<PAGE>
RULE 424(b)(3)
REGISTRATION NO. 33-49947
PROSPECTUS SUPPLEMENT
- ---------------------
(TO PROSPECTUS SUPPLEMENT DATED OCTOBER 4, 1993 AND PROSPECTUS DATED AUGUST 27,
1993)
MERRILL LYNCH & CO., INC.
MEDIUM-TERM NOTES, SERIES B
DUE NINE MONTHS OR MORE FROM DATE OF ISSUE
ONE YEAR FRENCH FRANC DURATION ENHANCED NOTES WITH FFR EXPOSURE
ON GAIN/LOSS DUE MARCH 1, 1995
<TABLE>
<S> <C>
Original Issue Date: March 1, 1994 Principal Amount: U.S.$30 million
Maturity Date: March 1, 1995 Interest Rate: 4%
Redemption Date: Not Applicable Principal Redemption Amount: the
greater of (a) U.S. dollar principal
amount + [[Adjusted French Franc
Notional Amount x 4.3 x (5.49% -
[Five-Year FFR Offer-Side Swap Rate
or Forward Five-Year FFR Offer Side
Swap Rate, as determined herein])] /
[FFR/USD]], and (b) zero
Optional Repayment Dates: Not
Applicable
Interest Payment Dates: September 1,
1994 and March 1, 1995
</TABLE>
DESCRIPTION OF THE NOTES
GENERAL
The Medium-Term Notes, Series B of Merrill Lynch & Co., Inc. (the
"Company"), offered hereby are "One Year French Franc Duration Enhanced Notes
with FFR Exposure on Gain/Loss due March 1, 1995" and are referred to in this
Prospectus Supplement as the "Notes". The Notes are Fixed Rate Notes and
certain provisions of the Notes are more fully described in the accompanying
Prospectus and Prospectus Supplement.
The principal of the Notes repayable on the Maturity Date specified
above (the "Principal Redemption Amount") will be determined pursuant to the
formulae applicable to the Notes described herein, and such amount may be less
than, equal to or more than the principal amount of the Notes (but will not be
less than zero). The Notes will be issued as Book-Entry Notes in denominations
of U.S.$1,000,000 and integral multiples of U.S.$100,000 in excess thereof.
The Notes will not be subject to redemption by the Company in
whole or in part prior to the Maturity Date.
IN CERTAIN CIRCUMSTANCES, THE PRINCIPAL REDEMPTION AMOUNT OF A NOTE
PAYABLE ON THE MATURITY DATE MAY BE LESS THAN THE PRINCIPAL AMOUNT OF SUCH NOTE,
BUT MAY NOT BE LESS THAN ZERO.
This Prospectus Supplement relates to $30,000,000 aggregate principal
amount of Notes which the Company has agreed to sell to Merrill Lynch, Pierce,
Fenner & Smith Incorporated (the "Underwriter"), and which the Underwriter has
agreed to purchase from the Company, at a price of 99.875% of the principal
amount thereof. The Underwriter has advised the Company that it proposes
initially to offer the Notes to the public at a public offering price equal to
100% of the principal amount thereof. After the initial public offering, such
public offering price may be changed.
The date of this Prospectus Supplement is February 25, 1994
<PAGE>
INTEREST
The Notes will bear interest, payable in U.S. dollars, from and
including March 1, 1994 to but excluding the Maturity Date. Interest on the
Notes will be payable in U.S. dollars on the Interest Payment Dates specified
above at a per annum rate equal to 4%. Interest will be payable semi-annually
in arrears on September 1, 1994 and on March 1, 1995. Interest will be
computed on the basis of a 360-day year of twelve 30-day months. Interest
payable on the Maturity Date will be payable to the person to whom the Principal
Redemption Amount, if any, is payable.
PRINCIPAL REDEMPTION AMOUNT
The Principal Redemption Amount of a Note payable by the Company on
the Maturity Date will be payable in U.S. dollars based on the following
formula, as determined by the relevant Calculation Agent on the Determination
Date, provided that in no event shall the Principal Redemption Amount be less
--------
than zero:
U.S. dollar principal amount of such Note + [[Adjusted French Franc Notional
Amount x 4.3 x (5.49% - Five-Year FFR Offer-Side Swap Rate)] / [FFR/USD]].
Notwithstanding the foregoing, on any New York Business Day on or after June 1,
1994 and prior to 5:00 P.M. New York City time on the second New York Business
Day prior to the Maturity Date, the Holder of the Notes may exercise the Swap
Rate Lock Option to lock-in the Forward Five-Year FFR Offer-Side Swap Rate on
the date (the "Swap Rate Lock Option Date") which is the earlier of (i) the New
York Business Day selected by such Holder (which may not be earlier than the
second Calculation Business Day after the Exercise Date) and (ii) the Maturity
Date, with respect to the calculation of the Principal Redemption Amount of the
Notes based on the following formula, as determined by the relevant Calculation
Agent on the Determination Date, provided that in no event shall the Principal
--------
Redemption Amount be less than zero:
U.S. dollar principal amount of such Note + [[Adjusted French Franc Notional
Amount x 4.3 x (5.49% - Forward Five-Year FFR Offer-Side Swap Rate)] /
[FFR/USD]].
The Swap Rate Lock Option can be exercised only by a Holder holding a Note or
Notes having an aggregate principal amount of $30,000,000 or more. In the event
that the Swap Rate Lock Option is exercised by the Holder of any Note, such
election shall be binding and irrevocable with respect to such Note.
To exercise the Swap Rate Lock Option, the beneficial owner of a Note
must (i) give irrevocable written exercise instructions on a New York Business
Day (the "Exercise Date") to (a) Merrill Lynch Capital Services, Inc. ("MLCS"),
World Financial Center, North Tower, 7th Floor, New York, New York 10281 (phone
212-449-6177) and (b) the Trustee, Chase Manhattan Bank (National Association),
4 Chase MetroTech Center, Brooklyn, New York 11245, Attention: Corporate Trust
Administration, and (ii) cause title of such Note to be transferred free on the
records of the Securities Depository to the Trustee by the second New York
Business Day immediately succeeding the Exercise Date. Upon receipt of the
Note, the Trustee will record that the Swap Rate Lock Option with respect to
such Note has been exercised and will cause title of the Note to be transferred
free on the records of the Securities Depository to the account of the
Participant designated by the beneficial owner. If the Trustee does not receive
the transfer of the Note for which exercise notice has been duly given to MLCS
and the Trustee by the close of business of the second New York Business Day
immediately succeeding the Exercise Date, the Swap Rate Lock Option will be
deemed not to have been exercised with respect to such Note.
S-2
<PAGE>
All calculations of the Five-Year FFR Offer-Side Swap Rate and the
Forward Five-Year FFR Offer-Side Swap Rate shall be made as of the Determination
Date.
In the absence of manifest error, determinations by the relevant
Calculation Agent shall be final and binding on the Company and the Holders of
the Notes.
If an Event of Default (as defined in the Indenture) with respect to
the Notes shall have occurred and be continuing, the Principal Redemption Amount
of all of the Notes may be declared due and payable in the manner and with the
effect provided in the Indenture. In such cases, the Principal Redemption
Amount declared due and payable on the date of acceleration will be calculated
as if such date of acceleration were the Maturity Date.
Any payment of principal or interest required to be made on an
Interest Payment Date or the Maturity Date, as the case may be, which is not a
New York Business Day may be made on the next succeeding New York Business Day
with the same force and effect as if made on such Interest Payment Date or the
Maturity Date, as the case may be, and no interest will accrue with respect to
such payment for the period from and after such Interest Payment Date or the
Maturity Date, as the case may be.
As used with respect to the Notes, the following terms and
definitions apply:
"Adjusted French Franc Notional Amount" means FFR42,732,000 for
each U.S.$1,000,000 principal amount of Notes.
"Calculation Business Day" means any day which is both a New
York Business Day and a Paris Business Day.
"Calculation Agent" means (i) with respect to the calculation of the
Five-Year FFR Offer-Side Swap Rate, the Forward Five-Year FFR Offer-Side Swap
Rate and the Principal Redemption Amount, Merrill Lynch Capital Services, Inc.
and (ii) with respect to the calculation of FFR/USD, Merrill Lynch International
Bank.
"Determination Date" means (i) with respect to the calculation of the
Five-Year FFR Offer-Side Swap Rate, the second Calculation Business Day prior to
the Maturity Date, and (ii) with respect to the calculation of the Forward Five-
Year FFR Offer-Side Swap Rate in the event that the Holder of a Note has elected
to exercise its Swap Rate Lock Option then the second Calculation Business Day
prior to the New York Business Day on which such rate shall be locked in.
"Forward Five-Year FFR Offer-Side Swap Rate" means the arithmetic mean
of the forward offered-side fixed rate (expressed as a percent) of a fixed for
floating French Franc PIBOR ("FF PIBOR") interest rate swap transaction with a
five year maturity, beginning on the Maturity Date, and a notional amount equal
to the Adjusted French Franc Notional Amount determined by the relevant
Calculation Agent on the Determination Date based on the quotes of five leading
market-makers in Paris in such interest rate swap transactions selected by such
Calculation Agent.
"FFR/USD" means the exchange rate for French Francs per U.S. dollar as
determined by the relevant Calculation Agent equal to the arithmetic mean of
spot offer rates for French Francs (spot bid for U.S. dollars) at 10 A.M. (Paris
time) on the second Calculation Business Day preceding the Maturity Date, or, if
the Swap Rate Lock Option is exercised, on the second Calculation Business Day
prior to the Swap Rate Lock Option Date, for an amount of French Francs equal to
FFR30,000,000 for delivery on the Maturity Date which have been obtained by the
Calculation Agent from five major currency exchange rate market makers selected
by the Calculation Agent, after eliminating the highest and lowest of such rates
(or, in the event of equality of the highest and/or lowest rates, after
eliminating one of such highest and/or lowest rates, as the case may be). If
fewer than five market-makers are quoting as described in this paragraph, then
the FFR/USD will equal the arithmetic mean of the spot offer rates obtained and
neither the highest nor the lowest of such quotations will be eliminated. If
only one market-maker is quoting as described in this paragraph, then FFR/USD
will equal such quote.
S-3
<PAGE>
"New York Business Day" means any day that is not a Saturday or a
Sunday and that, in The City of New York, is not a day on which banking
institutions are generally authorized or obligated by law to close.
"Paris Business Day" means a day (other than a Saturday or Sunday) on
which banks and foreign exchange markets are open for business in Paris.
"Telerate Page 2514" means the display page so designated on the Dow
Jones Telerate Service (or such other page as may replace such page on that
service for the purpose of displaying the five-year FF PIBOR offered-side swap
rate).
"Five-Year FFR Offer-Side Swap Rate" means the offered-side fixed rate
(expressed as a percent) of a fixed for floating FF PIBOR interest rate swap
transaction with a five year maturity, beginning on the Maturity Date, such rate
being determined by the relevant Calculation Agent as of 11:00 A.M. (Paris time)
on the Determination Date as shown on Telerate Page 2514; provided that if such
rate is not being shown on Telerate Page 2514 by 3:00 P.M. (Paris time) on the
Determination Date, then the Five-Year FFR Offer-Side Swap Rate shall be
determined by such Calculation Agent on such Determination Date based on the
arithmetic mean of the rate quoted by five leading market-makers in Paris in
such interest rate swap transactions selected by such Calculation Agent.
All other capitalized terms used but not defined herein shall have the
meanings assigned to such terms in the accompanying Prospectus and Prospectus
Supplement.
S-4
<PAGE>
The following table sets forth the closing values of the FFR/USD
exchange rate and Five-Year FFR Offer-Side Swap Rate on the last business day of
each quarter for the periods indicated. The historical experience of such rates
should not be taken as an indication of future performance, and no assurance can
be given as to the levels of such rates as of their respective Determination
Dates.
<TABLE>
<CAPTION>
FFR/USD Five-Year FFR
Exchange Rate(1) Offer-Side Swap Rate(2)
------------- --------------------
<S> <C> <C>
1989:
1st Quarter 6.41 N/A%
2nd Quarter 6.64 9.27%
3rd Quarter 6.35 9.35%
4th Quarter 5.78 10.22%
1990:
1st Quarter 5.68 10.65%
2nd Quarter 5.58 10.23%
3rd Quarter 5.24 10.89%
4th Quarter 5.09 10.63%
1991:
1st Quarter 5.78 9.55%
2nd Quarter 6.14 9.57%
3rd Quarter 5.67 9.35%
4th Quarter 5.20 9.27%
1992:
1st Quarter 5.57 9.29%
2nd Quarter 5.13 9.32%
3rd Quarter 4.80 9.30%
4th Quarter 5.53 8.39%
1993:
1st Quarter 5.46 7.42%
2nd Quarter 5.75 6.43%
3rd Quarter 6.02 5.90%
4th Quarter 5.92 5.19%
1994
1st Quarter (as of February 24,
1994) 5.83 5.84%
- ---------------------------
</TABLE>
(1) As derived from Bloomberg Financial Markets.
(2) As derived from DRI/McGraw-Hill-DRIFACS.
S-5
<PAGE>
The following table illustrates the Principal Redemption Amounts (expressed
as percentages of the principal amount of a Note) which would result for a range
of hypothetical FFR/USD rates and Five-Year Offer-Side Swap Rates.
<TABLE>
<CAPTION>
FFR/USD Exchange Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5.35 5.55 5.75 5.95 6.10 6.30 6.50
3.50 168.35 165.88 163.59 161.46 159.94 161.61 156.26
3.75 159.76 157.61 155.60 153.73 152.41 153.87 149.19
4.00 151.17 149.33 147.61 146.01 144.88 146.13 142.12
4.25 142.59 141.05 139.63 138.29 137.35 138.39 135.05
4.50 134.00 132.78 131.64 130.57 129.82 130.65 127.99
4.75 125.42 124.50 123.65 122.85 122.29 122.91 120.92
Five-Year 5.00 116.83 116.22 115.66 115.13 114.76 115.17 113.85
Offer-Side 5.25 108.24 107.95 107.67 107.41 107.23 107.43 106.78
Swap Rate 5.50 99.66 99.67 99.68 99.69 99.70 99.69 99.72
(expressed as 5.75 91.07 91.39 91.69 91.97 92.17 91.95 92.65
a percent) 6.00 82.48 83.12 83.70 84.25 84.64 84.21 85.58
6.25 73.90 74.84 75.71 76.53 77.11 76.47 78.52
6.50 65.31 66.56 67.72 68.81 69.58 68.73 71.45
6.75 56.72 58.28 59.74 61.09 62.05 60.99 64.38
7.00 48.14 50.01 51.75 53.37 54.51 53.25 57.31
7.25 39.55 41.73 43.76 45.65 46.98 45.51 50.25
7.50 30.97 33.45 35.77 37.93 39.45 37.77 43.18
7.75 22.38 25.18 27.78 30.21 31.92 30.03 36.11
8.00 13.79 16.90 19.79 22.49 24.39 22.29 29.05
8.25 5.21 8.62 11.80 14.77 16.86 14.55 21.98
8.50 -3.38 0.35 3.81 7.05 9.33 6.81 14.91
</TABLE>
The above figures are for purposes of illustration only. The actual
Principal Redemption Amount received by investors will depend on the actual
values of the FFR/USD exchange rates and the Five-Year Offer-Side Swap Rates or
Forward Five-Year Offer-Side Swap Rates, as the case may be.
S-6
<PAGE>
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain United States Federal income tax
consequences of the purchase, ownership and disposition of the Notes is based
upon the opinion, set forth in full below, of Brown & Wood, counsel to the
Company, which opinion is based upon laws, regulations, rulings and decisions
now in effect (or, in the case of certain regulations, in proposed form), all of
which are subject to change (including changes in effective dates) or possible
differing interpretations. The discussion below deals only with Notes held as
capital assets and does not purport to deal with persons in special tax
situations, such as financial institutions, insurance companies, regulated
investment companies, dealers in securities or currencies, persons holding Notes
as a hedge against currency risks or as a position in a "straddle" for tax
purposes, or persons whose functional currency is not the United States dollar.
It also does not deal with holders other than original purchasers who purchase
the Notes for an amount equal to the Principal Amount nor does it deal with
holders other than U.S. Holders (as defined below). Persons considering the
purchase of the Notes should consult their own tax advisors concerning the
application of United States Federal income tax laws to their particular
situations as well as any consequences of the purchase, ownership and
disposition of the Notes arising under the laws of any other taxing
jurisdiction.
As used herein, the term "U.S. Holder" means a beneficial owner of a Note
that is for United States Federal income tax purposes (i) a citizen or resident
of the United States, (ii) a corporation, partnership or other entity created or
organized in or under the laws of the United States or of any political
subdivision thereof, (iii) an estate or trust the income of which is subject to
United States Federal income taxation regardless of its source or (iv) any other
person whose income or gain in respect of a Note is effectively connected with
the conduct of a United States trade or business.
GENERAL
There are no regulations (except the 1986 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 Notes. However, the Company currently intends to
treat the Notes as debt obligations of the Company 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. Although there exists a
reasonable basis for the Company's characterization of the Notes as debt
obligations for United States Federal income tax purposes, the matter is not
free from doubt and prospective investors in the Notes should be aware that the
IRS is not bound by the Company's characterization of the Notes as indebtedness
and that the IRS could possibly take a different position as to the proper
characterization of the Notes for United States Federal income tax purposes.
The following discussion of the principal United States Federal income tax
consequences of the purchase, ownership and disposition of the Notes is based
upon the assumption that the Notes will be treated as debt obligations of the
Company for the United States Federal income tax purposes. If the Notes are not
in fact treated as debt obligations of the Company for United States Federal
income tax purposes, then the United States Federal income tax treatment of the
purchase, ownership and disposition of the Notes could differ from the treatment
discussed below.
U.S. HOLDERS
Since the Principal Redemption Amount payable on the Maturity Date with
respect to the Notes may be less than the Principal Amount thereof, the Notes
would be treated as contingent payment debt obligations. It is not entirely
clear under current law how the Notes would be taxed since they would be
classified as contingent payment debt obligations.
Under general principles of current United States Federal income tax law,
payments of interest on a debt instrument generally will be taxable to a U.S.
Holder as ordinary interest income at the time such payments are
S-7
<PAGE>
accrued or are received (in accordance with the U.S. Holder's regular method of
tax accounting). In addition, under Section 988 of the Internal Revenue Code of
1986, as amended (the "Code") and the regulations promulgated thereunder, in the
case of a debt instrument that provides for payments the amounts of which are
determined by reference to the value of one or more nonfunctional currencies
(generally, a currency other than the U.S. dollar), any gain or loss realized
with respect to such debt instrument by reason of changes in foreign currency
exchange rates generally must be treated as foreign currency gain or loss and
must be treated as ordinary income (other than interest income) or ordinary
loss, as the case may be, to the extent such foreign currency gain or loss does
not exceed the total gain or loss realized on such debt instrument.
Although Code Section 988 and the regulations promulgated thereunder do not
specifically address the proper treatment of an instrument such as the Notes and
therefore the matter is not free from doubt, under the foregoing principles, the
amounts payable with respect to a Note at the Interest Rate (the "Semiannual
Interest Payments") should be includible in income by a U.S. Holder as ordinary
interest on the respective dates that the Semiannual Interest Payments are
accrued or are received (in accordance with the U.S. Holder's regular method of
tax accounting). Upon retirement of a Note, the excess of the Principal
Redemption Amount over the Principal Amount (the "Supplemental Redemption
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 that the
Principal Redemption 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). However, any portion of the Supplemental Redemption Amount that is
attributable to fluctuations in foreign currency exchange rates occurring
between the Original Issue Date and the Determination Date with respect to the
calculation of FFR/USD should constitute foreign currency gain under Section 988
of the Code and should be treated as ordinary income. If, however, the
Principal Redemption Amount is equal to or less than the Principal Amount, then,
under general principles of current United States Federal income tax law, a Note
would be treated as having been retired on the Maturity Date for an amount equal
to the Principal Redemption Amount. A U.S. Holder generally would recognize
taxable loss under such circumstances in an amount equal to the excess, if any,
of the U.S. Holder's tax basis in the Note over the Principal Redemption Amount.
A U.S. Holder's tax basis in a Note generally will equal such U.S. Holder's
initial investment in the Note (generally the Principal Amount). Such loss
generally should be short-term capital loss. However, any portion of such loss
that is attributable to fluctuations in foreign currency exchange rates
occurring between the Original Issue Date and the Determination Date with
respect to the calculation of FFR/USD should constitute foreign currency loss
under Section 988 of the Code and should be treated as ordinary loss. Upon the
sale or exchange of a Note prior to the Maturity Date, a U.S. Holder generally
would recognize taxable gain or loss in an amount equal to the difference, if
any, between the amount realized on such sale or exchange (other than amounts
representing accrued and unpaid interest) and such U.S. Holder's tax basis in
the Note. Such gain or loss generally should be short-term capital gain or
loss. Nevertheless, any such gain or loss realized upon the sale or exchange of
a Note prior to the Maturity Date by reason of changes in foreign currency
exchange rates occurring between the Original Issue Date and the date of such
sale or exchange should constitute foreign currency gain or loss under Section
988 of the Code and should be treated as ordinary income or loss, as the case
may be.
However, in 1986, the Treasury Department issued proposed regulations with
a retroactive effective date of July 1, 1982 (the "1986 Proposed Regulations")
under the original issue discount provisions of the Code concerning contingent
payment debt obligations. Although the 1986 Proposed Regulations would
generally apply to any contingent payment debt obligation where the issue price
of the debt instrument exceeds the total noncontingent payments due under the
debt instrument by more than an insubstantial amount, it is unclear to what
extent the 1986 Proposed Regulations would apply to a debt instrument providing
for one or more payments the amount of which are determined, in whole or in
part, by reference to the value of a foreign currency (such as the Notes).
Nevertheless, although the matter is not free from doubt, if the 1986 Proposed
Regulations are ultimately adopted in their current form, such regulations
should apply to the Notes and such application of the 1986 Proposed Regulations
would cause the timing and character of income, gain or loss recognized on a
Note to differ from the timing and character of income, gain or loss recognized
on a Note had the 1986 Proposed Regulations not applied.
Under the 1986 Proposed Regulations, the Semiannual Interest Payments would
be treated by a U.S. Holder as a return of principal. In addition, the
Principal Redemption Amount generally would be treated first as a return
S-8
<PAGE>
of principal, to the extent that the Principal Redemption Amount plus the
Semiannual Interest Payments equals the Principal Amount, and then as ordinary
interest includible in income by a U.S. Holder on the date that the Principal
Redemption Amount is determined. If, however, the Principal Amount exceeds the
sum of the Principal Redemption Amount and the Semiannual Interest Payments,
then a U.S. Holder generally should recognize a short-term capital loss on the
Maturity Date in an amount equal to the excess of the Principal Amount over the
sum of the Principal Redemption Amount and the Semiannual Interest Payments.
Under the 1986 Proposed Regulations, a U.S. Holder of a contingent payment
debt obligation with an issue price that exceeds the total noncontingent
payments due under the debt instrument by more than an insubstantial amount
generally is required to recognize ordinary interest income at the time that the
amount of any contingent payment due under the debt instrument becomes fixed.
Accordingly, in the event that the 1986 Proposed Regulations are applied to the
Notes, upon exercise of the Swap Rate Lock Option, a U.S. Holder generally
should be required to treat the Principal Redemption Amount as ordinary interest
includible in income on the date that the Swap Rate Lock Option is exercised to
the extent of the amount of interest which would have accrued with respect to
the Notes as of such date if the Notes had provided for stated interest equal to
the short-term applicable federal rate in effect as of the Original Issue Date
(the "Deemed Accrued Interest"). The remaining portion of the Principal
Redemption Amount (i.e., that portion of the Principal Redemption Amount that is
not treated as ordinary interest pursuant to the foregoing rule) should be
treated by a U.S. Holder first as a return of principal, to the extent that the
sum of the remaining portion of the Principal Redemption Amount and the
Semiannual Interest Payments equals the Principal Amount, and then as ordinary
interest includible in income by a U.S. Holder on the date that the Swap Rate
Lock Option is exercised. Alternatively, if the Principal Amount exceeds the
sum of the remaining portion of the Principal Redemption Amount and the
Semiannual Interest Payments, then a U.S. Holder generally should be required to
recognize a capital loss on the Maturity Date in an amount equal to such excess.
However, if a U.S. Holder exercises the Swap Rate Lock Option six months or more
prior to the Maturity Date, then an amount equal to the excess of the Principal
Redemption Amount over the present value (determined by using a discount rate
equal to the short-term applicable federal rate in effect as of the Original
Issue Date) of the Principal Redemption Amount (the "Discounted Principal
Redemption Amount") should be treated as original issue discount under the 1986
Proposed Regulations and a U.S. Holder should be required to include such
discount into income as ordinary interest under a constant yield method over a
period commencing on the date that the Swap Rate Lock Option is exercised and
concluding on the Maturity Date. In addition, under such circumstances, a U.S.
Holder should be required to treat the Discounted Principal Redemption Amount as
ordinary interest includible in income on the date that the Swap Rate Lock
Option is exercised to the extent of the Deemed Accrued Interest. The remaining
portion of the Discounted Principal Redemption Amount (i.e., the portion of the
Discounted Principal Redemption Amount that is not treated as ordinary interest
pursuant to the foregoing rule) should be treated first as a return of
principal, to the extent that the sum of the remaining portion of the Discounted
Principal Redemption Amount and the Semiannual Interest Payments equals the
Principal Amount, and then as ordinary interest includible in income by a U.S.
Holder on the date that the Swap Rate Lock Option is exercised. If, however,
the Principal Amount exceeds the sum of the remaining portion of the Discounted
Principal Redemption Amount and the Semiannual Interest Payments, then a U.S.
Holder generally should be required to recognize a short-term capital loss on
the Maturity Date in an amount equal to such excess.
Despite the foregoing, any amounts that would otherwise be treated as
ordinary interest income or as short-term capital loss under the 1986 Proposed
Regulations in accordance with the preceding rules, but which are attributable
to fluctuations in foreign currency exchange rates occurring between the
Original Issue Date and the Determination Date with respect to the calculation
of FFR/USD should constitute foreign currency gain or loss under Section 988 of
the Code and should be treated as ordinary income or loss, as the case may be.
Prospective investors in the Notes should also be aware that if the 1986
Proposed Regulations were applied to the Notes such regulations together with
Section 988 of the Code and the regulations promulgated thereunder could
possibly be interpreted as requiring a treatment of the Notes that differs from
the treatment discussed above.
There is no assurance that the 1986 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 1986
S-9
<PAGE>
Proposed Regulations and which would have provided for a set of rules with
respect to the timing and character of income, gain or loss on contingent
payment debt obligations that differ from the rules contained in the 1986
Proposed Regulations with respect to the timing and character of income, gain or
loss 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 realized on the sale,
exchange or retirement of a contingent payment debt obligation generally would
have been treated entirely as ordinary interest income and any loss realized on
the sale, exchange or retirement of a contingent payment debt obligation
generally 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
the Federal Register, including the 1993 Proposed Regulations, had been
withdrawn. In addition, it is unclear to what extent, if any, the 1993 Proposed
Regulations would have applied to debt instruments providing for one or more
payments determined, in whole or in part, by reference to the value of foreign
currency. Accordingly, 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 Notes. Based upon the foregoing, the continued viability of the
1986 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 Notes are urged to consult their own tax advisors regarding the application
of the 1986 Proposed Regulations, if any, and the effect of possible changes to
the 1986 Proposed Regulations to their investment in the Notes.
S-10
