Information", the price of the Common Stock has during
certain recent periods been highly volatile. It is impossible to predict whether
the price of the Common Stock will rise or fall. Trading prices of the Common
Stock will be influenced by the financial results and prospects of Compaq and by
complex and interrelated political, economic, financial and other factors that
can affect capital markets generally and the market segment of which the Common
Stock is a part. See "Compaq Computer Corporation" Further, prior to the
Maturity Date, the value of the Notes may not have a one-to-one relationship
with changes in price of the Common Stock.
Moreover, since the Exchange Rate is determined in relation to the
Final Closing Price on the Determination Date (which is five Business Days prior
to the Maturity Date) and the price of the Common Stock may fluctuate after the
Determination Date and prior to the Maturity Date, the value of any Common Stock
delivered may be less than the value of such Common Stock on the Determination
Date.
EFFECT OF TRADING AND OTHER TRANSACTIONS BY THE ISSUER IN THE COMMON STOCK
As described under "Use of Proceeds and Hedging," the Issuer will hedge
its obligations under the Notes by acquiring shares of Common Stock, writing
over-the-counter call options on the Common Stock and entering into interest
rate swaps with GS&Co. and/or GSCM. It is anticipated that GS&Co. will hedge its
obligations under the call options from time to time by (i) acquiring, disposing
of or selling short the Common Stock or other securities of Compaq, (ii) taking
positions in or disposing of positions in listed or over-the-counter options on
the Common Stock and (iii) taking positions in or disposing of positions in
listed or over-the-counter options or other instruments based on broad market
indices or indices designed to track the performance of computer stocks.
Moreover, GS&Co. may liquidate its hedges, in whole or in part, on or prior to
the Determination Date or Maturity Date. Any of these activities may adversely
affect the value of the Notes and/or the Principal Amount payable on the
Maturity Date. It is possible that GS&Co. could receive substantial returns with
respect to its hedging activities while the value of the Notes may decline. See
"Use of Proceeds and Hedging"
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<PAGE>
for a further discussion of securities transactions that will be engaged in by
the Issuer and may be engaged in by GS&Co.
GS&Co. and other affiliates of the Issuer may also engage in trading in
the Common Stock for their proprietary accounts, for other accounts under their
management and to facilitate transactions (including block transactions) on
behalf of customers. GS&Co. and other affiliates of the Issuer may also issue or
underwrite other securities or financial instruments with returns indexed to
changes in the value of the Common Stock. Trading in the Common Stock by GS&Co.
and other affiliates of the Issuer and the issuance or underwriting of other
securities or financial instruments indexed to the value of the Common Stock
could adversely affect the value of the Notes.
The Indenture relating to the Notes does not contain any restriction on
the ability of the Issuer to sell, pledge or otherwise convey all or any portion
of the Common Stock to be acquired by it, and no shares of Common Stock will be
pledged or otherwise held in escrow for exchange on the Maturity Date.
Consequently, in the event of a bankruptcy, insolvency or liquidation of the
Issuer, any Common Stock owned by the Issuer will be subject to the claims of
the creditors of the Issuer.
NO RIGHTS AS STOCKHOLDERS
Holders of the Notes will not be entitled to any rights with respect to
the Common Stock (including, without limitation, voting rights and rights to
receive any dividends or other distributions in respect thereof) unless and
until such time, if any, as the Issuer has delivered shares of Common Stock on
the Maturity Date, and unless the applicable record date, if any, for the
exercise of such rights occurs after such date.
POTENTIAL CONFLICTS OF INTEREST
As discussed above under "--Effect of Trading and Other Transactions by
the Issuer in the Common Stock", GS&Co. and other affiliates of the Issuer
expect to engage in trading activities related to the Common Stock for their
proprietary accounts and to facilitate transactions (including block
transactions) for customers, and GS&Co. and other affiliates of the Issuer may
engage in trading for other accounts under their management. These trading
activities may present a conflict of interests between the interests of Holders
of the Notes and the interests GS&Co. and other affiliates of the Issuer will
have in their proprietary accounts, in the customer transactions and in accounts
under their management. These trading activities, if they influence the price of
the Common Stock, could be adverse to the interests of the Holders of the Notes.
GS&Co. and other affiliates of the Issuer may engage in business with
Compaq in the future, including extending loans to, or making equity investments
in, Compaq or
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providing advisory services to Compaq, including merger and acquisition advisory
services, and purchasing computers, software and related products from Compaq.
These activities may present a conflict between GS&Co.'s (or such other of the
Issuer's affiliate's) obligations to Compaq and the interests of Holders of the
Notes. Moreover, GS&Co. has published and anticipates that it will in the future
publish research reports with respect to Compaq. Any of these activities by
GS&Co. or another affiliate of the Issuer may affect the price of the Common
Stock and, therefore, could reduce the Principal Amount and/or the value of the
Notes.
As discussed under "--Effect of Trading and Other Transactions by the
Issuer in the Common Stock," GS&Co. may engage in transactions in the Common
Stock, other securities of Compaq and listed and over-the-counter options on the
Common Stock and various indices in order to hedge its option positions. These
activities may adversely affect the price of the Common Stock and the Notes, but
may result in a profit for GS&Co.
DISCRETION OF GS&CO. AS CALCULATION AGENT
GS&Co., as Calculation Agent, has discretion in making certain
determinations in connection with certain anti-dilution adjustments. See
"Description of Notes--Anti- Dilution Adjustments". The exercise of this
discretion by GS&Co. could adversely affect the value of the Notes and may
present conflicts of interest between GS&Co.'s activities as Calculation Agent
and GS&Co.'s activities for its proprietary accounts, in facilitating
transactions (including block transactions) for its customers and for accounts
under its management. GS&Co. is also responsible for calculating the amounts
payable upon redemption of the Notes, as described under "Description of
Notes--Redemption". See "--Potential Conflicts of Interest" above.
GS&Co. will have no liability to the Issuer or any holder of Notes for
any action taken or omitted to be taken by it as Calculation Agent in good
faith.
LACK OF AFFILIATION BETWEEN THE ISSUER AND COMPAQ; NO RESPONSIBILITY FOR COMPAQ
DISCLOSURE
The Issuer is not affiliated with Compaq and, as of the date of this
Pricing Supplement, does not have any material non-public information concerning
Compaq. The Issuer assumes no responsibility for the adequacy or accuracy of the
information contained in this Pricing Supplement with respect to Compaq or in
any of Compaq's publicly available filings. Investors in the Notes should make
their own investigation into Compaq. See "Compaq Computer Corporation".
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<PAGE>
Compaq is not involved in the offering of the Notes and has no
obligation with respect to the Notes, including any obligation to take the
interests of the Holders of the Notes into consideration for any reason. Compaq
will not receive any of the proceeds of the offering of the Notes made hereby
and is not responsible for, and has not participated in, the determination of
the timing of, prices for, or quantities of, the Notes offered hereby or the
determination or calculation of the amount to be paid to Holders of Notes at
maturity. Compaq is not involved with the administration, marketing or trading
of the Notes and has no obligations with respect to the amount to be paid to
Holders of the Notes.
POSSIBLE ILLIQUIDITY OF NOTES; SECONDARY TRADING IN THE NOTES
The Notes are a new issue of securities and it is impossible to predict
whether a secondary market for the Notes will develop or how the Notes will
trade in any market that does develop. The requirement that beneficial owners of
the Notes hold and trade in integral multiples of o Notes may also adversely
affect the development of a secondary market. The Issuer has been advised by GS
& Co. that it intends to make a market in the Notes but it is not obligated to
do so and any such market making may be discontinued at any time without notice.
DILUTION
The Exchange Rate is subject to adjustment for certain events arising
from stock splits and combinations, stock dividends and extraordinary cash
dividends and for certain other events that affect Compaq's capital structure.
See "Description of Notes--Anti- Dilution Adjustments" below. The Exchange Rate
will not be adjusted for other events, such as offerings of the Common Stock for
cash or an issuer tender or exchange offer at a premium to the then current
market price or a third party tender or exchange offer for less than all of the
outstanding shares of the Common Stock, that may adversely affect the price of
the Common Stock and, therefore, adversely affect the trading price of the Notes
and the amount of Common Stock to be exchanged on the Maturity Date. There can
be no assurance that Compaq will not make offerings of the Common Stock in the
future or effect an issuer tender or exchange offer or take any other action
which adversely affects the value of the Notes but does not result in an
anti-dilution adjustment.
REDEMPTION
The Notes are subject to redemption, at the option of the Issuer, if
the Issuer has determined it will no longer maintain its public registrant
status with the Commission, in whole but not in part, at 105% of the average of
the Closing Values of the Notes on the 10 trading days immediately preceding the
mailing of the notice of redemption, together
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with any accrued and unpaid interest up to but not including the Redemption
Date, unless such interest is reflected in the Closing Values. See "Description
of Notes-- Redemption".
UNCERTAINTY OF FEDERAL INCOME TAX CONSEQUENCES
Neither the Internal Revenue Service nor any court has decided how the
Notes or similar securities should be treated for United States federal income
tax purposes. As a result, significant aspects of their tax treatment are
uncertain. The Issuer will not ask the Internal Revenue Service to rule on how
the Notes should be treated. The Internal Revenue Service may disagree with the
description of tax consequences of owning the Notes that is described under
"United States Federal Income Tax Considerations".
DESCRIPTION OF NOTES
SEE "RISK FACTORS" IN THIS PRICING SUPPLEMENT AND "CERTAIN FACTORS" AND
"RISKS RELATING TO INDEXED SECURITIES" IN THE PROSPECTUS FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE NOTES.
The following description of the Notes offered hereby supplements and,
to the extent inconsistent therewith, supersedes the general terms and
provisions of the Notes set forth in the accompanying Prospectus, dated December
28, 1995 (the "Prospectus"), and the Prospectus Supplement, dated January 3,
1996 (the "Prospectus Supplement"). For purposes of the general description of
Notes set forth in the Prospectus and the Prospectus Supplement, the Notes
offered hereby constitute "Indexed Notes". All capitalized and undefined terms
used herein have the meanings assigned to them in the Prospectus or the
Prospectus Supplement.
GENERAL
The 6% Mandatorily Exchangeable Notes due 1999 (Subject to Mandatory
Exchange into Shares of Common Stock of Compaq Computer Corporation) (the
"Notes") will mature on November [O], 1999 (the "Stated Maturity Date"). The
Face Amount of each Note will be mandatorily exchanged on the Maturity Date for
shares of common stock, par value $0.01 per share (the "Common Stock"), of
Compaq Computer Corporation ("Compaq"). See "--Principal Amount and Mandatory
Exchange at Maturity" below.
The Notes will be issued in a face amount of $[O] (the "Face Amount")
per Note. Each beneficial owner of the Notes must own and trade in integral
multiples of o Notes. The Notes will be issued in the form of one or more Global
Notes as described under "Description of Notes--Book-Entry Notes" in the
Prospectus Supplement.
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Settlement for the Notes will be made in immediately available funds.
The Notes will trade in the Depositary's Same Day Funds Settlement System and
secondary market trading activity for the Notes will settle in immediately
available funds.
The Notes are subject to redemption, at the option of the Issuer, as
described under "--Redemption of Notes" below. The Notes are not repayable at
the option of the holder thereof and are not entitled to the benefits of a
sinking fund.
Solely for purposes of the aggregate principal amount of Notes required
for any consent, waiver, authorization or other action taken or to be taken by
holders of Notes pursuant to the Notes and the Indenture, the principal amount
of the Notes offered hereby will equal the Face Amount of the Notes.
The Specified Currency for the Notes is U.S. dollars.
GS&Co. will act as Calculation Agent with respect to the Notes. See
"Risk Factors--Potential Conflicts of Interest" and "--Discretion of GS&Co. as
Calculation Agent" in this Pricing Supplement.
PRINCIPAL AMOUNT AND MANDATORY EXCHANGE AT MATURITY
The Notes will mature on the Stated Maturity Date, subject to extension
as hereinafter described (such date of maturity herein referred to as the
"Maturity Date"). In the event that the Stated Maturity Date is not a Business
Day, the Maturity Date will be the next Business Day; provided, however, that if
the fifth Business Day immediately preceding November [|X|], 1999 (or if such
day is not a Business Day, the next succeeding Business Day) is not the
Determination Date, the Maturity Date will be the fifth Business Day following
the Determination Date, provided, further, however, that in no event will the
Maturity Date be later than November [|X|], 1999. The Issuer will promptly
notify each Holder of a Note of such extension of the Stated Maturity Date.
On the Maturity Date, the Face Amount of each Note will be mandatorily
exchanged for Common Stock at the Exchange Rate (the "Principal Amount"),
provided such Notes have not been redeemed by the Issuer as described under
"--Redemption of Notes" prior to the Maturity Date. In the event of a merger of
Compaq into another company, or the liquidation of Compaq, or certain related
events, Holders may, in lieu thereof (or in lieu of a portion thereof), receive
principal payments in cash. The "Exchange Rate" is equal to (i) if the Final
Closing Price per share of Common Stock is greater than or equal to the
Threshold Appreciation Price, a number of shares of Common Stock per Note equal
to the product of (A) the Cap Rate and (B) the quotient of the Initial Price of
a Note and the Final Closing Price, and (ii) if the Final Closing Price is less
than the Threshold Appreciation Price, one share of Common Stock per Note. The
Exchange Rate
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is subject to adjustment as a result of certain dilution events. See
"--Anti-Dilution Adjustments--Merger, Consolidation or Sale of Assets". Holders
of Notes otherwise entitled to receive fractional shares of Common Stock in
respect of their aggregate holdings of Notes will receive cash in lieu thereof
based on the Final Closing Price.
INTEREST
Interest will accrue on the Face Amount of the Notes at 6% per annum
from and including the Issue Date to but excluding the Maturity Date or, if
earlier, the Redemption Date. Interest on the Notes will be payable quarterly on
February |X|, May |X|, August |X| and November |X| in each year and on the
Maturity Date, commencing on February [O],1988 or if any such day is not a
Business Day, the next succeeding Business Day (each, an "Interest Payment
Date"). The Regular Record Date with respect to any Interest Payment Date will
be the February [O], May [O], August [O], or November [O], whether or not a
Business Day, as the case may be, immediately preceding such Interest Payment
Date. If the Stated Maturity Date is extended (as described above under
"--Principal Amount and Mandatory Exchange at Maturity"), interest will not be
paid on the Stated Maturity Date and will continue to accrue on the Face Amount
of the Notes at 6% per annum to but excluding the Maturity Date and will be
payable on the Maturity Date. Interest will be calculated on the basis of a
360-day year consisting of twelve 30-day months.
ANTI-DILUTION ADJUSTMENTS
GENERAL
The Exchange Rate will be subject to adjustment by the Calculation
Agent as described below to the extent that any of the events requiring such
adjustment occur during the period commencing on the date of this Pricing
Supplement and ending on the Determination Date. No adjustments to the Exchange
Rate will be made other than those specified below. Such adjustments do not
cover all events that could affect the Exchange Rate, including, without
limitation, an issuer tender or exchange offer at a premium to the market price
or a third party tender or exchange offer for less than all of the outstanding
shares of Common Stock. See "Risk Factors--Dilution".
No adjustments to the Exchange Rate will be required unless such
adjustment would require a change of at least 0.1% in the Exchange Rate. The
Exchange Rate resulting from any of the adjustments specified below will be
rounded to the nearest one thousandth with five ten-thousandths being rounded
upward.
All determinations made by the Calculation Agent will be at the sole
discretion of the Calculation Agent and, in the absence of manifest error, will
be conclusive for all
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purposes and binding on the Issuer and the Holders of Notes, and the Calculation
Agent will have no liability therefor. The Calculation Agent will provide
information as to any adjustments to the Exchange Rate upon written request by
any Holder of the Notes.
In the case of any adjustment to the Exchange Rate as a result of an
event described under "--Stock Splits", "--Stock Dividends", "--Dividends and
Other Distributions" or "--Rights and Warrants", the Final Closing Price shall
be adjusted in
the same manner.
For purposes of clarity, it is intended that the adjustments for stock
splits, reverse stock splits, stock dividends, cash dividends and other
distributions described below are meant to apply only if such events actually
occur, as often as they occur.
STOCK SPLITS
If the Common Stock is subject to a stock split or reverse stock split,
then at the opening of business on the first day on which the Common Stock
trades without the right to receive such stock split (the "ex-dividend date"),
the Exchange Rate will be adjusted by multiplying such Exchange Rate by a
fraction, the numerator of which will be the number of shares of the Common
Stock outstanding at the close of business on the record date for holders of the
Common Stock entitled to such split plus or minus the change in the number of
shares resulting from such stock split or reverse stock split and the
denominator of which will be the number of shares of the Common Stock
outstanding at the close of business on such record date.
STOCK DIVIDENDS
If the Common Stock is subject to a stock dividend that is given
ratably to all holders of shares of the Common Stock, then at the opening of
business on the ex-dividend date, the Exchange Rate will be adjusted by
multiplying such Exchange Rate by a fraction, the numerator of which will be the
number of shares of the Common Stock outstanding at the opening of business on
such ex-dividend date plus the number of shares constituting such stock dividend
and the denominator of which will be the number of shares of the Common Stock
outstanding at the opening of business on such ex-dividend date.
If the ex-dividend date relating to the two for one stock split
announced by Compaq on October 16, 1997 occurs after the date of this Pricing
Supplement, the Exchange Rate will be adjusted to reflect such stock split. See
"Compaq Computer Corporation--Historical Information".
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DIVIDENDS AND OTHER DISTRIBUTIONS
There will be no adjustments to the Exchange Rate to reflect cash
dividends or other distributions paid with respect to the Common Stock other
than (i) distributions that constitute Spin-Off Events as described in the first
paragraph under "--Merger, Consolidation or Sale of Assets" below and (ii)
Extraordinary Dividends as described below. A dividend or other distribution
with respect to the Common Stock will be deemed to be an "Extraordinary
Dividend" if such dividend or other distribution exceeds the immediately
preceding non-Extraordinary Dividend, if any, for the Common Stock by an amount
equal to at least 10% of the Closing Price of the Common Stock on the first
Business Day immediately preceding the ex-dividend date. If an Extraordinary
Dividend occurs with respect to the Common Stock, the Exchange Rate will be
adjusted by multiplying such Exchange Rate by a fraction, the numerator of which
will be the Closing Price of the Common Stock on the Business Day immediately
preceding the ex-dividend date with respect to such Extraordinary Dividend and
the denominator of which will be the difference between such Closing Price and
the Extraordinary Dividend Amount. The "Extraordinary Dividend Amount" with
respect to an Extraordinary Dividend for the Common 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 the Common
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 will be conclusive. A distribution on the Common Stock that
constitutes a Spin-Off Event and that also constitutes an Extraordinary Dividend
will only cause an adjustment to the Exchange Rate pursuant to the first
paragraph under "--Merger, Consolidation or Sale of Assets" below.
Unless the previously announced cash dividend by Compaq
constitutes an "Extraordinary Dividend", such cash dividend will not result in
an adjustment to the Exchange Rate. See "Compaq Computer Corporation--Historical
Information".
RIGHTS AND WARRANTS
If Compaq issues rights or warrants to all holders of the Common Stock
to subscribe for or purchase the Common Stock at an exercise price per share
less than the Closing Price of the Common Stock on the record date for
determining the holders of the Common Stock entitled to receive such rights and
warrants, then the Exchange Rate will be adjusted by multiplying such Exchange
Rate by a fraction, the numerator of which will be the number of shares of the
Common Stock outstanding at the close of business on such record date, plus the
number of additional shares of the Common Stock offered for
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subscription or purchase pursuant to such rights or warrants and the denominator
of which will be the number of shares of the Common Stock outstanding at the
close of business on such record date, plus the number of additional shares of
the Common Stock which the aggregate offering price of the total number of
shares of the Common Stock so offered for subscription or purchase pursuant to
such rights or warrants would purchase at the Closing Price of the Common Stock
on such record date, which will 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 Closing Price.
MERGER, CONSOLIDATION OR SALE OF ASSETS
If (A) (i) there occurs any reclassification or change of the Common
Stock, (ii) Compaq or any surviving entity or subsequent surviving entity of
Compaq (a "Successor") has been subject to a merger, combination or
consolidation and either (x) is not the surviving entity or (y) survives and all
of the outstanding shares of the Common Stock are exchanged for or converted
into Exchange Property (as defined below), (iii) any statutory exchange of
securities of Compaq or any Successor with another entity occurs (other than
pursuant to clause (ii) above), (iv) any sale, lease, transfer, or conveyance to
another entity of the property of Compaq or any Successor as an entirety or
substantially an entirety, (v) Compaq or any Successor is liquidated, dissolved
or wound up, (vi) Compaq issues to all of its shareholders equity securities of
an issuer other than Compaq (other than in a transaction described in clauses
(ii), (iii), (iv) or (v) above, a "Spin-off Event") or (vii) a tender or
exchange offer is consummated for all the outstanding shares of the Common Stock
or for all of a particular type of Exchange Property (any such event in clauses
(i) through (vii), a "Reorganization Event"), and (B) in the case of (i) a
Reorganization Event other than a Spin-Off Event, the effective time of such
Reorganization Event occurs prior to the Determination Date or (ii) a Spin-Off
Event, the record date fixed for the determination of the shareholders of Compaq
entitled to receive the securities distributed in such Spin-Off Event (the
"Spin-Off Record Date") occurs prior to the Determination Date, then each Note
will be exchangeable for Exchange Property (as defined below). In the case of a
Reorganization Event, the Final Closing Price will be equal to the sum of the
Transaction Values for each type of Exchange Property, as of the Determination
Date. The "Transaction Value" means (i) for any cash received in any such
Reorganization Event, the product of (A) the Exchange Rate (as in effect
immediately prior to such Reorganization Event) and (B) the amount of cash
received per share of the Common Stock, (ii) for any property other than cash or
securities received in any such Reorganization Event, the product of (A) the
Exchange Rate applicable to such Exchange Property as of the Determination Date
and (B) the market value of such Exchange Property received for each share of
the Common Stock as determined by the Calculation Agent as of the Determination
Date, and (iii) for any security received in any such Reorganization Event, an
amount equal to the product of (A) the Exchange Rate applicable to such Exchange
Property as of the Determination Date
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and (B) the Closing Price per share of such security as of the Determination
Date multiplied by the quantity of such security received for each share of the
Common Stock. "Exchange Property" means securities, cash or any other assets
distributed in any Reorganization Event, including, in the case of a Spin-off
Event, the share of the Common Stock with respect to which the spun-off security
was issued. If Exchange Property consists of more than one type of Exchange
Property, Holders will receive an amount of each type of Exchange Property in
the same proportion as each type of Exchange Property bears to the Transaction
Value for all the Exchange Property.
For purposes of the preceding paragraph, in the case of a consummated
tender or exchange offer for all of a particular type of Exchange Property,
Exchange Property will 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 will be deemed to include the kind and
amount of cash and other property received by offerees who elect to receive
cash.
The Calculation Agent will be solely responsible for the determination
and calculation of any adjustments to the Exchange Rate 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 the second preceding paragraph, and its
determinations and calculations with respect thereto will be conclusive and
binding on the Issuer and the holders of the Notes.
NOTWITHSTANDING THE FOREGOING, THE AMOUNT PAYABLE BY THE ISSUER ON THE
MATURITY DATE WITH RESPECT TO EACH NOTE WILL NOT UNDER ANY CIRCUMSTANCES EXCEED
$[O] PER NOTE OR AN AMOUNT OF CASH, PROPERTY AND/OR SECURITIES HAVING AN
EQUIVALENT VALUE AS OF THE DETERMINATION DATE.
REDEMPTION OF NOTES
The Notes are redeemable, in whole and not in part, at the option of
the Issuer, if the Issuer certifies to the Trustee that it has determined to
terminate its public registrant status with the Commission, as described in the
first paragraph of "Description of Notes--Redemption" in the Prospectus as
supplemented and superseded by the following discussion. Any such redemption of
the Notes will be made at a redemption price equal to 105% of the average of the
Closing Values of the Notes on the 10 trading days immediately preceding the
Issuer Notice Date (as defined below under "--Definitions"), together with any
accrued and unpaid interest up to but not including the Redemption
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Date, unless such interest is reflected in the Closing Values. "Closing Value"
means, with respect to any trading day, the mean, as determined by the
Calculation Agent, of the bid prices for such security obtained from as many
dealers in such security (which may include the Calculation Agent or its
affiliate), but not exceeding three, as will make such bid prices available to
the Calculation Agent in order to determine the Closing Value.
EVENTS OF DEFAULT AND ACCELERATION; DEFAULT AMOUNT
In case an Event of Default with respect to the Notes shall have
occurred and be continuing prior to the Determination Date, the amount payable
to a Holder on any day on which the principal of the Notes becomes payable upon
any acceleration, will equal the Default Amount and, on or after the
Determination Date, the Principal Amount; provided, however, that, solely for
purposes of the aggregate principal amount of Notes required for any consent,
waiver, authorization or other action taken or to be taken by holders of Notes
pursuant to the Notes and the Indenture have taken such action, the principal
amount of the Notes offered hereby will equal the Face Amount of the Notes.
DEFINITIONS
"Business Day" means any day that is not a Saturday, a Sunday or a day
on which the NYSE (or, if different, the principal securities exchange on which
the Common Stock (or, in the case of a Reorganization Event, any Exchange
Property) is then listed) is authorized or obligated by law or executive order
to close.
"Cap Rate" means [1.57 TO 1.59].
"Closing Price" means, with respect to any security on any date, the
closing sale price or last reported sale price, regular way, for the security on
the principal national securities exchange on which such security is listed for
trading on such date or, in the event such security is not listed on any
national securities exchange, on the U.S. national market system that is the
primary market for trading such security or, in the event such security is not
listed on any national securities exchange or quoted through any U.S. national
market system, the Closing Price with respect to such security will be the mean,
as determined by the Calculation Agent, of the bid prices for such security
obtained from as many dealers in such security (which may include the
Calculation Agent or its affiliate), but not exceeding three, as will make such
bid prices available to the Calculation Agent.
"Common Stock" means the common stock, par value $0.01 per share, of
Compaq.
"Compaq" means Compaq Computer Corporation, a Delaware corporation.
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"Default Amount" means, on any day, an amount, in U.S. dollars, equal
to the cost of having a Qualified Financial Institution expressly assume, as of
such day, the due and punctual payment of the Principal Amount of and interest
on the Notes offered hereby, and the performance and observance of every
covenant thereof and of the Indenture on the part of the Issuer to be performed
or observed with respect to such Notes (or to undertake other obligations
providing the same economic value to the Holder of such Notes as the Issuer's
obligations thereunder). Such cost will equal (i) the lowest amount that a
Qualified Financial Institution (selected as provided below) would charge to
effect such assumption (or undertaking) plus (ii) the reasonable expenses
(including reasonable attorneys' fees) incurred by the Holder of such Notes in
preparing any documentation necessary for such assumption (or undertaking).
During the Default Quotation Period, each of the Holder of a Note and the Issuer
may request a Qualified Financial Institution to provide a quotation of the
amount it would charge to effect such assumption (or undertaking) and will
notify the other in writing of such quotation. The amount referred to in clause
(i) of this paragraph will equal the lowest (or, if there is only one, the only)
quotation so obtained, and as to which notice is so given, during the Default
Quotation Period; provided, however, that, with respect to any quotation, the
party not obtaining such quotation may object, on reasonable and significant
grounds, to the effectuation of such assumption (or undertaking) by the
Qualified Financial Institution providing such quotation and notify the other
party in writing of such grounds within two Business Days after the last day of
the Default Quotation Period, in which case such quotation will be disregarded
in determining the Default Amount. The Default Quotation Period will be the
period beginning on the day the Default Amount first becomes due and payable and
ending on the third Business Day after such due day, unless no such quotation is
so obtained, or unless every such quotation so obtained is objected to within
five Business Days after such due day as provided above, in which case the
Default Quotation Period will continue until the third Business Day after the
first Business Day on which prompt notice is given of such a quotation as
provided above, unless such quotation is objected to as provided above within
five Business Days after such first Business Day, in which case the Default
Quotation Period will continue as provided in this sentence. Notwithstanding the
foregoing, if the Default Quotation Period (and the subsequent two Business Day
objection period) has not ended prior to the Determination Date, then the
Default Amount will equal the Principal Amount.
"Determination Date" means the fifth Business Day immediately prior to
the Stated Maturity Date, provided, however, that if a Market Disruption Event
has occurred on such Business Day, the Determination Date will be the first
following Business Day on which a Market Disruption Event has not occurred, but
in no event later than the fifth Business Day immediately prior to November | |,
1999.
"Face Amount" or "Initial Price" means $[ ] per Note.
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"Final Closing Price" means the Closing Price of the Common Stock on
the Determination Date.
"Issuer Notice Date" means any Business Day on which the Issuer, or the
Trustee on behalf of the Issuer, mails to Holders a notice of redemption with
respect to the Notes.
"Market Disruption Event" means, with respect to the Common Stock, (i)
(a) a suspension, absence or material limitation of trading of the Common Stock
on the primary market for the Common Stock for more than two hours of trading or
during the one-half hour period preceding the close of trading in such market or
a suspension, absence or material limitation on the primary market for trading
in options contracts related to the Common Stock, if available, during the
one-half hour period preceding the close of trading in such market, in each case
as determined by the Calculation Agent in its sole discretion, or (b) the Common
Stock does not trade on the primary market for the Common Stock, and (ii) a
determination by the Calculation Agent in its sole discretion that either event
described in clauses (a) or (b) above materially interfered with the ability of
the Issuer or any of its affiliates to unwind all or a material portion of the
hedges with respect to the Notes. For purposes of determining whether a Market
Disruption Event has occurred (i) 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 market, (ii) a
decision to permanently discontinue trading in the relevant option contract will
not constitute a Market Disruption Event, (iii) limitations pursuant to NYSE
Rule 80A (or any applicable rule or regulation enacted or promulgated by the
NYSE, the National Association of Securities Dealers, Inc., 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 will constitute a Market Disruption Event, (iv)
a suspension of trading in an options contract on the Common 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 the Common Stock
and (v) an "absence of trading" on the primary securities market on which
options contracts related to the Common Stock are traded will not include any
time when such securities market is itself closed for trading under ordinary
circumstances. References to the Common Stock in this definition will also be
deemed to refer to any Exchange Property consisting of securities.
"NYSE" means the New York Stock Exchange, Inc.
"Qualified Financial Institution" means, at any time, a financial
institution organized under the laws of any jurisdiction in the United States of
America, Europe or Japan that at such time has outstanding debt obligations with
a stated maturity of one year
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or less from the date of issue and rated A-1 or higher by Standard & Poor's
Ratings Group or P-1 or higher by Moody's Investors Service, Inc. (or such other
comparable rating, if any, then used by such rating agency).
CALCULATION AGENT
All determinations made by the Calculation Agent will be at the sole
discretion of the Calculation Agent and, in the absence of manifest error, will
be conclusive for all purposes and binding on the Issuer and the Holders of
Notes, and the Calculation Agent will have no liability therefor.
DEFEASANCE AND COVENANT DEFEASANCE
The Notes are not subject to defeasance or covenant defeasance as
described under "Description of Debt Securities--Defeasance and Covenant
Defeasance" in the Prospectus.
USE OF PROCEEDS AND HEDGING
The Issuer expects to use all of the proceeds from the issuance of the
Notes to purchase shares of Common Stock. (although the Issuer will not be
required to retain such Common Stock). The Issuer will also write
over-the-counter call options and enter into interest rate swaps with GS&Co. or
GSCM. Any remaining proceeds from the offering of the Notes, together with the
premium received from the writing of the call options, will be added to the
Issuer's working capital to support its Derivative Transaction activities. The
Issuer does not anticipate entering into any other transactions to hedge the
Notes.
GS&Co., in order to hedge its position under the call options, may sell
Common Stock contemporaneously with the pricing of the Notes. After the date
hereof, GS&Co. may from time to time (i) acquire, dispose of or sell short
shares of Common Stock or other securities of Compaq, (ii) take positions in or
dispose of positions in listed or over-the-counter options on the Common Stock
and/or (iii) take positions in or dispose of positions in listed or
over-the-counter options or other instruments based on broad market indices or
indices designed to track the performance of computer stocks. In addition, the
Issuer or GS&Co. may purchase or otherwise acquire a long or short position in
Notes from time to time and may, in their sole discretion, hold or resell such
Notes.
GS&Co. may liquidate its hedges, in whole or in part, on or prior to
the Determination Date or Maturity Date. Such liquidation may involve purchase
or sales of (i) the Common Stock, (ii) listed or over-the-counter options on the
Common Stock or
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(iii) listed or over-the-counter options or other instruments based on broad
market indices or indices designed to track the performance of computer stocks.
WHILE THE HEDGING ACTIVITY DISCUSSED ABOVE MAY ADVERSELY AFFECT THE
MARKET VALUE FROM TIME TO TIME OF THE NOTES AND THE PRINCIPAL AMOUNT PAYABLE ON
THE MATURITY DATE, THERE WILL BE NO DIRECT RELATIONSHIP BETWEEN THE GAINS OR
LOSSES THAT AFFILIATES OF ISSUER REALIZE FROM THEIR HEDGING ACTIVITIES AND THE
VALUE OF THE COMMON STOCK FOR WHICH THE NOTES WILL BE EXCHANGED ON THE MATURITY
DATE. See "RISK FACTORS--EFFECT OF TRADING AND OTHER TRANSACTIONS BY THE ISSUER
IN THE COMMON STOCK" AND "--POTENTIAL CONFLICTS OF INTEREST".
COMPAQ COMPUTER CORPORATION
According to publicly available documents, Compaq is the fifth largest
computer company in the world and the largest global supplier of personal
computers. Compaq develops and markets hardware, software, solutions and
services, including industry-leading enterprise computing solutions,
fault-tolerant business-critical solutions, networking products, commercial
desktop and portable products and consumer PCs. Compaq is subject to the
information reporting requirements of the Exchange Act. Accordingly, Compaq
files reports, proxy statements and other information with the Commission.
Copies of such reports, proxy statements and other information may be inspected
and copied at certain offices of the Commission or on the Commission's web site
(http://www.sec.gov.).
THIS PRICING SUPPLEMENT RELATES ONLY TO THE NOTES OFFERED HEREBY AND
DOES NOT RELATE TO THE COMMON STOCK. ALL DISCLOSURES CONTAINED IN THIS PRICING
SUPPLEMENT REGARDING COMPAQ ARE DERIVED FROM THE PUBLICLY AVAILABLE DOCUMENTS
DESCRIBED IN THE PRECEDING PARAGRAPH OR OTHER SPECIFIED SOURCES. THE ISSUER HAS
NOT PARTICIPATED IN THE PREPARATION OF SUCH DOCUMENTS OR MADE ANY DUE DILIGENCE
INQUIRY WITH RESPECT TO THE INFORMATION PROVIDED THEREIN AND ASSUMES NO
RESPONSIBILITY FOR THE ADEQUACY OR ACCURACY OF ANY SUCH INFORMATION. INVESTORS
IN THE NOTES ARE URGED TO CONDUCT THEIR OWN INVESTIGATION INTO COMPAQ. THE
ISSUER MAKES NO REPRESENTATION THAT SUCH PUBLICLY AVAILABLE DOCUMENTS OR ANY
OTHER PUBLICLY AVAILABLE INFORMATION REGARDING COMPAQ ARE ACCURATE OR COMPLETE.
FURTHERMORE, THERE CAN BE NO ASSURANCE THAT ALL EVENTS OCCURRING PRIOR TO THE
DATE OF THIS PRICING SUPPLEMENT (INCLUDING EVENTS THAT WOULD AFFECT THE ACCURACY
OR COMPLETENESS OF THE PUBLICLY AVAILABLE DOCUMENTS
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DESCRIBED IN THE PRECEDING PARAGRAPH) THAT WOULD AFFECT THE TRADING PRICE OF THE
COMMON STOCK (AND THEREFORE THE NUMBER OF SHARES OF COMMON STOCK WHICH WILL BE
EXCHANGED FOR THE NOTES ON THE MATURITY DATE) HAVE BEEN PUBLICLY DISCLOSED.
SUBSEQUENT DISCLOSURE OF ANY SUCH EVENTS OR THE DISCLOSURE OF OR FAILURE TO
DISCLOSE MATERIAL FUTURE EVENTS CONCERNING COMPAQ COULD AFFECT THE TRADING PRICE
OF THE NOTES AND THE NUMBER OF SHARES OF COMMON STOCK WHICH WILL BE EXCHANGED
FOR THE NOTES ON THE MATURITY DATE.
HISTORICAL INFORMATION
The Common Stock is traded on the NYSE under the symbol "CPQ". The
following table sets forth the quarterly high and low Closing Prices for the
Common Stock quoted on the NYSE for the four calendar quarters in 1995, 1996 and
1997 (through October 21, 1997), and the closing price at October 21, 1997, all
as reported by Bloomberg Financial Services. The prices set forth in the
following table have been adjusted to reflect the five-for-two split, effected
by means of a stock dividend, on each outstanding share of Common Stock, which
was payable on July 28, 1997 to holders of record on July 14, 1997. On October
16, 1997, Compaq announced a two-for-one split (the "Split"), to be effected by
means of a stock dividend, on each outstanding share of Common Stock. The Split
is subject to shareholder approval and will be payable to holders of record on
October 31, 1997. If the date of this Pricing Supplement is before the
ex-dividend date for the Split, the Exchange Rate will be subject to adjustment
as described under "Description of the Notes--Anti-Dilution Adjustments--Stock
Dividends". The Issuer assumes no responsibility for the accuracy or
completeness of this information and has relied upon this information without
independent verification. The historical prices of the Common Stock should not
be taken as an indication of future performance. No assurance can be given that
the prices of the Common Stock will remain at a level which will result in an
investor recouping his or her original investment in the Notes. See "Risk
Factors--Payment at Maturity; Lack of Principal Protection; Limited
Appreciation".
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<PAGE>
<TABLE>
<CAPTION>
HIGH LOW
($) ($)
<S> <C> <C> <C>
1995
Quarter ended March 31............................. 17 35/64 12 51/64
Quarter ended June 30.............................. 18 5/32 12 45/64
Quarter ended September 30 ........................ 21 45/64 18
Quarter ended December 31. ........................ 22 19/32 17 61/64
1996
Quarter ended March 31............................. 21 1/4 14 19/32
Quarter ended June 30.............................. 19 29/32 15 3/64
Quarter ended September 30......................... 26 16 19/32
Quarter ended December 31.......................... 34 19/64 25 45/64
1997
Quarter ended March 31............................. 34 3/4 28 51/64
Quarter ended June 30.............................. 43 21/32 28 27/32
Quarter ended September 30......................... 78 40 3/4
Quarter ended December 31.......................... 69 1/2 77 1/4
(through October 21, 1997)
Closing price on October 21, 1997........................... 73 7/8
</TABLE>
On October 16, 1997, Compaq announced the initiation of a quarterly
dividend (the "Quarterly Dividend") of $0.03 per share of Common Stock ($0.015
per share of Common Stock after the Split). The first Quarterly Dividend will be
payable on January 20, 1998 to holders of record on December 31, 1997. The
Issuer makes no representation as to the amount of dividends, if any, that
Compaq may pay in the future. In any event, Holders of the Notes will not be
entitled to receive any cash dividends that may be payable on the Common Stock.
Unless the Quarterly Dividend qualifies as an Extraordinary Dividend, there will
be no adjustment to the Exchange Rate to reflect the Quarterly Dividend. See
"Description of Notes--Anti-Dilution Adjustments--Dividends and Other
Distributions".
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<PAGE>
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
THE FOLLOWING DISCUSSION REPLACES, TO THE EXTENT INCONSISTENT
THEREWITH, THE DISCUSSION OF UNITED STATES TAXATION SET FORTH IN THE PROSPECTUS
SUPPLEMENT.
The following summary of the principal United States federal income tax
consequences of ownership of the Notes deals only with a Note held as a capital
asset by an initial purchaser who or that is (i) a citizen or resident of the
United States, (ii) a domestic corporation or (iii) otherwise subject to United
States federal income taxation on a net income basis in respect of a Note (a
"U.S. Holder"). It does not discuss the rules that may apply to special classes
of holders such as life insurance companies, banks, tax-exempt organizations,
dealers in securities, currencies or commodities, traders in securities that
elect to mark to market, persons that hold Notes that are a hedge or that are
hedged against price risks or that are part of a straddle or conversion
transaction, or persons whose functional currency is not the U.S. dollar. The
summary is based on current provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), its legislative history, existing and proposed regulations
thereunder, published rulings and court decisions, all as in effect on the date
hereof and all subject to change at any time, perhaps with retroactive effect.
NO STATUTORY, JUDICIAL OR ADMINISTRATIVE AUTHORITY DIRECTLY DISCUSSES
HOW THE NOTES SHOULD BE TREATED FOR UNITED STATES FEDERAL INCOME TAX PURPOSES.
AS A RESULT, THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF AN INVESTMENT
IN THE NOTES ARE HIGHLY UNCERTAIN. ACCORDINGLY, A PROSPECTIVE INVESTOR IN THE
NOTES SHOULD CONSULT ITS TAX ADVISOR IN DETERMINING THE TAX CONSEQUENCES OF AN
INVESTMENT IN THE NOTES, INCLUDING THE APPLICATION OF STATE, LOCAL OR OTHER TAX
LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
Pursuant to the terms of the Indenture, the Issuer and every holder of
Notes will be obligated (in the absence of an administrative determination or
judicial ruling to the contrary) to characterize the Notes for all tax purposes
as a forward contract to purchase shares of Common Stock on the Maturity Date,
under the terms of which contract (i) at the time of issuance of the Notes the
holder deposits irrevocably with the Issuer a fixed amount of cash equal to the
purchase price of the Notes to assure the fulfillment of the holder's purchase
obligation described in clause (iii) below, which deposit will unconditionally
and irrevocably be applied on the Maturity Date to satisfy such obligation, (ii)
until the Maturity Date the Issuer will be obligated to pay interest on such
deposit at a rate equal to the stated rate of interest on the Notes as
compensation to the holder for the
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<PAGE>
Issuer's use of such cash deposit during the term of the Notes and (iii) on the
Maturity Date such cash deposit unconditionally and irrevocably will be applied
by the Issuer in full satisfaction of the holder's obligation under the forward
purchase contract, and the Issuer will deliver to the holder the number of
shares of Common Stock that the holder is entitled to receive at that time
pursuant to the terms of the Notes. (Prospective investors should note that cash
proceeds of this offering will not be segregated by the Issuer during the term
of the Notes, but instead will be commingled with the Issuer's other assets).
Consistent with the above characterization, (i) amounts paid to the Issuer in
respect of the original issue of Notes will be treated as allocable in their
entirety to the amount of the cash deposit attributable to such Notes and (ii)
amounts denominated as interest that are payable with respect to the Notes will
be characterized as interest payable on the amount of such deposit, includible
annually in the income of a U.S. Holder as interest income in accordance with
such holder's method of accounting.
Assuming that the Notes are characterized as described above, a
holder's tax basis in a Note generally would equal the holder's cost for the
Note. Upon the sale or exchange of a Note, a U.S. Holder generally would
recognize gain or loss equal to the difference between the amount realized on
the sale or exchange and the U.S. Holder's tax basis in the Note. Such gain or
loss generally would be long-term capital gain or loss if the U.S. Holder has
held the Note for more than one year at the time of disposition. Upon delivery
of the shares of Common Stock at Maturity, a U.S. Holder would not recognize
gain or loss on the purchase of such shares of Common Stock against application
of the monies received by the Issuer in respect of the Notes. A U.S. Holder
would have a tax basis in such stock equal to the U.S. Holder's tax basis in the
Notes (less the portion of the tax basis of the Notes allocable to any
fractional share, as described in the next sentence) and would have a holding
period in such stock beginning on the date following the date of receipt of such
shares of Common Stock. A U.S. Holder would recognize gain or loss (which would
be short-term capital gain or loss) with respect to cash received in lieu of
fractional shares, in an amount equal to the difference between the cash
received and the portion of the basis of the Notes allocable to fractional
shares (based on the relative number of fractional shares and full shares
delivered to the holder).
Alternatively, the Internal Revenue Service may assert that a Note
should be treated as a single debt instrument subject to special rules governing
contingent payment debt instruments (the "Contingent Payment Regulations"). If
the Contingent Payment Regulations were to apply to the Notes, a U.S. Holder
would be required to include in income for each accrual period an amount
determined by constructing a projected payment schedule for the Notes and
applying rules similar to those for accruing original issue discount on a
hypothetical non-contingent debt instrument with that projected payment
schedule. This method is applied by first determining the yield at which the
Issuer would issue a noncontingent fixed rate debt instrument with terms and
conditions similar to the
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<PAGE>
Notes (the "comparable yield") and then determining a payment schedule as of the
issue date that would produce the comparable yield.
If the Contingent Payment Regulations were to apply to the Notes, gain
or loss upon the sale, exchange or retirement of the Notes would be determined
by the difference, if any, between the fair market value of the amount received
by the U.S. Holder and the U.S. Holder's adjusted basis in the Notes. In
general, a U.S. Holder's adjusted basis in a Note would equal the amount paid
for the Note, increased by the amount of interest previously accrued by the
holder (in accordance with the comparable yield and the projected payment
schedule), and decreased by the amount of interest payments received by the
holder with respect to the Note. Any gain upon sale, exchange or retirement of
the Notes would be ordinary interest income; any loss would be ordinary loss to
the extent of interest included as income in the current or previous taxable
years by the U.S. Holder in respect of the Notes, and thereafter, capital loss.
Even if the Contingent Payment Regulations do not apply to the Notes,
it is possible that the Internal Revenue Service could seek to characterize the
Notes in a manner that results in tax consequences to U.S. Holders different
from those reflected in the Indenture and described above. For example, the
Internal Revenue Service could seek to allocate less than all of the amounts
paid for the Notes to the cash deposit described above and treat the cash
deposit as a debt instrument acquired at a discount. In that case, U.S. Holders
would be required to include such original issue discount in income as it
accrues in addition to stated interest on the Notes. Prospective investors
should consult their tax advisors as to possible alternative characterizations
of the Notes for United States federal income tax purposes.
VALIDITY OF NOTES
The validity of the Notes offered hereby will be passed upon by Maples
and Calder, George Town, Grand Cayman, Cayman Islands, British West Indies, and
by Sullivan & Cromwell, New York, New York. Sullivan & Cromwell will rely as to
all matters of Cayman Islands law upon the opinion of Maples and Calder. See
"Validity of Notes" in the Prospectus.
-----------------
The Issuer's Medium-Term Notes, Series B will be offered for sale in
the aggregate principal amount of up to $500,000,000 (or the equivalent thereof
in any foreign currencies or currency units) (provided that the Issuer reserves
the right to increase such aggregate principal amount from time to time). After
giving effect to the issuance of the Notes to which this Pricing Supplement
relates, $[O] principal amount of Medium-Term Notes, Series B have been issued
by the Issuer.
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<PAGE>
-----------------
GOLDMAN, SACHS & CO.
-----------------
The date of this Pricing Supplement is October [ ], 1997.
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