<PAGE> 1
<TABLE>
<S> <C>
PRICING SUPPLEMENT NO. 7 DATED April 19, 1994 Rule 424(b)(3)
(To the Prospectus Dated August 13, 1993 and the Prospectus Supplement dated August 17, 1993) File No. 33-66004
</TABLE>
AIR PRODUCTS AND CHEMICALS, INC.
MEDIUM-TERM NOTES, SERIES C
DUE FROM 9 MONTHS TO 10 YEARS FORM DATE OF ISSUE
S&P 500 LINKED NOTES
<TABLE>
<S> <C> <C>
Trade Date: April 19, 1994 Original Issue Date: May 3, 1994 Maturity Date: May 3, 2001
</TABLE>
<TABLE>
<CAPTION>
Interest Rate
Range of Maturities Per Annum
------------------- -----------
<S> <C>
From 9 months to less than 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ----------%
From 1 year to less than 18 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ----------%
From 18 months to less than 2 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ----------%
From 2 years to less than 3 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ----------%
From 3 years to less than 4 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ----------%
From 4 years to less than 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ----------%
From 5 years to less than 6 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ----------%
From 6 years to less than 7 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ----------%
From 7 years to less than 8 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.66%
----------
From 8 years to less than 9 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ----------%
From 9 years up to and including 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ----------%
</TABLE>
<TABLE>
<S> <C>
Principal Amount: $10,000,000.00 Face Amount: $10,000,000.00 Issue Price: Par
Specified Currency: U.S. Dollars
(If other than U.S. dollars, see attached)
Base Exchange Rate: N/A Exchange Rate Agent: N/A
Agent: Lehman Brothers Inc. Agent's Commission: $50,000.00
Net Proceeds to Issuer: $9,950,000.00
Interest Payment Dates: May 3 of each year beginning in 1995 and ending in 2001
Base Interest Rate: 2.66% Record Dates: N/A
Global Note : [x] Yes [ ] No Form: [x] Book-Entry [ ] Certificated Depositary: DTC
Indexed Commodity: S&P 500 Index. See "The Standard & Poor's 500 Index" below.
Calculation Dates: See "Description of Index Notes" below. Calculation Agent: Lehman Brothers Inc.
Yield to Maturity: See "Description of Index Notes" below. Reference Dealers: N/A
Payment at Maturity: See "Description of Index Notes" below. Participation Rate: 100%
Final Average Level: See "Description of Index Notes" below. Placement Agent: Lehman Brothers Inc.
Total Amount of OID: N/A Initial Accrued Period OID: N/A
Redemption: Check box opposite applicable sentence.
[x] The Notes cannot be redeemed prior to maturity.
[ ] The Notes may be redeemed prior to maturity.
Terms of Redemption: N/A
</TABLE>
i
<PAGE> 2
Repayment: Check the box opposite applicable sentence.
[x] The Notes cannot be repaid prior to maturity.
[ ] The Notes may be repaid prior to maturity.
Terms of Repayment: N/A
- -----------------
"Standard & Poor's (TM)", "S&P 500 (TM)", "Standard & Poor's 500 (TM)", and
"500 (TM)" are trademarks of McGraw-Hill, Inc. and have been licensed for use
by Lehman Brothers Inc. and sublicensed to the Company. The Index Notes are
not sponsored, endorsed, sold or promoted by Standard & Poor's and Standard &
Poor's makes no representation regarding the advisability of investing in the
Index Notes.
ii
<PAGE> 3
DESCRIPTION OF INDEX NOTES
I. GENERAL.
The following description of the particular terms of the Notes offered
hereby (the "Index Notes") supplements, and to the extent inconsistent
therewith replaces, the description of the general terms and provisions of the
Notes set forth in the accompanying Prospectus Supplement and the description
of Securities set forth in the accompanying Prospectus, to which
descriptions reference is hereby made. The term "Issuer," as used herein,
shall mean Air Products and Chemicals, Inc. All terms used herein but not
otherwise defined herein and which are defined in the accompanying Prospectus or
Prospectus Supplement shall have the meanings therein assigned to them.
II. MATURITY AMOUNT.
The amount payable at maturity in respect of each Index Note (the
"Maturity Amount") will be equal to the greater of (i) the principal amount of
such Index Note ("Principal Amount") and (ii) the Index Maturity Amount.
The "Index Maturity Amount" with respect to any Index Note means an
amount equal to the sum of (i) the Principal Amount and (ii) the product of (x)
the Principal Amount, (y) the Index Appreciation Ratio and (z) the
Participation Rate. Where:
"Index Appreciation Ratio" means:
Final Average Index Value-Initial Index Value
------------------------------------------------
Initial Index Value
"Participation Rate" means 100%
The "Initial Index Value" equals 442.54, the closing value of the S&P
500 Index on April 19, 1994.
The "Final Average Index Value" of the S&P 500 Index will be
determined by Lehman Brothers Inc. (the "Calculation Agent") and will equal the
arithmetic average (mean) of the Annual Values, as defined below, for 1999,
2000 and 2001. The "Annual Value" for any year will be calculated during the
"Calculation Period" for such year which will be from and including April 26
in 1999, April 26 in 2000 and April 25 in 2001 to and including the fifth
scheduled Business Day after such date. The Annual Value for each year will
equal the arithmetic average (mean) of the closing values of the S&P 500 Index
on the first day in the applicable Calculation Period (provided that a Market
Disruption Event, as defined under the caption "Market Disruption Event" below,
shall not have occurred on such day) and on each succeeding Business Day
(provided that a Market Disruption Event shall not have occurred on the
applicable day) up to and including the last Business Day in the
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<PAGE> 4
applicable Calculation Period (each, a "Calculation Date") until the
Calculation Agent has so determined such closing values for five Business Days.
If a Market Disruption Event occurs on two or more of the Business Days during
a Calculation Period, the Annual Value for the relevant year will equal the
average of the values on Business Days on which a Market Disruption Event did
not occur during such Calculation Period or, if there is only one such Business
Day, the value on such day. If Market Disruption Events occur on all of such
Business Days during a Calculation Period, the Annual Value for the relevant
year shall equal the closing value of the S&P 500 Index on the last Business
Day of the Calculation Period regardless of whether a Market Disruption Event
shall have occurred on such day.
For purposes of determining the Final Average Index Value, a "Business
Day" is a day on which The New York Stock Exchange is open for trading. All
determinations made by the Calculation Agent shall be at the sole discretion of
the Calculation Agent and, absent a determination by the Calculation Agent of a
manifest error, shall be conclusive for all purposes and binding on the Issuer
and beneficial owners of the Index Notes.
III. DISCONTINUANCE OF THE S&P 500 INDEX AND SUCCESSOR INDEX
If S&P discontinues publication of the S&P 500 Index and S&P or
another entity publishes a successor or substitute index that the Calculation
Agent determines, in its sole discretion, to be comparable to the S&P 500 Index
(any such index being referred to hereinafter as a "Successor Index"), then,
upon the Calculation Agent's notification of such determination to the Trustee
and the Issuer, the Calculation Agent will substitute the Successor Index as
calculated by S&P or such other entity for the S&P 500 Index.
If S&P discontinues publication of the S&P 500 Index and a Successor
Index is not selected by the Calculation Agent or is no longer published on any
of the Calculation Dates, the value to be substituted for the S&P 500 Index for
any such Calculation Date will be calculated as described below under
"Discontinuance of the S&P 500 Index."
If a Successor Index is selected or the Calculation Agent calculates a
value as a substitute for the S&P 500 Index as described below, such Successor
Index or value shall be substituted for the S&P 500 Index for all purposes,
including for purposes of determining whether a Market Disruption Event exists.
If at any time the method of calculating the S&P 500 Index, or the
value thereof, is changed in a material respect, or if the S&P 500 Index is in
any other way modified such that in the opinion of the Calculation Agent, the
S&P 500 Index does not fairly represent the value of the S&P 500 Index had such
change or modification not been made, then, from and after such time, the
Calculation Agent shall on each Calculation Date make such adjustments as, in
the good faith judgment of the Calculation Agent, may be necessary in order to
arrive at a calculation of a stock index comparable to the S&P 500 Index as if
such change or modification had not
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<PAGE> 5
been made. For example, if the method of calculating the S&P 500 Index is
modified so that the value of such S&P 500 Index is a fraction or a multiple of
what it would have been if it had not been modified (e.g., due to a split in
the S&P 500 Index), then the Calculation Agent shall adjust the S&P 500 Index
in order to arrive at a value of the S&P 500 Index as if it had not been
modified (e.g., as if such split had not occurred).
Discontinuance of the S&P 500 Index
If S&P discontinues publication of the S&P 500 Index and a Successor
Index is available, then the Maturity Amount will be determined by referenced
to the Successor Index, as provided above.
If the publication of the S&P 500 Index is discontinued and S&P or
another entity does not publish a Successor Index on any of the Calculation
Dates, the index to be substituted for the S&P 500 Index for any such
Calculation Date will be computed by the Calculation Agent for each such
Calculation Date in accordance with the following procedures:
(1) identifying the component stocks of the S&P 500 Index
or any Successor Index as of the last date on which either of such
indices was calculated by S&P or another entity and published by S&P
or such other entity (each such component stock is an "Index Component
Stock");
(2) for each Index Component Stock, calculating as of
each such Calculation Date the product of the market price per share
and the number of the then outstanding shares (such product referred
to as the "Market Value" of such Index Component Stock), by reference
to (a) the closing market price per share of such Index Component
Stock as quoted by the New York Stock Exchange or the American Stock
Exchange or any other registered national securities exchange that is
the primary market for such Index Component Stock, or if no such
quotation is available, then the closing market price as quoted by any
other registered national securities exchange or the National
Association of Securities Dealers Automated Quotation National Market
System ("NASDAQ"), or if no such price is quoted, then the market
price from the best available source as determined by the Calculation
Agent (collectively, the "Exchanges") and (b) the most recent publicly
available statement of the number of outstanding shares of such Index
Component Stock;
(3) aggregating the Market Values obtained in clause (2)
for all Index Component Stocks;
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<PAGE> 6
(4) ascertaining the Base Value* in effect as of the last
day on which either the S&P 500 Index or any Successor Index was
published by S&P or another entity, adjusted as described below;
(5) dividing the aggregate Market Value of all Index
Component Stocks by the Base Value (adjusted as described below);
(6) multiplying the resulting quotient (expressed in
decimals) by ten.
If any Index Component Stock is no longer publicly traded on any
registered national securities exchange or in the over- the-counter market, the
last available market price per share for such Index Component Stock as quoted
by any registered national securities exchange or in the over-the-counter
market, and the number of outstanding shares thereof at such time, will be used
in computing the last available Market Value of such Index Component Stock.
Such Market Value will be used in all computations of the S&P 500 Index
thereafter.
If a company that has issued an Index Component Stock and another
company that has issued an Index Component Stock are consolidated to form a new
company, the common stock of such new company will be considered an Index
Component Stock and the common stocks of the constituent companies will no
longer be considered Index Component Stocks. If any company that has issued an
Index Component Stock merges with, or acquires, a company that has not issued
an Index Component Stock, the common stock of the surviving corporation will,
upon the effectiveness of such merger or acquisition, be considered an Index
Component Stock. In each such case, the Base Value will be adjusted so that
the Base Value immediately after such consolidation, merger or acquisition will
equal (a) the Base Value immediately prior to such event, multiplied by (b) the
quotient of the aggregate Market Value of all Index Component Stocks
immediately after such event, divided by the aggregate Market Value for all
Index Component Stocks immediately prior to such event.
If a company that has issued an Index Component Stock issues a stock
dividend, declares a stock split or issues new shares pursuant to the
acquisition of another company, then, in each case, the Base Value will be
adjusted so that the Base Value immediately after the time the particular Index
Component Stock commences trading ex-dividend, the effectiveness of the stock
split or the time new shares of such Index Component Stock commence trading
equals (a) the Base Value immediately prior to such event, multiplied by (b)
the quotient of the aggregate Market Value for all Index Component Stocks
immediately after such event, divided by the aggregate Market Value of all
Index Component Stocks immediately prior to
- ----------------------------------
* "Base Value" shall mean the aggregate of the mean average Market Value
of the common stock of each company in a group of 500 companies
substantially similar to the current S&P 500 group over the base
period of the years 1941 through 1943.
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<PAGE> 7
such event. The Base Value used by the Calculation Agent to calculate the
value described above will not necessarily be adjusted in all cases in which
S&P, in its discretion, might adjust the Base Value (as described below).
IV. MARKET DISRUPTION EVENT
"Market Disruption Event" means either of the following events, as
determined by the Calculation Agent:
(i) the suspension or material limitation (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 be considered
"material" for purposes of this definition), in each case, for more
than two hours of trading in 100 or more of the securities included in
the S&P 500 Index, or
(ii) the suspension or material limitation, in each case,
for more than two hours of trading (whether by reason of movements in
price otherwise exceeding levels permitted by the relevant exchange or
otherwise) in (A) future contracts related to the S&P 500 Index which
are traded on the Chicago Mercantile Exchange or (B) option contracts
related to the S&P 500 Index which are traded on the Chicago Board
Options Exchange, Inc.
For purposes of this definition, a limitation on the hours in a
trading day and/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.
V. EVENTS OF DEFAULT AND ACCELERATION
In case an Event of Default with respect to any Index Notes shall have
occurred and be continuing, the amount payable in respect of an Index Note upon
any acceleration permitted by the Indenture, with respect to each $1,000
principal amount thereof, will be equal to the greater of (i) the Principal
Amount and (ii) the Index Maturity Amount calculated as described in "Maturity
Amount" with the following modifications. The Calculation Period used to
calculate the final Annual Value of the Index Notes so accelerated will begin
on the eighth scheduled Business Day next preceding the scheduled date for such
early redemption. If such final Annual Value is the only Annual Value which
shall have been calculated with respect to the Index Notes, such final Annual
Value will be the Final Average Index Value. If one or two other Annual Values
shall have been calculated with respect to the Index Notes for prior years when
the Index Notes shall have been outstanding, the average of the final Annual
Value and such one other Annual Value or such two other Annual Values, as the
case may be, will be the Final Average Index Value. If a bankruptcy proceeding
is commenced in respect of the Issuer, the claim with respect to an Index Note
may be limited, under Section 502(b)(2) of Title 11 of the United States Code,
to
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<PAGE> 8
the Principal Amount plus an additional amount of contingent interest
calculated as though the date of the commencement of the proceeding were the
maturity date of the Index Notes.
CERTAIN INVESTMENT CONSIDERATIONS
PAYMENT AT MATURITY
Investors should be aware that if the Final Average Index Value of the
S&P 500 Index does not exceed the Initial Index Value, Holders of the Index
Notes will be entitled to receive only the Principal Amount. Such Principal
Amount is below what the Issuer would pay as interest as of the date hereof if
the Issuer issued non-callable senior debt securities with a similar maturity as
that of the Index Notes. The payment of the Principal Amount at maturity of the
Index Notes is not expected to reflect the full opportunity costs implied by
inflation or other factors relating to the time value of money.
The S&P 500 Index does not reflect the payment of dividends on the
stocks underlying it and therefore, in addition to the considerations regarding
averaging discussed below, the yield based on the S&P 500 Index to the maturity
of the Index Notes will not produce the same yield as if such underlying stocks
were purchased and held for a similar period.
Because the Final Average Index Value will be based upon average
values of the S&P 500 Index during specified periods in three successive years,
a significant increase in the S&P 500 Index as measured by the average values
during the specified period in the final year, or in either earlier year, may
be substantially or entirely offset by the average values of the S&P 500 Index
during the specified periods in the other two years.
VALUE PRIOR TO MATURITY
There can be no assurance that there will be a secondary market for
the Index Notes or liquidity in the secondary market if one develops. It is
expected that the secondary market value of the Index Notes will be affected by
the creditworthiness of the Issuer and by a number of other factors.
Because the Final Average Index Value is an average of three Annual Values as
described above, the price at which the Holder of an Indexed Note will be able
to sell such Note in the secondary market may be at a discount if the first or
second such Annual Value is below the Initial Index Value.
The secondary market value of the Index Notes is expected to depend
primarily on the extent of the appreciation, if any, of the S&P 500 Index over
the Initial Index Value. If, however, Index Notes are sold prior to the Stated
Maturity Date at a time when the S&P 500 Index exceeds the Initial Index Value,
the sale price may be at a discount from the amount expected to be payable to
the Holder if such excess of the S&P 500 Index over the Initial Index Value
were to prevail until maturity of the
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<PAGE> 9
Index Notes because of the possible fluctuation of the S&P 500 Index between
the time of such sale and the Stated Maturity Date and the effect of the value
of the S&P 500 Index on prior days used to calculate the Final Average Index
Value, if any. See "The Standard & Poor's 500 Index -- Historical Data on the
S&P 500 Index" herein. Furthermore, the price at which a holder will be able
to sell Index Notes prior to maturity may be at a discount, which could be
substantial, from the principal amount thereof, if, at such time, the S&P 500
Index is below, equal to or not sufficiently above the Initial Index Value
and/or if the value of the S&P 500 Index on prior days used to calculate the
Final Average Index Value, if any, was below, equal to or not sufficiently
above the Initial Index Value. A discount could also result from rising
interest rates.
The secondary market value of the Index Notes may be affected by a
number of interrelated factors, including those listed below. The relationship
among these factors is complex, including how these factors affect the relative
value of the principal amount of the Index Notes to be repaid at the maturity
and the value of the supplemental redemption amount to be paid at maturity.
Accordingly, investors should be aware that factors other than the level of the
S&P 500 Index are likely to affect the secondary market value of the Index
Notes. The expected effect on the secondary market value of the Index Notes of
each of the factors listed below, assuming in each case that all other factors
are held constant, is as follows:
Interest Rates. In general, if U.S. interest rates increase,
the secondary market value of the Index Notes is expected to decrease.
If U.S. interest rates decrease, the value of the Index Notes is
expected to increase. Interest rates may also affect the U.S. economy,
and, in turn, the value of the S&P 500 Index. Rising interest rates
may lower the value of the S&P 500 Index and, thus, the Index Notes.
Falling interest rates may increase the value of the S&P 500 Index and,
thus, may increase the value of the Index Notes.
Volatility of the S&P 500 Index. If the volatility of the S&P
500 Index increases, the secondary market value of the Index Notes is
expected to increase. If the volatility of the S&P 500 Index
decreases, the secondary market value of the Index Notes is expected
to decrease.
Time Remaining to Maturity. The secondary market value of the
Index Notes may be above that which may be inferred from the level of
interest rates and the S&P 500 Index. This difference will reflect a
"time premium" due to expectations concerning the value of the S&P 500
Index during the period prior to maturity of the Index Notes. As the
time remaining to maturity of the Index Notes decreases, however, this
time premium is expected to decrease, thus decreasing the secondary
market value of the Index Notes. In addition, the price at which a
Holder may be able to sell Index Notes prior to maturity may be at a
discount, which may be substantial, from the minimum expected value at
maturity if one or more Annual Values were below, equal to or not
sufficiently above the Initial Index Value.
- 7 -
<PAGE> 10
Dividend Rates in the United States. If dividend rates on the
stocks comprising the S&P 500 Index increase, the value of the Index
Notes is expected to decrease. Conversely, if dividend rates on the
stocks comprising the S&P 500 Index decrease, the value of the Index
Notes is expected to increase. However, in general, rising U.S.
corporate dividend rates may increase the value of the S&P 500 Index
and, in turn, increase the value of the Index Notes. Conversely,
falling U.S. dividend rates may decrease the value of the S&P 500
Index and, in turn, decrease the value of the Index Notes.
OTHER CONSIDERATIONS
It is suggested that prospective investors who consider purchasing the
Index Notes should reach an investment decision only after carefully
considering with their advisers the suitability of the Index Notes in the light
of their particular circumstances.
Investors should also consider the tax consequences of investing in
the Index Notes. See "Certain Federal Tax Consequences" herein.
THE STANDARD & POOR'S 500 INDEX
All disclosure contained in this Pricing Supplement regarding the S&P
500 Index, including, without limitation, its make-up, method of calculation
and changes in its components, is derived from publicly available information
prepared by S&P. Neither the Issuer nor Lehman Brothers Inc. takes any
responsibility for the accuracy or completeness of such information.
GENERAL
The S&P 500 Index is published by S&P and is intended to provide an
indication of the pattern of common stock price movement. The calculation of
the value of the S&P 500 Index (discussed below in further detail) is based on
the relative value of the aggregate Market Value (as defined below) of the
common stocks of 500 companies as of a particular time as compared to the
aggregate average Market Value of the common stocks of 500 similar companies
during the base period of the years 1941 through 1943. As of November 30,
1993, the 500 companies included in the S&P 500 Index represented approximately
75% of the aggregate Market Value of common stocks traded on The New York Stock
Exchange; however, the 500 companies are not the 500 largest companies listed
on The New York Stock Exchange and not all 500 companies are listed on such
exchange. As of November 30, 1993, the aggregate market value of the 500
companies included in the S&P 500 Index represented approximately 70% of the
aggregate market value of United States domestic, public companies. S&P
chooses companies for inclusion in the S&P 500 Index with the aim of achieving
a distribution by broad industry groupings that approximates the distribution
of these groupings in the common stock population of The New York Stock
Exchange, which S&P uses as an assumed model for the composition of the total
market. Relevant criteria employed by S&P include the viability of the
particular company, the extent to which that company represents
- 8 -
<PAGE> 11
the industry group to which it is assigned, the extent to which the market price
of that company's common stock is generally responsive to changes in the affairs
of the respective industry and the Market Value and trading activity of the
common stock of that company. As of November 30, 1993, the 500 companies
included in the Index were divided into 87 individual groups. These individual
groups comprised the following four main groups of companies (with the number of
companies currently included in each group indicated in parentheses):
Industrials (380), Utilities (47), Transportation (16) and Financial (57). S&P
may from time to time, in its sole discretion, add companies to, or delete
companies from, the S&P 500 Index to achieve the objectives stated above.
The Index Notes are not sponsored, endorsed, sold or promoted by S&P.
S&P makes no representation or warranty, expressed or implied, to the owners of
the Index Notes or any member of the public regarding the advisability of
investing in securities generally or in the Index Notes particularly or the
ability of the S&P 500 Index to track general stock market performance. S&P's
only relationship to Lehman Brothers Inc. and the Issuer (other than
transactions in the ordinary course of business) is the licensing of certain
trademarks and trade names of S&P and the S&P 500 Index which is determined,
composed and calculated by S&P without regard to Lehman Brothers Inc., the
Issuer or the Index Notes. S&P has no obligation to take the needs of Lehman
Brothers Inc., the Issuer or the owners of the Index Notes into consideration in
determining, composing or calculating the S&P 500 Index. S&P is not responsible
for and has not participated in the determination of the timing of the sale of
the Index Notes, prices at which the Index Notes are initially to be sold, or
quantities of the Index Notes to be issued or in the determination or
calculation of the equation by which the interest on the Index Notes is to be
converted into cash. S&P has no obligation or liability in connection with the
administration, marketing or trading of the Index Notes.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P
500 INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY
ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR
IMPLIED, AS TO RESULTS TO BE OBTAINED BY LEHMAN BROTHERS INC., THE ISSUER,
OWNERS OF THE INDEX NOTES, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE
S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED
WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR
ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT
SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT OR
CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE
POSSIBILITY OF SUCH DAMAGES.
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<PAGE> 12
COMPUTATION OF THE S&P 500 INDEX
S&P currently computes the S&P 500 Index as of a particular time as
follows:
(1) the Market Value of each component stock is
determined as of such time;
(2) the Market Value of all component stocks as of such
time (as determined under clause (1) above) are aggregated;
(3) the mean average of the Market Values as of each week
in the base period of the years 1941 through 1943 of the common stock
of each company in a group of 500 substantially similar companies is
determined;
(4) the mean average Market Values of all such common
stocks over such base period (as determined under clause (3) above)
are aggregated (such aggregate amount being referred to as the "Base
Value");
(5) the aggregate Market Value of all component stocks as
of such time (as determined under clause (2) above) is divided by the
Base Value; and
(6) the resulting quotient (expressed in decimals) is
multiplied by ten.
While S&P currently employs the above methodology to calculate the S&P 500
Index, no assurance can be given that S&P will not modify or change such
methodology in a manner that may affect the Maturity Amount payable to Index
Noteholders.
S&P adjusts the foregoing formula to negate the effect of changes in
the Market Value of a component stock that are determined by S&P to be
arbitrary or not due to true market fluctuations. Such changes may result from
such causes as the issuance of stock dividends, the granting to shareholders of
rights to purchase additional shares of such stock, the purchase thereof by
employees pursuant to employee benefit plans, certain consolidations and
acquisitions, the granting to shareholders of rights to purchase other
securities of the company, the substitution by S&P of particular component
stocks in the S&P 500 Index, and other reasons. In all such cases, S&P first
recalculates the aggregate Market Value of all component stocks (after taking
account of the new market price per share of the particular component stock or
the new number of outstanding shares thereof or both, as the case may be) and
then determines the new Base Value in accordance with the following formula:
New Market Value
Old Base Value x ---------------- = New Base Value
Old Market Value
- 10 -
<PAGE> 13
The result is that the Base Value is adjusted in proportion to any change in
the aggregate Market Value of all component stocks resulting from the causes
referred to above to the extent necessary to negate the effects of such causes
upon the S&P 500 Index.
HISTORICAL DATA ON THE S&P 500 INDEX
The following tables set forth the closing values of the S&P 500 Index
on the last business day of each year from 1947 through 1986 and the high, low
and closing value of the S&P 500 Index for each quarter from 1987 to the
present, as published by S&P. The historical experience of the S&P 500 Index
should not be taken as an indication of future performance.
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<PAGE> 14
YEAR END VALUE OF THE S&P 500 INDEX
<TABLE>
<CAPTION>
YEAR CLOSING VALUE YEAR CLOSING VALUE
<S> <C> <C> <C>
1947 15.30 1967 96.47
1948 15.20 1968 103.86
1949 16.76 1969 92.06
1950 20.41 1970 92.15
1951 23.77 1971 102.09
1952 26.57 1972 118.05
1953 24.81 1973 97.55
1954 35.98 1974 68.56
1955 45.48 1975 90.19
1956 46.67 1976 107.46
1957 39.99 1977 95.10
1958 55.21 1978 96.11
1959 59.89 1979 107.94
1960 58.11 1980 135.76
1961 71.55 1981 122.55
1962 63.10 1982 140.64
1963 75.02 1983 164.93
1964 84.75 1984 167.24
1965 92.43 1985 211.28
1966 80.33 1986 242.17
</TABLE>
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<PAGE> 15
QUARTERLY VALUES OF THE S&P 500 INDEX SINCE 1987
<TABLE>
<CAPTION>
CLOSING
HIGH LOW VALUE
<S> <C> <C> <C> <C>
1987:
1st Quarter . . . . . 301.64 246.45 291.70
2nd Quarter . . . . . 309.65 278.21 304.00
3rd Quarter . . . . . 336.77 302.94 321.83
4th Quarter . . . . . 328.08 223.92 247.08
1988:
1st Quarter . . . . . 271.22 242.63 258.89
2nd Quarter . . . . . 275.66 250.83 273.50
3rd Quarter . . . . . 275.81 256.98 271.91
4th Quarter . . . . . 283.66 263.82 277.72
1989:
1st Quarter . . . . . 299.63 275.31 294.87
2nd Quarter . . . . . 328.44 295.29 317.98
3rd Quarter . . . . . 353.73 319.23 349.15
4th Quarter . . . . . 359.80 332.61 353.40
1990:
1st Quarter . . . . . 359.69 322.98 339.94
2nd Quarter . . . . . 367.40 329.11 358.02
3rd Quarter . . . . . 368.95 300.97 306.05
4th Quarter . . . . . 331.75 295.46 330.22
1991:
1st Quarter . . . . . 376.72 311.49 375.22
2nd Quarter . . . . . 390.45 368.57 371.16
3rd Quarter . . . . . 396.64 373.33 387.86
4th Quarter . . . . . 417.09 375.22 417.09
1992:
1st Quarter . . . . . 420.77 403.00 403.69
2nd Quarter . . . . . 418.49 394.50 408.14
3rd Quarter . . . . . 425.27 409.16 417.80
4th Quarter . . . . . 441.28 402.66 435.71
1993:
1st Quarter . . . . . 456.33 429.05 451.67
2nd Quarter . . . . . 453.85 433.54 450.53
3rd Quarter . . . . . 463.56 441.43 458.93
4th Quarter . . . . . 470.94 457.48 466.45
1994:
1st Quarter . . . . . 482.00 445.55 445.76
2nd Quarter (through April 19, 1994) 450.88 438.92 442.54
</TABLE>
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<PAGE> 16
CERTAIN FEDERAL TAX CONSEQUENCES
The following discussion supplements the information set forth in the
accompanying Prospectus Supplement under the heading "United States Tax
Considerations," and should be read in conjunction with such information.
The following is a summary of the principal United States federal tax
consequences resulting from the ownership of Index Notes by certain holders.
It does not purport to consider all the possible tax consequences of the
purchase, ownership, or disposition of the Index Notes, and it is not intended
to reflect the individual tax position of any holder. Except as expressly
indicated, it does not deal with special tax situations, such as dealers in
securities. The discussion applies only to any holder of an Index Note that is
a "United States person" (a "U.S. Holder"). For purposes of this discussion, a
United States person is a citizen or resident of the United States, a
corporation, partnership, or other entity created or organized under the laws
of the United States, or an estate or trust the income of which is subject to
United States federal income taxation regardless of its source, and the
"United States" means the United States of America (including the States and
the District of Columbia). The discussion may not be applicable to non-U.S.
Holders. The discussion is based upon the United States federal tax laws and
regulations as now in effect and as currently interpreted and does not take
into account possible changes in such tax laws or such interpretations. Under
such tax laws and regulations, the proper United States federal tax treatment
is uncertain. The discussion does not include any description of the tax laws
of any state or local governments, or of any foreign government, that may be
applicable to the Index Notes or holders thereof. Persons considering the
purchase of Index Notes should consult their own tax advisors concerning the
application of the United States federal tax laws to their particular
situations as well as any consequences arising under the laws of any other
taxing jurisdiction.
GENERAL
There are no regulations (except the Proposed Regulations as described
below), published rulings or judicial decisions involving the characterization,
for United States federal income tax purposes, of securities with terms
substantially the same as the Index Notes. However, although the matter is not
free from doubt, the Issuer currently intends to treat the Index Notes as debt
instruments of the Issuer for United States federal income tax purposes and,
where required, intends to file information returns with the Internal Revenue
Service ("IRS") in accordance with such treatment, in the absence of any
change or clarification in the law, by regulation or otherwise, requiring a
different characterization. The discussion below is based upon the assumption
that the Index Notes will be treated as debt instruments of the Issuer for
United States federal income tax purposes.
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<PAGE> 17
The following discussion supplements the information set forth in the
accompanying Prospectus Supplement under the heading "United States Tax
Considerations--United States Holders".
Under general principles of current United States federal income tax
law, payments of interest on an Index Note generally will be taxable to a U.S.
Holder as ordinary interest income at the time such payments are accrued or are
received (in accordance with the U.S. Holder's regular method of tax
accounting). Despite the foregoing, nonperiodic payments of interest on an
Index Note generally will be treated as original issue discount ("OID"), for
United States federal income tax purposes, and will be includible in income by
a U.S. Holder as ordinary interest as it accrues over the term of the Index
Note under a constant yield method in advance of receipt of the cash payments
attributable to such income, regardless of the U.S. Holder's regular method of
tax accounting. Under these general principles, the excess of the Maturity
Amount payable with respect to an Index Note over the Principal Amount (the
"Additional Interest Amount"), if any, would be treated as contingent interest
and generally would be includible in income by a U.S. Holder as ordinary
interest on the date the Maturity Amount is accrued (i.e., determined) or when
such amount is received (in accordance with the U.S. Holder's regular method
of tax accounting). It is possible, however, that as of the last Calculation
Date in one or more certain Calculation Periods (other than the final
Calculation Period), the sum of the Annual Value calculated during the
Calculation Period to which such last Calculation Date relates and the Annual
Values for all prior Calculation Periods, if any, would equal an amount such
that the Maturity Amount is certain to exceed the Principal Amount even if the
Annual Values for all subsequent Calculation Periods were to be zero (such
Maturity Amount is hereinafter referred to as the "Fixed Maturity Amount" and
each last Calculation Date relating to a certain Fixed Maturity Amount is
hereinafter referred to as a "Fixing Calculation Date"). Under such
circumstances, an accrual method U.S. Holder would be required to include in
income on the Fixing Calculation Date, as ordinary interest, an amount equal
to the portion of the excess of the Fixed Maturity Amount over the Principal
Amount (the "Fixed Additional Interest Amount") that has accrued as of the
Fixing Calculation Date. The remaining portion of the Fixed Additional
Interest Amount would be includible in income by an accrual method U.S. Holder
as ordinary interest as it accrues over a period commencing on the Fixing
Calculation Date and concluding on the Stated Maturity Date. A cash method
U.S. Holder, however, would not be required to include any portion of the Fixed
Additional Interest Amount in income prior to receipt of the Maturity Amount.
Upon the sale or exchange of an Index Note prior to the Stated Maturity
Date, a U.S. Holder generally would recognize taxable gain or loss equal to the
difference between the amount realized upon the sale or exchange and such U.S.
Holder's adjusted tax basis in the Index Note. A U.S. Holder's adjusted tax
basis in an Index Note generally will equal such U.S. Holder's initial
investment in the Index Note increased by the amount of any OID included in
income by the U.S. Holder. Such gain or loss generally should be capital gain
or loss and should be long-term capital gain or loss if the Index Note were
held by the U.S. Holder for more than one year (subject to the market discount
rules). Prospective investors in the Index Notes
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<PAGE> 18
should be aware, however, that it is possible that the IRS could assert that any
amounts realized upon the sale or exchange of an Index Note prior to the Stated
Maturity Date in excess of the sum of the principal amount thereof and the
amount of OID which has accrued on the Index Note as of the date of such sale or
exchange constitutes ordinary interest income (subject to the bond premium
rules).
As discussed below, the Treasury Department has issued proposed
regulations that could potentially apply to the Index Notes and holders
thereof. There is no assurance that the proposed regulations will be adopted,
or, if adopted, that they will be adopted in their current form. It should
also be noted that proposed Treasury regulations are not binding upon either
the IRS or taxpayers prior to becoming effective as temporary or final
regulations. Prospective investors in the Index Notes are urged to consult
their own tax advisors regarding the application of the proposed regulations to
their investment in the Index Notes, if any, and the effect of the possible
changes to the proposed regulations.
It is not entirely clear under current law how the Index Notes would
be taxed since they are classified as contingent payment debt obligations. The
Additional Interest Amount would be treated as contingent interest and
generally would be includible in income by a U.S. Holder as ordinary interest
on the date the Maturity Amount is accrued (i.e., determined) or when such
amount is received (in accordance with the U.S. Holder's regular method of tax
accounting). In addition, in the event of a Fixing Calculation Date, an
accrual method U.S. Holder would be required to include in income on such
Fixing Calculation Date, as ordinary interest, an amount equal to the portion
of the Fixed Additional Interest Amount that has accrued as of the Fixing
Calculation Date. The remaining portion of the Fixed Additional Interest
Amount would be includible in income by an accrual method U.S. Holder as
ordinary interest as it accrues over a period commencing on the Fixing
Calculation Date and concluding on the Stated Maturity Date.
In 1991, the Treasury Department issued proposed regulations (the
"1991 Proposed Regulations") under the original issue discount provisions of
the Code concerning contingent payment debt obligations which, if applicable to
the Index Notes, would bifurcate an Index Note into a debt instrument and a
right based upon the value of the S&P 500 Index. The 1991 Proposed Regulations
contain a retroactive effective date of February 20, 1991. Thus, if the 1991
Proposed Regulations are ultimately adopted in their current form, such
regulations would apply to the Index Notes and would cause the timing and
character of income, gain or loss reported on an Index Note to differ from the
timing and character of income, gain or loss reported on an Index Note had the
1991 Proposed Regulations not applied. Because of the uncertainty as to what
regulations, if any, will apply to Index Notes, and the provisions of such
regulations, purchasers should consult their own tax advisors with respect to
the current application of the OID rules to such Index Notes.
The 1991 Proposed Regulations would treat an Index Note as consisting
of two separate instruments: (i) the fixed payments (i.e., the debt
instrument), consisting of the right to receive the Principal Amount (the
"Fixed Payment"), and (ii) the contingent
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<PAGE> 19
payment, consisting of the right to receive the Additional Interest
Amount (the "Contingent Payment"). An Index Note's original issue price would
be allocated between the Fixed Payment and the Contingent Payment in
accordance with their relative fair market values.
Under the 1991 Proposed Regulations, the Fixed Payment would be
treated, for United States federal income tax purposes, as a separate debt
obligation issued at an original issue discount. A U.S. Holder (whether a cash
or accrual method taxpayer) would be required to include the original issue
discount on an Index Note in gross income (using a constant yield method) over
the Index Note's term in advance of receipt of the cash payments attributable
to such income. The original issue discount required to be included in income
with respect to an Index Note would be equal to the difference between the
Principal Amount and the amount of the Index Note's original issue price
allocated to the Fixed Payment. Unless the rights to the Contingent Payments
are substantially equivalent to publically traded property, the issue price
allocated to the Fixed Payment is determined in the same manner as if the Fixed
Payment were a debt instrument issued as part of an investment unit. Under the
1991 Proposed Regulations, a U.S. Holder that disposes of an Index Note prior
to its maturity would generally recognize taxable gain or loss, with respect to
the Fixed Payment, in an amount equal to the difference (if any) between the
portion of the sales proceeds allocated to such Fixed Payment (in accordance
with the relative fair market values of the Fixed Payment and the Contingent
Payment as determined on the date of disposition) and such U.S. Holder's
adjusted tax basis in the Fixed Payment. A U.S. Holder's adjusted tax basis in
the Fixed Payment generally would equal the portion of such U.S. Holder's
initial investment in the Index Note that is allocated to the Fixed Payment (in
accordance with the relative fair market values of the Fixed Payment and the
Contingent Payment), increased by the amount of original issue discount
previously included in income by such U.S. Holder with respect to the Fixed
Payment.
Under the 1991 Proposed Regulations, the Contingent Payment would be
treated separately from the Fixed Payment and taxed "in accordance with (its)
economic substance". Although not entirely free from doubt, if the 1991
Proposed Regulations were applied to the Index Notes, under an "economic
substance" analysis, the Contingent Payment would most likely be treated as an
"unlisted" cash settlement option (an "S&P Right") on the S&P 500 Index. A
U.S. Holder would recognize taxable gain or loss with respect to the S&P Right
only upon its sale, exchange, expiration or payment at maturity. The gain or
loss with respect to the S&P Right would generally be measured by the
difference between the amount realized with respect to the S&P Right and its
tax basis. A U.S. Holder's tax basis in the S&P Right generally would be the
portion of the U.S. Holder's initial investment in the Index Note that is
allocated to the Contingent Payment (in accordance with the relative fair
market values of the Fixed Payment and the Contingent Payment). Such gain or
loss on the S&P Right would generally be long-term capital gain or loss if
the Index Note were held by the U.S. Holder for more than one year.
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<PAGE> 20
Prospective investors in the Index Notes should also be aware that it
is possible that the IRS could assert that the S&P Right should be treated as a
listed option that is a nonequity option subject to Code section 1256 (which
includes the Code's mark- to-market rules). The IRS may take this position
based on the fact that there are listed nonequity options and futures based on
the S&P 500 Index. Although it is possible that if the 1991 Proposed
Regulations were applicable to the Index Notes the S&P Right could be treated
as a listed nonequity option, it is not clear that Code section 1256 and the
1991 Proposed Regulations contemplate such a result. Moreover, there are
differences between the S&P Right and options on the S&P 500 Index that are
actually traded which means that there is no public trading market from which
to draw a market price.
If the 1991 Proposed Regulations were applicable to the Index Notes
and if the S&P Right was treated as a "listed nonequity option", such S&P Right
would generally be marked to market under Code section 1256, (i.e., treated as
if it were sold for its fair market value on the last business day of the U.S.
Holder's taxable year). Any resulting gain or loss would be treated as 60
percent long-term and 40 percent short-term capital gain or loss.
Additionally, gain or loss on the sale, exchange, expiration or payment at
maturity of the S&P Right would be 60 percent long-term and 40 percent
short-term capital gain or loss. Prospective investors in the Index Notes
should consult their own tax advisors as to the proper treatment of the S&P
Right under the 1991 Proposed Regulations in the event that the 1991 Proposed
Regulations are applied to the Index Notes.
There is no assurance that the 1991 Proposed Regulations will be
adopted or, if adopted, adopted in their current form. In addition, on January
19, 1993, the Treasury Department issued proposed regulations (the "1993
Proposed Regulations"), concerning contingent payment debt obligations, which
would have replaced the 1991 Proposed Regulations and which would have provided
for a set of rules with respect to the timing and character of income
recognition on contingent payment debt obligations that differ from the rules
contained in the 1991 Proposed Regulations with respect to the timing and
character of income recognition on contingent payment debt obligations. The
1993 Proposed Regulations, which would have applied to debt instruments issued
60 days or more after the date the 1993 Proposed Regulations became final,
generally provided for several alternative timing methods which would have
required annual interest accruals to reflect either a market yield for the debt
instrument, determined as of the issue date, or a reasonable estimate of the
performance of contingencies. The amount of interest deemed to accrue in a
taxable year pursuant to such methods would have been currently includible in
income by a U.S. Holder, with subsequent adjustments to the extent that the
estimate of income was incorrect. In addition, under the 1993 Proposed
Regulations, any gain recognized by a U.S. Holder on the sale, exchange or
retirement of a contingent payment debt obligation would have been treated
entirely as ordinary interest income and any loss recognized on the sale,
exchange or retirement of a contingent payment debt obligation would have been
treated entirely as a capital loss. However, on January 22, 1993, the United
States Government's Office of Management and Budget announced that certain
proposed regulations which had not yet been published in
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<PAGE> 21
the Federal Register, including the 1993 Proposed Regulations, had been
withdrawn. It is unclear whether the 1993 Proposed Regulations will be
re-proposed or, if re-proposed, what effect, if any, such regulations would have
on the Index Notes. Based upon the foregoing, the continued viability of the
1991 Proposed Regulations is uncertain. It should also be noted that proposed
Treasury regulations are not binding upon either the IRS or taxpayers prior to
becoming effective as temporary or final regulations. Prospective investors in
the Index Notes are urged to consult their own tax advisors regarding the
application of the Proposed Regulations to their Investment in the Index Notes,
if any, and the effect of possible changes to the Proposed Regulations.
MARKET DISCOUNT AND PREMIUM
Prospective investors in the Index Notes should be aware that the
application of the market discount and premium rules to the Index Notes may
differ from the application discussed in the accompanying Prospectus Supplement
in the event that the 1991 Proposed Regulations are applied to the Index Notes.
Persons considering an investment in the Index Notes are urged to consult their
own tax advisors in this regard.
NON-UNITED STATES HOLDERS
The following discussion supplements the information set forth in the
accompanying Prospectus Supplement under the heading "United States Tax
Considerations--Non-United States Holders".
Under the 1991 Proposed Regulations, a portion of an Index Note equal
to the fair market value of the Contingent Payment may be includible in the
gross estate of a nonresident alien individual for United States federal
estate tax purposes in the event that the 1991 Proposed Regulations were
applied to the Index Notes.
PURCHASES AS PRINCIPAL
This Pricing Supplement relates to $10,000,000 aggregate principal
amount of Notes that may be offered, as principal, by Lehman Brothers Inc.
("Lehman Brothers") from time to time to one or more investors or to one or
more broker-dealers (acting as principal for purposes of resale) at varying
prices related to prevailing market prices at the time of resale, as determined
by Lehman Brothers. Net proceeds payable by Lehman Brothers to the Issuer will
be $9,950,000, before deduction of expenses payable by the Issuer. In
connection with the sale of the Notes, Lehman Brothers may be deemed to have
received compensation from the Issuer in the form of underwriting discounts.
- 19 -
