<PAGE>
RULE NO. 424(b)(1)
REGISTRATION NO. 33-60413
PROSPECTUS
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LOGO
5,000,000 STRYPES
MERRILL LYNCH & CO., INC.
6 1/2% STRYPES SM DUE AUGUST 15, 1998
PAYABLE WITH SHARES OF COMMON STOCK OF MGIC INVESTMENT CORPORATION
(OR CASH WITH AN EQUAL VALUE)
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The issue price of each Structured Yield Product Exchangeable for Stock SM,
6 1/2% STRYPES SM Due August 15, 1998 (each, a "STRYPES") of Merrill Lynch &
Co., Inc. (the "Company") being offered hereby is $48.00, which amount is
equal to the last sale price of the common stock, par value $1.00 per share
(the "MGIC Common Stock"), of MGIC Investment Corporation, a Wisconsin
corporation ("MGIC Investment"), on July 20, 1995, as reported on the New York
Stock Exchange (the "Initial Price"). The STRYPES will mature on August 15,
1998 (the "Maturity Date"). Interest on the STRYPES, at the rate of 6 1/2% of
the issue price per annum, is payable in cash quarterly in arrears on February
15, May 15, August 15 and November 15, beginning November 15, 1995, and on the
Maturity Date. The STRYPES are not subject to redemption or any sinking fund
prior to maturity. The STRYPES will be unsecured obligations of the Company
ranking pari passu with all of its other unsecured and unsubordinated
indebtedness. See "Description of the STRYPES--Ranking."
On the Maturity Date, the Company will pay and discharge each STRYPES by
delivering to the holder thereof a number of shares of MGIC Common Stock (or,
at the Company's option, which may be exercised with respect to all, but not
less than all, shares of MGIC Common Stock deliverable on the Maturity Date,
cash with an equal value) determined in accordance with the following formula
(the "Payment Rate Formula"), subject to certain adjustments: (a) if the
Maturity Price is greater than or equal to $57.60 per share of MGIC Common
Stock (the "Threshold Appreciation Price"), .8333 shares of MGIC Common Stock
per STRYPES, (b) if the Maturity Price is less than the Threshold Appreciation
Price but is greater than the Initial Price, a number of shares of MGIC Common
Stock per STRYPES so that the value thereof (determined based on the Maturity
Price) equals the Initial Price and (c) if the Maturity Price is less than or
equal to the Initial Price, one share of MGIC Common Stock per STRYPES. The
"Maturity Price" means the average Closing Price (as defined herein) per share
of MGIC Common Stock on the 20 Trading Days (as defined herein) immediately
prior to the second Trading Day preceding the Maturity Date. ACCORDINGLY,
THERE CAN BE NO ASSURANCE THAT THE AMOUNT RECEIVABLE BY HOLDERS OF THE STRYPES
ON THE MATURITY DATE WILL BE EQUAL TO OR GREATER THAN THE ISSUE PRICE OF THE
STRYPES. IF THE MATURITY PRICE OF THE MGIC COMMON STOCK IS LESS THAN THE
INITIAL PRICE, SUCH AMOUNT RECEIVABLE ON THE MATURITY DATE WILL BE LESS THAN
THE ISSUE PRICE PAID FOR THE STRYPES, IN WHICH CASE AN INVESTMENT IN STRYPES
WILL RESULT IN A LOSS. See "Description of the STRYPES."
Reference is made to the accompanying prospectus of MGIC Investment covering
the shares of MGIC Common Stock which may be received by a holder of the
STRYPES at Maturity.
MGIC Investment is not affiliated with the Company, will not receive any of
the proceeds from the sale of the STRYPES and will have no obligations with
respect to the STRYPES.
SEE "RISK FACTORS" ON PAGE 7 OF THIS PROSPECTUS FOR CERTAIN CONSIDERATIONS
RELEVANT TO AN INVESTMENT IN THE STRYPES.
For a discussion of certain United States Federal income tax consequences
for holders of the STRYPES, see "Certain United States Federal Income Tax
Considerations."
The MGIC Common Stock is listed on the New York Stock Exchange ("NYSE")
under the trading symbol "MTG." The STRYPES have been approved for listing on
the NYSE, subject to official notice of issuance.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per STRYPES............................. $48.00 $1.44 $46.56
- --------------------------------------------------------------------------------
Total(4)................................ $240,000,000 $7,200,000 $232,800,000
</TABLE>
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(1) Plus accrued interest, if any, from July 26, 1995 to the date of delivery.
(2) The Company, MGIC Investment and The Northwestern Mutual Life Insurance
Company have agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."
(3) Before deducting expenses payable by the Company estimated at $550,000.
(4) The Company has granted the Underwriter an option for 30 days to purchase
up to an additional 750,000 STRYPES at the initial public offering price
per STRYPES, less the underwriting discount, solely to cover over-
allotments. If such over-allotment option is exercised in full, the total
Price to Public, Underwriting Discount and Proceeds to Company will be
$276,000,000, $8,280,000 and $267,720,000, respectively. See
"Underwriting."
---------------
The STRYPES are offered by the Underwriter, subject to prior sale, when, as
and if issued to and accepted by the Underwriter and subject to certain other
conditions. The Underwriter reserves the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the STRYPES will be made in New York, New York, on or about July
26, 1995.
This Prospectus may be used by the Underwriter in connection with offers and
sales related to market-making transactions in the STRYPES. The Underwriter
may act as principal or agent in such transactions. Such sales will be made at
prices related to prevailing market prices at the time of sale.
---------------
SM Service Mark of Merrill Lynch & Co., Inc.
MERRILL LYNCH & CO.
---------------
The date of this Prospectus is July 20, 1995.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE STRYPES AND
THE MGIC COMMON STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK
EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy and information statements and
other information filed by the Company can be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional
Offices of the Commission: Midwest Regional Office, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511 and Northeast Regional Office, Seven
World Trade Center, New York, New York 10048. Copies of such material can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. Reports, proxy and
information statements and other information concerning the Company may also
be inspected at the offices of the New York Stock Exchange, the American Stock
Exchange, the Chicago Stock Exchange and the Pacific Stock Exchange.
The Company has filed a Registration Statement on Form S-3 (the
"Registration Statement") with the Commission pursuant to the Securities Act
of 1933, as amended (the "Securities Act"), covering the STRYPES. This
Prospectus does not contain all the information set forth in the Registration
Statement and the exhibits thereto, to which reference is hereby made.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended December 30,
1994, Quarterly Report on Form 10-Q for the period ended March 31, 1995, and
Current Reports on Form 8-K dated January 12, 1995, January 23, 1995, February
8, 1995, February 9, 1995, March 3, 1995, March 9, 1995, April 18, 1995, May
2, 1995, May 23, 1995, and July 18, 1995 filed pursuant to Section 13 of the
Exchange Act, are hereby incorporated by reference into this Prospectus.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering of the STRYPES shall be deemed to be
incorporated by reference into this Prospectus and to be a part hereof from
the date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent
that a statement contained herein or in any other subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Prospectus.
THE COMPANY WILL PROVIDE WITHOUT CHARGE TO EACH PERSON TO WHOM THIS
PROSPECTUS IS DELIVERED, ON THE WRITTEN OR ORAL REQUEST OF SUCH PERSON, A COPY
(WITHOUT EXHIBITS OTHER THAN EXHIBITS SPECIFICALLY INCORPORATED BY REFERENCE)
OF ANY OR ALL DOCUMENTS INCORPORATED BY REFERENCE INTO THIS PROSPECTUS.
REQUESTS FOR SUCH COPIES SHOULD BE DIRECTED TO MR. GREGORY T. RUSSO,
SECRETARY, MERRILL LYNCH & CO., INC., 100 CHURCH STREET, 12TH FLOOR, NEW YORK,
NEW YORK 10080-6512; TELEPHONE NUMBER (212) 602-8435.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE COMMISSIONER
OF INSURANCE FOR THE STATE OF NORTH CAROLINA, NOR HAS THE COMMISSIONER OF
INSURANCE RULED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the information
incorporated by reference in this Prospectus and by the more detailed
information included elsewhere in this Prospectus. Unless otherwise indicated,
the information contained in this Prospectus assumes that the Underwriter's
over-allotment option is not exercised.
MERRILL LYNCH & CO., INC.
Merrill Lynch & Co., Inc. is a holding company that, through its subsidiaries
and affiliates, provides investment, financing, insurance, and related services
on a global basis. Its principal subsidiary, Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("MLPF&S"), is one of the largest securities firms in the
world.
MGIC INVESTMENT CORPORATION
MGIC Investment Corporation is a holding company which, through its indirect
wholly owned subsidiary, Mortgage Guaranty Insurance Corporation, is a leading
provider of private mortgage insurance coverage in the United States to
mortgage bankers, savings institutions, commercial banks, mortgage brokers,
credit unions and other lenders. Private mortgage insurance covers residential
first mortgage loans and expands home ownership opportunities by enabling
people to purchase homes with less than 20% down payments. If the home owner
defaults, private mortgage insurance reduces and, in some instances, eliminates
the loss to the insured institution. Private mortgage insurance also
facilitates the sale of low down payment mortgage loans in the secondary
mortgage market, principally to the Federal National Mortgage Association and
the Federal Home Loan Mortgage Corporation. In addition to mortgage insurance,
MGIC Investment, through other subsidiaries, provides various underwriting and
contract services related to home mortgage lending.
Reference is made to the accompanying prospectus of MGIC Investment covering
the shares of MGIC Common Stock which may be received by a holder of STRYPES on
the Maturity Date. MGIC Investment is not affiliated with the Company, will not
receive any of the proceeds from the sale of the STRYPES and will have no
obligations with respect to the STRYPES. THE PROSPECTUS OF MGIC INVESTMENT IS
BEING ATTACHED HERETO AND DELIVERED TO PROSPECTIVE PURCHASERS OF STRYPES
TOGETHER WITH THIS PROSPECTUS FOR CONVENIENCE OF REFERENCE ONLY. THE PROSPECTUS
OF MGIC INVESTMENT DOES NOT CONSTITUTE A PART OF THIS PROSPECTUS, NOR IS IT
INCORPORATED BY REFERENCE HEREIN.
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<PAGE>
THE STRYPES
Offering.................. 5,000,000 STRYPES
Issue Price............... $48.00 per STRYPES
Maturity Date............. August 15, 1998
Interest Rate............. 6 1/2% of the issue price per annum, or $.78 per
STRYPES per quarter, payable in cash quarterly in
arrears
Interest Payment Dates.... February 15, May 15, August 15 and November 15, be-
ginning November 15, 1995, and the Maturity Date.
Payment at Maturity....... On the Maturity Date, the Company will pay and dis-
charge each STRYPES by delivering to the holder
thereof a number of shares of MGIC Common Stock
(or, at the Company's option, which may be exer-
cised with respect to all, but not less than all,
shares of MGIC Common Stock deliverable on the Ma-
turity Date, cash with an equal value) determined
in accordance with the following Payment Rate For-
mula, subject to certain adjustments: (a) if the
Maturity Price is greater than or equal to $57.60
per share of MGIC Common Stock (the "Threshold Ap-
preciation Price"), .8333 shares of MGIC Common
Stock per STRYPES, (b) if the Maturity Price is
less than the Threshold Appreciation Price but is
greater than the Initial Price, a number of shares
of MGIC Common Stock per STRYPES so that the value
thereof (determined based on the Maturity Price)
equals the Initial Price and (c) if the Maturity
Price is less than or equal to the Initial Price,
one share of MGIC Common Stock per STRYPES. The
"Maturity Price" means the average Closing Price
per share of MGIC Common Stock on the 20 Trading
Days immediately prior to the second Trading Day
preceding the Maturity Date. ACCORDINGLY, THERE
CAN BE NO ASSURANCE THAT THE AMOUNT RECEIVABLE BY
HOLDERS OF THE STRYPES ON THE MATURITY DATE WILL
BE EQUAL TO OR GREATER THAN THE ISSUE PRICE OF THE
STRYPES. IF THE MATURITY PRICE OF THE MGIC COMMON
STOCK IS LESS THAN THE INITIAL PRICE, SUCH AMOUNT
RECEIVABLE ON THE MATURITY DATE WILL BE LESS THAN
THE ISSUE PRICE PAID FOR THE STRYPES, IN WHICH
CASE AN INVESTMENT IN STRYPES WILL RESULT IN A
LOSS. See "Description of the STRYPES--General."
No Redemption, Sinking
Fund or Payment prior to
Maturity................. The STRYPES are not subject to redemption by the
Company prior to the Maturity Date and do not con-
tain any sinking fund or other mandatory redemp-
tion provisions. The STRYPES are not subject to
payment prior to the Maturity Date at the option
of the holder.
Ranking................... The STRYPES will be unsecured obligations of the
Company ranking pari passu with all of its other
unsecured and unsubordinated indebtedness. See
"Description of the STRYPES--Ranking."
4
<PAGE>
Relationship to MGIC
Common Stock............. The STRYPES will bear interest at 6 1/2% of the is-
sue price per annum, a yield substantially in ex-
cess of the .3333% dividend yield of MGIC Common
Stock based on the last sale price of the MGIC
Common Stock on July 20, 1995, as reported on the
NYSE, and the current $.04 per share quarterly
dividend payable on the MGIC Common Stock. Howev-
er, the opportunity for equity appreciation af-
forded by an investment in the STRYPES is less
than the opportunity for equity appreciation af-
forded by a direct investment in the MGIC Common
Stock because the amount receivable by a holder of
a STRYPES on the Maturity Date will only exceed
the issue price of such STRYPES if the Maturity
Price of the MGIC Common Stock exceeds the Thresh-
old Appreciation Price (which represents an appre-
ciation of 20% over the Initial Price). Moreover,
holders of the STRYPES will only be entitled to
receive on the Maturity Date 83.33% (the percent-
age equal to the Initial Price divided by the
Threshold Appreciation Price) of any appreciation
of the value of MGIC Common Stock in excess of the
Threshold Appreciation Price. Holders of the
STRYPES will not be entitled to any rights with
respect to the MGIC Common Stock (including, with-
out limitation, voting rights and rights to re-
ceive any dividends or other distributions in re-
spect thereof) unless and until such time, if any,
as the Company shall have delivered shares of MGIC
Common Stock for STRYPES on the Maturity Date and
unless the applicable record date, if any, for the
exercise of such rights occurs after such deliv-
ery.
Purchase Contract with
The Northwestern Mutual
Life Insurance Company... The Company has entered into a contract (the "Pur-
chase Contract") to purchase from The Northwestern
Mutual Life Insurance Company ("NML") immediately
prior to the Maturity Date of the STRYPES, at an
aggregate purchase price equal to the total issue
price for the STRYPES, less the total underwriting
discount, plus an adjustment for an interest dif-
ferential factor, a number of shares of MGIC Com-
mon Stock equal to the number required by the Com-
pany to pay and discharge all of the STRYPES (in-
cluding any STRYPES issued pursuant to the over-
allotment option granted by the Company to the Un-
derwriter). See "Certain Arrangements With NML."
NML will be obligated to deliver such shares of
MGIC Common Stock pursuant to the Purchase Con-
tract only upon payment by the Company of the con-
sideration therefor. In lieu of delivering shares
of MGIC Common Stock, NML has the option, exercis-
able in its sole discretion, to require that obli-
gations under the Purchase Contract be satisfied
by a cash payment or net cash settlement based
upon the value of such number of shares of MGIC
Common Stock at the Maturity Price. Such option,
if exercised by NML, must be exercised with re-
spect to all shares of MGIC Common Stock delivera-
ble pursuant to the Purchase Contract. NML has no
obligations with respect to the STRYPES or amounts
to be paid to holders thereof, including
5
<PAGE>
any obligation to take the needs of the Company or
of holders of the STRYPES into consideration in
determining whether to deliver shares of MGIC Com-
mon Stock or cash or for any other reason. The
Purchase Contract between the Company and NML is a
commercial transaction and does not create any
rights in, or for the benefit of, any third party,
including any holder of STRYPES.
Under the Purchase Contract, the Company has agreed
to pay and discharge the STRYPES by delivering to
the holders thereof on the Maturity Date the form
of consideration that it receives from NML.
Certain United States
Federal Income Tax
Considerations........... Prospective investors in the STRYPES should be
aware that there exists uncertainty concerning the
proper United States Federal income tax character-
ization and treatment of the STRYPES. Accordingly,
prospective investors should consider the tax con-
sequences of investing in the STRYPES. See "Risk
Factors--Tax Matters" and "Certain United States
Federal Income Tax Considerations."
Global Notes.............. Upon issuance, all STRYPES will be represented by
one or more global securities deposited with, and
registered in the name of, the Securities Deposi-
tory or a nominee thereof. As a result, the Secu-
rities Depository, or its nominee, will be consid-
ered the sole owner of the STRYPES under the In-
denture. Ownership interests of actual purchasers
of STRYPES will be recorded on the records of par-
ticipants in the Securities Depository. See "De-
scription of the STRYPES--Securities Depository."
Use of Proceeds........... For general corporate purposes. The net proceeds
will be temporarily invested by the Company or ap-
plied by the Company to the reduction of short-
term indebtedness pending their application. See
"Use of Proceeds."
6
<PAGE>
RISK FACTORS
COMPARISON TO OTHER DEBT SECURITIES; RELATIONSHIP TO MGIC COMMON STOCK
The terms of the STRYPES differ from those of ordinary debt securities in
that the value of the MGIC Common Stock (or, pursuant to the option of the
Company, the amount of cash) that a holder of a STRYPES will receive on the
Maturity Date is not fixed, but is based on the Maturity Price of the MGIC
Common Stock (see "Description of the STRYPES"). THERE CAN BE NO ASSURANCE
THAT SUCH AMOUNT RECEIVABLE BY THE HOLDER ON THE MATURITY DATE WILL BE EQUAL
TO OR GREATER THAN THE ISSUE PRICE OF THE STRYPES. IF THE MATURITY PRICE OF
THE MGIC COMMON STOCK IS LESS THAN THE INITIAL PRICE, SUCH AMOUNT RECEIVABLE
ON THE MATURITY DATE WILL BE LESS THAN THE ISSUE PRICE PAID FOR THE STRYPES,
IN WHICH CASE AN INVESTMENT IN STRYPES WILL RESULT IN A LOSS. ACCORDINGLY, A
HOLDER OF STRYPES ASSUMES THE RISK THAT THE MARKET VALUE OF THE MGIC COMMON
STOCK MAY DECLINE, AND THAT SUCH DECLINE COULD BE SUBSTANTIAL. REFERENCE IS
MADE TO THE ACCOMPANYING PROSPECTUS OF MGIC INVESTMENT, INCLUDING THE
INFORMATION UNDER THE CAPTION "RISK FACTORS" THEREIN.
LIMITATIONS ON OPPORTUNITY FOR EQUITY APPRECIATION
The opportunity for equity appreciation afforded by an investment in the
STRYPES is less than the opportunity for equity appreciation afforded by a
direct investment in the MGIC Common Stock, because the amount receivable by a
holder of a STRYPES on the Maturity Date will only exceed the issue price of
such STRYPES if the Maturity Price of the MGIC Common Stock exceeds the
Threshold Appreciation Price (which represents an appreciation of 20% over the
Initial Price). Moreover, holders of the STRYPES will only be entitled to
receive on the Maturity Date 83.33% (the percentage equal to the Initial Price
divided by the Threshold Appreciation Price) of any appreciation of the value
of MGIC Common Stock in excess of the Threshold Appreciation Price. Because
the price of the MGIC Common Stock is subject to market fluctuations, the
value of the MGIC Common Stock (or, pursuant to the option of the Company, the
amount of cash) received by a holder of a STRYPES on the Maturity Date,
determined as described herein, may be more or less than the issue price of
the STRYPES.
FACTORS AFFECTING TRADING PRICES
The trading prices of the STRYPES in the secondary market will be directly
affected by the trading prices of the MGIC Common Stock in the secondary
market. It is impossible to predict whether the price of MGIC Common Stock
will rise or fall. Trading prices of MGIC Common Stock will be influenced by
MGIC Investment's operating results and prospects and by economic, financial
and other factors and market conditions that can affect the capital markets
generally, including the level of, and fluctuations in, the trading prices of
stocks generally and sales of substantial amounts of MGIC Common Stock in the
market subsequent to the offering of the STRYPES or the perception that such
sales could occur.
NO STOCKHOLDER RIGHTS
Holders of the STRYPES will not be entitled to any rights with respect to
the MGIC 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 Company shall have delivered shares of MGIC
Common Stock for STRYPES on the Maturity Date and, unless the applicable
record date, if any, for the exercise of such rights occurs after such date.
For example, in the event that an amendment is proposed to the Articles of
Incorporation or By-Laws of MGIC Investment and the record date for
determining the stockholders of record entitled to vote on such amendment
occurs prior to such delivery, holders of the STRYPES will not be entitled to
vote on such amendment.
NO AFFILIATION BETWEEN THE COMPANY AND MGIC INVESTMENT
The Company has no affiliation with MGIC Investment, and MGIC Investment has
no obligations with respect to the STRYPES or amounts to be paid to holders
thereof, including any obligation to take the needs of the Company or of
holders of the STRYPES into consideration for any reason. MGIC Investment will
not receive
7
<PAGE>
any of the proceeds of the offering of the STRYPES made hereby and is not
responsible for, and has not participated in, the determination of the timing
of, prices for or quantities of the STRYPES to be issued or the determination
or calculation of the amount receivable by holders of the STRYPES at maturity.
MGIC Investment is not involved with the administration or trading of the
STRYPES and has no obligations with respect to the amount receivable by
holders of the STRYPES at maturity.
PURCHASE FROM NML
Pursuant to the Purchase Contract, the Company will purchase from NML
immediately prior to the Maturity Date of the STRYPES, at an aggregate
purchase price equal to the total issue price for the STRYPES, less the total
underwriting discount, plus an adjustment for an interest differential factor,
a number of shares of MGIC Common Stock equal to the number required by the
Company to pay and discharge all of the STRYPES (including any STRYPES issued
pursuant to the over-allotment option granted by the Company to the
Underwriter). See "Certain Arrangements With NML." NML will be obligated to
deliver such shares of MGIC Common Stock pursuant to the Purchase Contract
only upon payment by the Company of the consideration therefor. In lieu of
delivering shares of MGIC Common Stock, NML has the option, exercisable in its
sole discretion, to require that obligations under the Purchase Contract be
satisfied by a cash payment or net cash settlement based upon the value of
such number of shares of MGIC Common Stock at the Maturity Price. Such option,
if exercised by NML, must be exercised with respect to all shares of MGIC
Common Stock deliverable pursuant to the Purchase Contract. The Company has
agreed to pay and discharge the STRYPES by delivering to the holders thereof
on the Maturity Date the form of consideration that it receives from NML under
the Purchase Contract. The net proceeds from the sale of the STRYPES will be
used by the Company for general corporate purposes. See "Use of Proceeds."
The Company has no affiliation with NML, and NML has no obligations with
respect to the STRYPES or amounts to be paid to holders thereof, including any
obligation to take the needs of the Company or of holders of the STRYPES into
consideration in determining whether to deliver shares of MGIC Common Stock or
cash or for any other reason. NML is not responsible for the determination or
calculation of the amount receivable by holders of the STRYPES at maturity.
The Purchase Contract between the Company and NML is a commercial transaction
and does not create any rights in, or for the benefit of, any third party,
including any holder of STRYPES.
In the event NML does not perform under the Purchase Contract, the Company
will be required to otherwise acquire shares of MGIC Common Stock for delivery
to the holders of the STRYPES, unless it elects to exercise its option to
deliver cash with an equal value.
TAX MATTERS
Because of an absence of authority as to the proper characterization of the
STRYPES, their ultimate tax treatment is uncertain. Accordingly, no assurances
can be given that any particular characterization and treatment of the STRYPES
will be accepted by the Internal Revenue Service ("IRS") or upheld by a court.
However, it is the opinion of Brown & Wood, counsel to the Company, that the
characterization and tax treatment of the STRYPES described herein (and
described in greater detail under "Certain United States Federal Income Tax
Considerations"), while not the only reasonable characterization and tax
treatment, is based on reasonable interpretations of law currently in effect
and, even if successfully challenged by the IRS, will not result in the
imposition of penalties. The Indenture will require that any holder subject to
U.S. Federal income tax include currently in income, for U.S. Federal income
tax purposes, payments denominated as interest that are made with respect to a
STRYPES in accordance with such holder's regular method of tax accounting. The
Indenture also requires the Company and holders to treat each STRYPES for tax
purposes as a unit (a "Unit") consisting of (i) a debt instrument (the "Debt
Instrument") with a fixed principal amount unconditionally payable on the
Maturity Date equal to the issue price of the STRYPES and bearing interest at
the stated interest rate on the STRYPES and (ii) a forward purchase contract
(the "Forward Contract") pursuant to which the holder agrees to use the
principal payment due on the Debt Instrument to purchase on the Maturity Date
the MGIC Common Stock which the Company is obligated under the STRYPES to
deliver at that time (subject to the Company's right to deliver cash with an
equal value in lieu of the MGIC Common Stock). The Indenture also requires
that upon the
8
<PAGE>
acquisition of a STRYPES and upon a holder's sale or other disposition of a
STRYPES prior to the Maturity Date, the amount paid or realized by the holder
be allocated by the holder between the Debt Instrument and the Forward
Contract based upon their relative fair market values (as determined on the
date of acquisition or disposition). For these purposes, with respect to
acquisitions of STRYPES in connection with the original issuance thereof, the
Company and each holder agrees, pursuant to the terms of the Indenture, to
allocate the entire initial purchase price of a STRYPES (i.e., the issue price
of a STRYPES) to the Debt Instrument and to allocate no portion of the initial
purchase price of a STRYPES to the Forward Contract. As previously mentioned,
the appropriate character and timing of income, gain or loss to be recognized
on a STRYPES is uncertain and investors should consult their own tax advisers
concerning the application of the United States Federal income tax laws to
their particular situations as well as any consequences of the purchase,
ownership and disposition of the STRYPES arising under the laws of any other
taxing jurisdiction. The tax consequences of investing in the STRYPES are
described in greater detail under "Certain United States Federal Income Tax
Considerations."
DILUTION OF MGIC COMMON STOCK
The number of shares of MGIC Common Stock (or cash with an equal value) that
holders of the STRYPES are entitled to receive on the Maturity Date is subject
to adjustment for certain events arising from stock splits and combinations,
stock dividends and certain other actions of MGIC Investment that modify its
capital structure. See "Description of the STRYPES--Dilution Adjustments."
Such number of shares of MGIC Common Stock (or cash amount) to be received by
such holders on the Maturity Date will not be adjusted for other events, such
as offerings of MGIC Common Stock for cash or in connection with acquisitions.
MGIC Investment is not restricted from issuing additional MGIC Common Stock
during the term of the STRYPES and has no obligation to consider the interests
of the holders of the STRYPES for any reason. Additional issuances may
materially and adversely affect the price of the MGIC Common Stock and,
because of the relationship of the number of shares (or cash amount) to be
received on the Maturity Date to the price of the MGIC Common Stock, such
other events may adversely affect the trading price of the STRYPES.
POSSIBLE ILLIQUIDITY OF THE SECONDARY MARKET
It is not possible to predict how the STRYPES will trade in the secondary
market or whether such market will be liquid or illiquid. The STRYPES are
novel securities and there is currently no secondary market for the STRYPES.
The STRYPES have been approved for listing on the NYSE, subject to official
notice of issuance. However, there can be no assurance that an active trading
market for the STRYPES will develop, that such listing will provide the
holders of the STRYPES with liquidity of investment, or that the STRYPES will
not later be delisted or that trading of the STRYPES on the NYSE will not be
suspended. In the event of a delisting or suspension of trading on the NYSE,
the Company will apply for listing of the STRYPES on another national
securities exchange or for quotation on another trading market. If the STRYPES
are not listed or traded on any securities exchange or trading market, or if
trading of the STRYPES is suspended, pricing information for the STRYPES may
be more difficult to obtain and the liquidity of the STRYPES may be adversely
affected.
HOLDING COMPANY STRUCTURE
Since the Company is a holding company, the right of the Company, and hence
the right of creditors of the Company (including the holders of the STRYPES),
to participate in any distribution of the assets of any subsidiary upon its
liquidation or reorganization or otherwise is necessarily subject to the prior
claims of creditors of the subsidiary, except to the extent that claims of the
Company itself as a creditor of the subsidiary may be recognized. In addition,
dividends, loans and advances from certain subsidiaries, including MLPF&S, to
the Company are restricted by net capital requirements under the Exchange Act
and under rules of certain exchanges and other regulatory bodies.
9
<PAGE>
MERRILL LYNCH & CO., INC.
Merrill Lynch & Co., Inc. is a holding company that, through its
subsidiaries and affiliates, provides investment, financing, insurance, and
related services on a global basis. Its principal subsidiary, MLPF&S, one of
the largest securities firms in the world, is a leading broker in securities,
options contracts, and commodity and financial futures contracts; a leading
dealer in options and in corporate and municipal securities; a leading
investment banking firm that provides advice to, and raises capital for, its
clients; and an underwriter of selected insurance products. Other subsidiaries
provide financial services on a global basis similar to those of MLPF&S and
are engaged in such other activities as international banking, lending, and
providing other investment and financing services. Merrill Lynch International
Incorporated, through subsidiaries and affiliates, provides investment,
financing, and related services outside the United States and Canada. Merrill
Lynch Government Securities Inc. is a primary dealer in obligations issued or
guaranteed by the U.S. Government and by Federal agencies or
instrumentalities. Merrill Lynch Capital Services, Inc., Merrill Lynch
Derivative Products, Inc., and Merrill Lynch Capital Markets PLC are the
Company's primary derivative product dealers and enter into interest rate and
currency swaps and other derivative transactions as intermediaries and as
principals. Merrill Lynch Asset Management L.P., with its related affiliates,
is one of the largest mutual fund managers in the world and provides
investment advisory services. The Company's insurance underwriting operations
consist of the underwriting of life insurance and annuity products. Banking,
trust, and mortgage lending operations conducted through subsidiaries of the
Company include issuing certificates of deposit, offering money market deposit
accounts, making secured loans, and providing foreign exchange facilities and
other related services.
The principal executive office of the Company is located at World Financial
Center, North Tower, 250 Vesey Street, New York, New York 10281; its telephone
number is (212) 449-1000.
10
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following summary of consolidated financial information was derived
from, and is qualified in its entirety by reference to, the financial
statements, condensed financial statements, and other information and data
contained in the Company's Annual Report on Form 10-K for the year ended
December 30, 1994, Quarterly Report on Form 10-Q for the period ended March
31, 1995 (the "Quarterly Report") and Current Report on Form 8-K dated July
18, 1995 (the "Current Report"). The Current Report, which includes
preliminary unaudited financial information for the period ended June 30,
1995, will be superseded in its entirety by the Company's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1995. See "Incorporation of
Certain Documents by Reference." The condensed consolidated financial
statements contained in the Company's Quarterly Report and the results of
operations contained in the Current Report are unaudited; however, in the
opinion of management of the Company, all adjustments (consisting only of
normal recurring accruals) necessary for a fair statement of the results of
operations have been included. The year-end results include 52 weeks for 1990,
1991, 1992 and 1994 and 53 weeks for 1993.
The Company conducts its business in highly volatile markets. Consequently,
the Company's results can be affected by many factors, including general
market conditions, the liquidity of secondary markets, the level and
volatility of interest rates and currency values, the valuation of securities
positions, competitive conditions, and the size, number, and timing of
transactions. In periods of unfavorable market activity, profitability can be
adversely affected because certain expenses remain relatively fixed. As a
result, net earnings and revenues can vary significantly from period to
period. Thus, interim results may not necessarily be representative of the
full year results of operations.
<TABLE>
<CAPTION>
YEAR ENDED LAST FRIDAY IN DECEMBER SIX MONTHS ENDED
---------------------------------------------------------------- ------------------------
JULY 1, JUNE 30,
1990 1991 1992 1993 1994 1994 1995
----------- ----------- ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
INFORMATION
(In thousands, except
ratios)
Revenues................ $11,147,229 $12,352,812 $ 13,412,668 $ 16,588,177 $ 18,233,091 $ 9,219,111 $10,788,871
Net revenues(1)......... $ 5,783,329 $ 7,246,468 $ 8,577,401 $ 10,558,230 $ 9,624,521 $ 5,229,547 $ 4,969,677
Earnings before income
taxes and cumulative
effect of changes in
accounting
principles(2).......... $ 282,328 $ 1,017,418 $ 1,621,389 $ 2,424,808 $ 1,729,604 $ 1,084,870 $ 843,092
Cumulative effect of
changes in accounting
principles (net of
applicable income
taxes)(2).............. -- -- $ (58,580) $ (35,420) -- -- --
Net earnings(2)......... $ 191,856 $ 696,117 $ 893,825 $ 1,358,939 $ 1,016,761 $ 623,568 $ 510,071
Ratio of earnings to
fixed charges(3)....... 1.1 1.2 1.3 1.4 1.2 1.3 --
BALANCE SHEET
INFORMATION(4)(5)
(In thousands)
Total assets............ $68,129,527 $86,259,343 $107,024,173 $152,910,362 $163,749,327 $174,006,536 --
Long-term borrowings.... $ 6,341,559 $ 7,964,424 $ 10,871,100 $ 13,468,900 $ 14,863,383 $ 15,289,293 --
Stockholders' equity.... $ 3,225,430 $ 3,818,088 $ 4,569,104 $ 5,485,913 $ 5,817,545 $ 5,628,394 --
</TABLE>
- --------
(1) Net revenues are revenues net of interest expense.
(2) Net earnings for 1992 were reduced by $58,580,000 to reflect the adoption of
Statement of Financial Accounting Standards ("SFAS") No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," and SFAS No.
109, "Accounting for Income Taxes." Net earnings for 1993 were reduced by
$35,420,000 to reflect the adoption of SFAS No. 112, "Employers' Accounting
for Postemployment Benefits."
(3) The ratio of earnings to fixed charges for the six months ended June 30,
1995 is not available as of the date of this Prospectus. For the quarter
ended March 31, 1995, the ratio of earnings to fixed charges was 1.1. For
the purpose of calculating the ratio of earnings to fixed charges,
"earnings" consists of earnings from continuing operations before income
taxes and fixed charges. "Fixed charges" consists of interest costs and
that portion of rentals estimated to be representative of the interest
factor.
(4) In 1994, the Company adopted Financial Accounting Standards Board ("FASB")
Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts,"
and FASB Interpretation No. 41, "Offsetting of Amounts Related to Certain
Repurchase and Reverse Repurchase Agreements," which increased assets and
liabilities at December 30, 1994 by approximately $8,500,000,000.
(5) Balance sheet information as of June 30, 1995 is not available as of the
date of this Prospectus. At March 31, 1995, total assets, long-term
borrowings, and stockholders' equity were $176,732,993,000,
$14,484,523,000, and $5,704,148,000, respectively. To finance its diverse
activities, the Company and certain of its subsidiaries borrow substantial
amounts of short-term funds on a regular basis. Although the amount of
short-term borrowings significantly varies with the level of general
business activity, on March 31, 1995, $538,157,000 of bank loans and
$14,821,594,000 of commercial paper were outstanding. In addition, certain
of the Company's subsidiaries lend securities and enter into repurchase
agreements to obtain financing. At March 31, 1995, cash deposits for
securities loaned and securities sold under agreements to repurchase
amounted to $5,406,241,000 and $57,110,193,000, respectively. From April
1, 1995 to July 18, 1995, long-term borrowings, net of repayments and
repurchases, increased by approximately $974,620,000.
11
<PAGE>
FISCAL YEAR 1994
Financial markets, strong from 1991 through the first six weeks of 1994,
changed significantly after inflationary fears prompted the Federal Reserve to
increase short-term interest rates in February 1994. As the U.S. economy
continued to expand, the Federal Reserve acted to further curb inflation and
to moderate growth by increasing short-term interest rates five additional
times during the year. The combination of rising interest rates, a falling
U.S. dollar, unsettled global stock, bond, and currency markets, reduced
foreign investment in U.S. financial markets, and overall investor caution
contributed to lower earnings for most U.S. securities firms. These conditions
affected the Company's 1994 fourth quarter and full year results. Net earnings
for the 1994 fourth quarter were $161.6 million, down 30% from the 1994 third
quarter and down 53% from the 1993 fourth quarter.
Net earnings for 1994 were $1,016.8 million, down 25% from record 1993
earnings of $1,358.9 million. Net earnings for 1993 included a $35.4 million
cumulative effect charge (net of $25.1 million of applicable income tax
benefits) related to the adoption of Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits." Earnings
for 1993 before the cumulative effect of the change in accounting principle
were $1,394.4 million. Earnings per common share in 1994 were $4.75 primary
and $4.74 fully diluted, compared with $5.98 primary and $5.95 fully diluted
($6.14 primary and $6.11 fully diluted before the accounting change) in 1993.
As previously reported, 1993 results included a non-recurring pretax lease
charge totaling $103.0 million ($59.7 million after income taxes) related to
the Company's decision not to occupy certain space at the World Financial
Center Headquarters ("Headquarters") facility. This space was sublet in 1994.
Total revenues were $18,233 million, up 10% from 1993. Net revenues
(revenues after interest expense) totaled $9,625 million in 1994, down 9% from
1993.
Commission revenues were $2,871 million, virtually unchanged from $2,894
million in 1993. Higher commission revenues from mutual funds and commodity
transactions were offset by lower revenues from money market instruments,
particularly medium-term notes, and listed securities transactions. Sales of
mutual funds, particularly front-end funds, declined as investors were less
active due to uncertain markets and rising interest rates. For the first time
since 1974, both stock and bond funds fell in value industrywide, on average,
in the same year. Distribution fees from deferred charge funds benefited from
strong mutual fund sales in prior periods, while redemption fees increased as
investors repositioned their portfolios primarily from fixed-income funds to
stock and money market funds. Commissions on listed securities transactions
decreased due to a decline in the relative amount of business by retail
clients versus institutional clients. Other commission revenues declined
principally as a result of lower commissions from money market instruments,
partially offset by higher revenues from commodity transactions.
Interest and dividend revenues increased 35% to $9,578 million from $7,099
million in 1993. Interest expense, which includes dividend expense, rose 43%
to $8,609 million from $6,030 million in 1993. Net interest and dividend
profit decreased 9% to $969 million as a significant increase in short-term
interest rates, year over year, led to a substantial flattening of the yield
curve. The change in the yield curve, the relationship between interest rates
and maturities, resulted from short-term interest rates rising faster than
long-term interest rates in 1994. As a result, interest spreads declined,
while financing and hedging costs increased from 1993.
Principal transactions revenues fell 20% to $2,335 million from the 1993
record $2,920 million due to rising interest rates, a declining U.S. dollar,
and volatile world financial markets. Revenues from taxable fixed-income
securities, equities and equity derivatives, and foreign exchange and
commodities decreased, while interest rate and currency swaps, and municipal
securities revenues increased. Taxable fixed-income revenues declined 52% to
$462 million as higher interest rates, wider credit spreads, and uncertainty
in emerging markets led to reduced demand and lower inventory values. Equities
and equity derivatives trading revenues decreased 28% to $627 million,
reflecting lower trading results in virtually all categories, including a loss
in convertible securities. Foreign exchange and commodities revenues, in the
aggregate, declined 31% to $109 million. Weakness in the
12
<PAGE>
U.S. dollar versus other major currencies depressed foreign exchange trading,
while commodities trading revenues benefited from increased volume. Interest
rate and currency swaps revenues advanced 24% to $749 million reflecting
higher revenues from U.S. dollar-denominated swap trading activities,
particularly those related to structured financing transactions. Municipal
securities trading revenues increased 20% to $388 million due to strong retail
investor demand for tax-exempt investments.
Investment banking revenues were $1,239 million, down 32% from $1,831
million in 1993 due primarily to the effects of rising interest rates and
reduced demand. Underwriting revenues declined in almost all categories, with
significant decreases in equities, corporate bonds and preferred stock, and
convertible securities. Strategic services revenues, which include fees for
debt restructuring, merger and acquisition activity, and other advisory
services, benefited from increased merger and acquisition advisory assignments
in various industries.
Asset management and portfolio services fees rose 12% from $1,558 million in
1993 to a record $1,739 million. Asset management fees advanced due primarily
to an increase in stock funds under management. Portfolio service fees
advanced due to the continued growth in the number of Asset Power(Registered
Trademark) accounts, a product with fees and transaction limits based on asset
levels, and increased revenues from the ML Consults(Registered Trademark)
product.
Other revenues were $471 million, up 65% from $285 million in 1993. The
increase in other revenues was attributable to net realized investment gains
related to merchant banking activities of $81 million, compared with
unrealized losses of $133 million in 1993.
Non-interest expenses were $7,895 million, down 3% from $8,133 million in
the year-ago period. Excluding the 1993 non-recurring lease charge totaling
$103.0 million, non-interest expenses declined 2%.
Compensation and benefits expense, which represented approximately 63% of
total non-interest expenses, declined 6% due principally to lower incentive
and production-related compensation. Compensation and benefits expense, as a
percentage of net revenues, was 51.5% in 1994, compared with 49.8% in 1993.
Occupancy costs declined 24% (7% excluding the 1993 non-recurring lease
charge) benefiting from continued relocation of support staff to lower-cost
facilities and reduced space requirements at the Headquarters facility. Other
facilities costs, which include communications and equipment rental, and
depreciation and amortization, were up 9% due to increased use of market data,
news, and statistical services and higher depreciation expense from the
acquisition of technology-related equipment.
Advertising and market development expenses were down 1% with discretionary
costs decreasing as business conditions became less favorable. Lower sales
promotion and a reduction in advertising campaigns were partially offset by
increased travel related to international business activities. Professional
fees increased 26% due primarily to the use of system and management
consultants to upgrade technology and processing capabilities in trading,
credit, and customer services, as well as higher legal fees. Brokerage,
clearing, and exchange fees increased 20% reflecting higher international
equity volume and expanded risk management activities related to volatile
global market conditions. Other expenses increased 1% from 1993, due to an
increase in office supplies and postage costs.
Income tax expense totaled $713 million in 1994, down 31% from $1,030
million in 1993. The effective tax rate was 41.2% in 1994 versus 42.5% in 1993
as a result of lower state income taxes.
The Company's Annual Report on Form 10-K for the year ended December 30,
1994 describes an action commenced against the Company by Orange County,
California (the "County") and the Orange County Investment Pools (the
"Pools"). See "Incorporation of Certain Documents by Reference." The County
and the Pools seek relief in excess of $2 billion in connection with various
securities transactions between the County and/or the Pools and the Company
and its subsidiaries. Other actions have also been commenced against the
Company and its subsidiaries arising out of the Company's dealings with the
County Treasurer and the Pools.
13
<PAGE>
The Company will vigorously contest these actions and believes it has
meritorious defenses. Although the ultimate outcome of these actions cannot be
ascertained at this time and the results of legal proceedings cannot be
predicted with certainty, it is the opinion of management that the resolution
of these actions will not have a material adverse effect on the consolidated
financial condition or results of operations of the Company for the year ended
December 30, 1994.
The Company has also received inquiries from various governmental entities
examining the underlying events and is cooperating with these inquiries.
CERTAIN BALANCE SHEET INFORMATION AS OF DECEMBER 30, 1994
On January 1, 1994, the Company adopted Financial Accounting Standards Board
Interpretation No. 39 ("Interpretation No. 39"), "Offsetting of Amounts Related
to Certain Contracts." Interpretation No. 39 affects the financial statement
presentation of balances related to swap, forward, and other similar exchange
or conditional type contracts, and unconditional type contracts. To offset
unconditional contracts, such as resale and repurchase agreements, net cash
settlement of the related receivable and payable balances is also required by
Interpretation No. 39, as modified by Interpretation No. 41, "Offsetting of
Amounts Related to Certain Repurchase and Reverse Repurchase Agreements." Prior
to the adoption of these Interpretations, the Company followed industry
practice in reporting balances related to certain types of contracts on a net
basis. Unrealized gains and losses for swap, forward, and other similar
contracts were reported net on the balance sheet by contract type, while
certain receivables and payables related to resale and repurchase agreements
were reported net by counterparty. The effect of these Interpretations
increased assets and liabilities at December 30, 1994 by approximately $8.5
billion.
The Company believes that its equity base is adequate relative to the level
and composition of its assets and the mix of its business.
In the normal course of business, the Company underwrites, trades, and holds
non-investment grade securities in connection with its market-making,
investment banking, and derivative structuring activities. These activities
are subject to risks related to the creditworthiness of the issuers and the
liquidity of the market for such securities, in addition to the usual risks
associated with investing in, extending credit, underwriting, and trading in
investment grade instruments.
At December 30, 1994, the fair value of long and short non-investment grade
trading inventories amounted to $3,309 million and $456 million, respectively,
and in the aggregate (i.e., the sum of long and short trading inventories)
represented 4.3% of aggregate consolidated trading inventories.
At December 30, 1994, the carrying value of extensions of credit provided to
corporations entering into leveraged transactions aggregated $257 million
(excluding unutilized revolving lines of credit and other lending commitments
of $50 million), consisting primarily of senior term and subordinated
financings to 35 medium-sized corporations. At December 30, 1994, the Company
had no bridge loans outstanding. Loans to highly leveraged corporations are
carried at unpaid principal balance less a reserve for estimated losses. The
allowance for loan losses is estimated based on a review of each loan, and
consideration of economic, market, and credit conditions. Direct equity
investments made in conjunction with the Company's investment and merchant
banking activities aggregated $289 million at December 30, 1994, representing
investments in 80 enterprises. Equity investments in privately-held
corporations for which sale is restricted by government or contractual
requirements are carried at the lower of cost or estimated net realizable
value. At December 30, 1994, the Company held interests in partnerships,
totaling $93 million (recorded on the cost basis), that invest in highly
leveraged transactions and non-investment grade securities. Prior to July 1,
1994, the Company had a co-investment arrangement to enter into direct equity
investments. At December 30, 1994, the Company also committed to invest an
additional $80 million in partnerships that invest in leveraged transactions.
The Company's insurance subsidiaries hold non-investment grade securities.
As a percentage of total insurance investments, non-investment grade
securities were 5.5% at December 30, 1994. Non-investment grade
14
<PAGE>
securities of insurance subsidiaries were classified as available-for-sale and
were carried at fair value at December 30, 1994.
At December 30, 1994, the largest non-investment grade concentration
consisted of various issues of a South American sovereign totaling $235
million, of which $60 million represented on-balance-sheet hedges for off-
balance-sheet instruments. No one industry sector accounted for more than 21%
of total non-investment grade positions. At December 30, 1994, the Company
held an aggregate carrying value of $292 million in debt and equity securities
of issuers in various stages of bankruptcy proceedings. Approximately 71% of
this amount resulted from the Company's market-making activities in such
securities.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1995
Financial markets, which were particularly weak during the last half of
1994, improved during the first six months of 1995 as a result of a steadying
U.S. economy, declining interest rates, and heightened investor activity. Net
earnings were $227 million in the first quarter of 1995 and $283 million in
the second quarter, or $510 million for the 1995 first-half. Six-month 1995
net earnings, however, were down 18% from the $624 million reported in the
comparable 1994 period, which included record first quarter net earnings of
$372 million. Total revenues for the first six months of 1995 were $10,789
million, up 17% over the 1994 first-half. Net revenues in the first six months
of 1995 were $4,970 million, down 5% from the comparable 1994 period due
primarily to lower investment banking and commission revenues. Non-interest
expenses were $4,127 million, virtually unchanged from the comparable 1994
period.
Commission revenues were $1,450 million for the first half of 1995, down 7%
from the 1994 first-half, primarily as a result of lower mutual fund revenues.
Mutual fund commissions were affected by lower volumes after the 1994 first
quarter as most stock and bond mutual funds declined in value. Sales of mutual
funds, however, increased during the 1995 second quarter as investors were
more active due to strong performances in both stock and bond markets.
Interest and dividend revenues were $6,325 million for the first half of
1995, up 40% from the comparable 1994 period. Interest expense, which includes
dividend expense, increased 46% from the first half of 1994 to $5,819 million.
Net interest profit declined 4% to $506 million primarily due to the continued
flattening of the yield curve (the relationship between interest rates and
maturities) since early 1994.
Principal transactions revenues increased 5% from the first half of 1994 to
$1,289 million. Taxable fixed-income trading revenues increased due, in part,
to higher revenues from corporate bonds and preferred stock, high-yield bonds,
and non-U.S. government and agencies securities. Trading results in mortgage-
backed products were negatively affected by reduced market liquidity after the
1994 first quarter and fluctuations in interest rates, leading to a moderate
loss. Net trading results from mortgage-backed products were positive,
however, when combined with related net interest income. Trading revenues in
U.S. Government and agencies securities were down from record 1994 levels due
to the negative effect of changing interest rates on net trading positions.
Revenues from interest rate and currency swaps increased due to slightly
higher volumes in non-U.S. dollar and U.S. dollar denominated transactions.
Municipal securities revenues were down from record 1994 levels as declining
interest rates and discussions on tax law changes decreased investor demand.
Equities and equity derivatives trading revenues were virtually unchanged,
while foreign exchange and commodities trading revenues decreased due
primarily to lower commodity trading volume.
Investment banking revenues were $584 million, down 24% from the first half
of 1994, as domestic and global industrywide underwriting volume declined 24%
and 22%, respectively, compared to volumes in the 1994 first-half. Although
down for the 1995 six-month period, second quarter 1995 industrywide domestic
underwriting volume increased 30% from the 1995 first quarter and 16% from the
1994 second quarter as a result of declining interest rates and stronger stock
and bond markets. Lower underwriting revenues were reported in equities and
high-yield securities, partially offset by higher revenues from corporate debt
and preferred stock issuances, particularly in the 1995 second quarter.
Strategic services revenues, which include merger and acquisition fees and
advisory fees, benefited from increased merger and acquisition advisory
assignments in various industries.
15
<PAGE>
Asset management and portfolio service fees rose 4% from the 1994 first-half
to $913 million, principally as a result of increased fees earned from mutual
fund investor services and asset management activities. Other revenues
decreased 17% from the 1994 first-half to $228 million, due primarily to
realized investment gains in the 1994 period, compared with break-even results
on sales of investments in the 1995 six-month period.
Non-interest expenses were $4,127 million, virtually unchanged from the 1994
first-half. Compensation and benefits expense, which represented approximately
62% of non-interest expenses, decreased 3% from the 1994 first-half due
primarily to lower levels of variable incentive and production-related
compensation. Compensation and benefits expense as a percentage of net
revenues was 51.9% in the first half of 1995, compared with 50.6% in the year-
ago period.
Occupancy costs were virtually unchanged from the 1994 first-half. Other
facilities-related costs, which include communications and equipment rental
expense and depreciation and amortization expense, rose 10% primarily due to
increased usage of market information services, as well as higher depreciation
expense from the purchase of technology-related assets over the past year.
Advertising and market development expenses decreased 8% from the 1994
first-half primarily due to lower travel and recognition program costs.
Professional fees increased 13% from the year ago period as higher legal fees
were partially offset by lower systems consulting fees. Brokerage, clearing,
and exchange fees increased 2% from the 1994 first-half as a result of higher
volumes, particularly in international markets. Other expenses increased 1%
from the 1994 first-half and included a $26 million charge for the write-off
of assets related to a technology contract in the 1995 first quarter.
Income tax expense totaled $333 million for the first half of 1995. The
effective tax rate for the first six months of 1995 was 39.5%, compared with
42.5% in the year-ago period. The decrease in the effective tax rate was
attributable to lower state income taxes, higher tax-exempt interest,
increased deductions for dividends received, and expanded international
business activities.
CERTAIN BALANCE SHEET INFORMATION AS OF MARCH 31, 1995
Balance sheet information as of June 30, 1995 is not available as of the
date of this Prospectus.
The Company believes that its equity base is adequate relative to the level
and composition of its assets and the mix of its business.
In the normal course of business, the Company underwrites, trades, and holds
non-investment grade securities in connection with its investment banking,
market-making, and derivative structuring activities. These activities are
subject to risks related to the creditworthiness of the issuers of, and the
liquidity of the market for, such securities, in addition to the usual risks
associated with investing in, financing, underwriting, and trading in
investment grade instruments.
At March 31, 1995, the fair value of long and short non-investment grade
trading inventories amounted to $3,446 million and $471 million, respectively,
and in the aggregate (i.e. the sum of long and short trading inventories),
represented 4.1% of aggregate consolidated trading inventories.
At March 31, 1995, the carrying value of extensions of credit provided to
corporations entering into leveraged transactions aggregated $225 million
(excluding unutilized revolving lines of credit and other lending commitments
of $45 million), consisting primarily of senior term and subordinated
financings to 34 medium-sized corporations. Subsequent to March 31, 1995, the
Company extended financing to a non-investment grade counterparty totaling $15
million. At March 31, 1995, the Company had no bridge loans outstanding. Loans
to highly leveraged corporations are carried at unpaid principal balances less
a reserve for estimated losses. The allowance for loan losses is estimated
based on a review of each loan, and consideration of economic, market, and
credit conditions. Direct equity investments made in conjunction with the
Company's investment and merchant banking activities aggregated $261 million
at March 31, 1995, representing investments in 76 enterprises. Equity
investments in privately-held companies for which sale is restricted by
government or
16
<PAGE>
contractual requirements are carried at the lower of cost or estimated net
realizable value. At March 31, 1995, the Company held interests in
partnerships, totaling $102 million (recorded on the cost basis), that invest
in highly leveraged transactions and non-investment grade securities. At March
31, 1995, the Company also committed to invest an additional $91 million in
partnerships that invest in leveraged transactions.
The Company's insurance subsidiaries hold non-investment grade securities.
As a percentage of total insurance investments, non-investment grade
securities were 4.5% at March 31, 1995. Non-investment grade securities of
insurance subsidiaries are classified as available-for-sale and are carried at
fair value.
At March 31, 1995, the largest non-investment grade concentration consisted
of government and corporate obligations of a Latin American sovereign totaling
$307 million, of which $38 million represented on-balance-sheet hedges for
off-balance-sheet financial instruments. No one industry sector accounted for
more than 23% of total non-investment grade positions. At March 31, 1995, the
Company held an aggregate carrying value of $227 million in debt and equity
securities of issuers in various stages of bankruptcy proceedings or in
default, of which 75% of this amount resulted from the Company's market-making
activities in such securities.
MGIC INVESTMENT CORPORATION
MGIC Investment Corporation is a holding company which, through its indirect
wholly owned subsidiary, Mortgage Guaranty Insurance Corporation, is a leading
provider of private mortgage insurance coverage in the United States to
mortgage bankers, savings institutions, commercial banks, mortgage brokers,
credit unions and other lenders. Private mortgage insurance covers residential
first mortgage loans and expands home ownership opportunities by enabling
people to purchase homes with less than 20% down payments. If the home owner
defaults, private mortgage insurance reduces and, in some instances,
eliminates the loss to the insured institution. Private mortgage insurance
also facilitates the sale of low down payment mortgage loans in the secondary
mortgage market, principally to the Federal National Mortgage Association and
the Federal Home Loan Mortgage Corporation. In addition to mortgage insurance,
MGIC Investment, through other subsidiaries, provides various underwriting and
contract services related to home mortgage lending.
MGIC Investment is subject to the informational requirements of the Exchange
Act. Accordingly, MGIC Investment files reports, proxy and information
statements and other information with the Commission. Copies of such material
can be inspected and copied at the public reference facilities maintained by
the Commission at the addresses specified under "Available Information."
Reports, proxy and information statements and other information concerning
MGIC Investment may also be inspected at the offices of the NYSE.
THE COMPANY IS NOT AFFILIATED WITH MGIC INVESTMENT, AND MGIC INVESTMENT HAS
NO OBLIGATIONS WITH RESPECT TO THE STRYPES. THIS PROSPECTUS RELATES ONLY TO
THE STRYPES OFFERED HEREBY AND DOES NOT RELATE TO MGIC INVESTMENT OR THE MGIC
COMMON STOCK. MGIC INVESTMENT HAS FILED A REGISTRATION STATEMENT ON FORM S-3
WITH THE COMMISSION COVERING THE SHARES OF MGIC COMMON STOCK THAT MAY BE
RECEIVED BY A HOLDER OF STRYPES ON THE MATURITY DATE. THE PROSPECTUS OF MGIC
INVESTMENT (THE "MGIC PROSPECTUS") CONSTITUTING A PART OF SUCH REGISTRATION
STATEMENT INCLUDES INFORMATION RELATING TO MGIC INVESTMENT AND THE MGIC COMMON
STOCK, INCLUDING CERTAIN RISK FACTORS RELEVANT TO AN INVESTMENT IN MGIC COMMON
STOCK. THE MGIC PROSPECTUS IS BEING ATTACHED HERETO AND DELIVERED TO
PROSPECTIVE PURCHASERS OF STRYPES TOGETHER WITH THIS PROSPECTUS FOR
CONVENIENCE OF REFERENCE ONLY. THE MGIC PROSPECTUS DOES NOT CONSTITUTE A PART
OF THIS PROSPECTUS, NOR IS IT INCORPORATED BY REFERENCE HEREIN.
17
<PAGE>
PRICE RANGE OF MGIC COMMON STOCK AND DIVIDENDS
MGIC Common Stock is listed on the NYSE under the trading symbol "MTG." The
following table sets forth the high and low sales prices of the MGIC Common
Stock for the periods indicated as reported on the NYSE Composite Tape and the
cash dividends per share of MGIC Common Stock paid during such periods. Data
reflected in the table for periods prior to MGIC Investment's 100% stock
dividend paid in December 1993 have been adjusted to reflect such stock
dividend.
The future payment of cash dividends is subject to the discretion of the
Board of Directors of MGIC Investment and will be dependent on MGIC
Investment's results of operations, financial condition, cash requirements and
other relevant factors. MGIC Investment is a holding company whose principal
source of cash flow is dividends from its subsidiaries, including Mortgage
Guaranty Insurance Corporation.
<TABLE>
<CAPTION>
DIVIDENDS
PERIOD HIGH LOW PER SHARE
- ------ ------- ------- ---------
<S> <C> <C> <C>
1993:
First Quarter....................................... $30.375 $24.750 $.035
Second Quarter...................................... 29.813 26.563 .035
Third Quarter....................................... 35.688 28.438 .035
Fourth Quarter...................................... 35.375 28.125 .040
1994:
First Quarter....................................... $32.875 $27.500 $.040
Second Quarter...................................... 31.500 25.000 .040
Third Quarter....................................... 31.125 26.125 .040
Fourth Quarter...................................... 34.250 28.500 .040
1995:
First Quarter....................................... $42.375 $32.750 $.040
Second Quarter...................................... 52.250 40.375 .040
Third Quarter (through July 20, 1995)............... 51.000 46.125 --
</TABLE>
On July 20, 1995, the last reported sale price of the MGIC Common Stock on
the NYSE was $48.00 per share.
The Company makes no representation as to the amount of dividends, if any,
that MGIC Investment will pay in the future. In any event, holders of STRYPES
will not be entitled to receive any dividends that may be payable on MGIC
Common Stock until such time as the Company, if it so elects, delivers MGIC
Common Stock at the Maturity Date of the STRYPES, and then only with respect
to dividends having a record date on or after the date of delivery of such
MGIC Common Stock. See "Description of the STRYPES."
USE OF PROCEEDS
The Company intends to use the net proceeds from the sale of the STRYPES for
general corporate purposes. Such uses may include the funding of investments
in, or extensions of credit to, its subsidiaries, the funding of assets held
by the Company or its subsidiaries, including securities inventories, customer
receivables and loans (including business loans, home equity loans, and loans
in connection with investment banking-related merger and acquisition
activities), and the refunding of maturing indebtedness. The precise amount
and timing of investments in, and extensions of credit to, its subsidiaries
will depend upon their funding requirements and the availability of other
funds to the Company and its subsidiaries. Pending such applications, the net
proceeds will be temporarily invested or applied to the reduction of short-
term indebtedness. Management of the Company expects that it will, on a
recurrent basis, engage in additional financings as the need arises to finance
the growth of the Company or to lengthen the average maturity of its
borrowings. To the extent that STRYPES being purchased for resale by MLPF&S
are not resold, the aggregate proceeds to the Company and its subsidiaries
would be reduced.
See "Certain Arrangements With NML" for a discussion of the Company's
obligations under the Purchase Contract.
18
<PAGE>
DESCRIPTION OF THE STRYPES
The STRYPES are a series of Senior Debt Securities to be issued under an
indenture, dated as of April 1, 1983 and restated as of April 1, 1987, as
amended and supplemented as of July 1, 1995 (the indenture dated as of April
1, 1983 and restated as of April 1, 1987, as amended and supplemented from
time to time, the "Indenture") between the Company and Chemical Bank
(successor by merger to Manufacturers Hanover Trust Company), as trustee (the
"Trustee"). The following summary of certain provisions of the Indenture does
not purport to be complete and is qualified in its entirety by reference to
the Indenture, a copy of which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part. All capitalized terms not
otherwise defined herein have the meanings specified in the Indenture.
Whenever defined terms of the Indenture are referred to herein, such defined
terms are incorporated by reference herein.
GENERAL
The aggregate number of STRYPES to be issued under the Indenture will be
limited to 5,000,000, plus such additional number of STRYPES as may be issued
pursuant to the over-allotment option granted by the Company to the
Underwriter. See "Underwriting." No fractional STRYPES will be issued.
Each STRYPES, which will be issued at a price of $48.00, will bear interest
at the rate of 6 1/2% of the issue price per annum (or $3.12 per annum) from
July 26, 1995, or from the most recent Interest Payment Date to which interest
has been paid or provided for until the Maturity Date or such earlier date on
which the issue price of such STRYPES is repaid pursuant to the terms thereof.
Interest on the STRYPES will be payable in cash quarterly in arrears on
February 15, May 15, August 15 and November 15, commencing November 15, 1995,
and on the Maturity Date (each, an "Interest Payment Date"), to the persons in
whose names the STRYPES are registered at the close of business on the last
day (whether or not a Business Day) of the calendar month immediately
preceding such Interest Payment Date. Interest on the STRYPES will be computed
on the basis of a 360-day year of twelve 30-day months. If an Interest Payment
Date falls on a day that is not a Business Day, the interest payment to be
made on such Interest Payment Date will be made on the next succeeding
Business Day with the same force and effect as if made on such Interest
Payment Date, and no additional interest will accrue as a result of such
delayed payment.
The STRYPES will mature on August 15, 1998. On the Maturity Date, the
Company will pay and discharge each STRYPES by delivering to the holder
thereof a number of shares (such number of shares being hereinafter referred
to as the "Payment Rate") of MGIC Common Stock (or, at the Company's option,
which may be exercised with respect to all, but not less than all, shares of
all MGIC Common Stock deliverable on the Maturity Date, cash with an equal
value) determined in accordance with the Payment Rate Formula. The "Payment
Rate Formula" is, subject to adjustment as a result of certain dilution
events: the Payment Rate equals (a) if the Maturity Price (as defined below)
per share of MGIC Common Stock is greater than or equal to the Threshold
Appreciation Price, .8333 shares of MGIC Common Stock per STRYPES, (b) if the
Maturity Price is less than the Threshold Appreciation Price but is greater
than the Initial Price, a number of shares of MGIC Common Stock per STRYPES so
that the value thereof (determined based on the Maturity Price) is equal to
the Initial Price and (c) if the Maturity Price is less than or equal to the
Initial Price, one share of MGIC Common Stock per STRYPES. ACCORDINGLY, THERE
CAN BE NO ASSURANCE THAT THE AMOUNT RECEIVABLE BY HOLDERS OF THE STRYPES ON
THE MATURITY DATE WILL BE EQUAL TO OR GREATER THAN THE ISSUE PRICE OF THE
STRYPES. IF THE MATURITY PRICE OF THE MGIC COMMON STOCK IS LESS THAN THE
INITIAL PRICE, SUCH AMOUNT RECEIVABLE ON THE MATURITY DATE WILL BE LESS THAN
THE ISSUE PRICE PAID FOR THE STRYPES, IN WHICH CASE AN INVESTMENT IN STRYPES
WILL RESULT IN A LOSS. The numbers of shares of MGIC Common Stock per STRYPES
specified in clauses (a) and (c) of the Payment Rate Formula are hereinafter
referred to as the "Share Components."
Notwithstanding the foregoing, the Company may, at its option, in lieu of
delivering shares of MGIC Common Stock, deliver cash in an amount equal to the
value of such number of shares of MGIC Common Stock
19
<PAGE>
at the Maturity Price, subject to the Company's agreement contained in the
Purchase Contract to deliver on the Maturity Date the form of consideration
that it receives from NML. Such option, if exercised by the Company, must be
exercised with respect to all shares of MGIC Common Stock otherwise
deliverable on the Maturity Date in payment of all outstanding STRYPES. On or
prior to the sixth Business Day prior to the Maturity Date, the Company will
notify the Trustee and publish a notice in The Wall Street Journal or another
daily newspaper of national circulation stating whether the STRYPES will be
paid and discharged with shares of MGIC Common Stock or cash. At the time such
notice is published, the Maturity Price will not have been determined. If the
Company elects to deliver shares of MGIC Common Stock, holders of the STRYPES
will be responsible for the payment of any and all brokerage costs upon their
subsequent sale of such stock.
The "Maturity Price" is defined as the average Closing Price per share of
MGIC Common Stock on the 20 Trading Days immediately prior to, but not
including, the second Trading Day preceding the Maturity Date. The "Closing
Price" of any security on any date of determination means the closing sale
price (or, if no closing price is reported, the last reported sale price) of
such security on the NYSE on such date or, if such security is not listed for
trading on the NYSE on any such date, as reported in the composite
transactions for the principal United States securities exchange on which such
security is so listed, or if such security is not so listed on a United States
national or regional securities exchange, as reported by the National
Association of Securities Dealers, Inc. Automated Quotation System, or, if
such security is not so reported, the last quoted bid price for such security
in the over-the-counter market as reported by the National Quotation Bureau or
similar organization, or, if such bid price is not available, the market value
of such security on such date as determined by a nationally recognized
independent investment banking firm retained for this purpose by the Company.
In the event that the Payment Rate is adjusted as described under "--Dilution
Adjustments" below, the Maturity Price is subject to adjustment to reflect the
average Closing Price per share of MGIC Common Stock on a pre-adjusted basis.
A "Trading Day" is defined as a day on which the security the Closing Price of
which is being determined (A) is not suspended from trading on any national or
regional securities exchange or association or over-the-counter market at the
close of business and (B) has traded at least once on the national or regional
securities exchange or association or over-the-counter market that is the
primary market for the trading of such security.
For illustrative purposes only, the following chart shows the number of
shares of MGIC Common Stock or the amount of cash that a holder of STRYPES
would receive for each STRYPES at various Maturity Prices. The table assumes
that there will be no dilution adjustments to the Payment Rate Formula as
described below. There can be no assurance that the Maturity Price will be
within the range set forth below. Given the Initial Price of $48.00 and the
Threshold Appreciation Price of $57.60, a STRYPES holder would receive on the
Maturity Date the following number of shares of MGIC Common Stock or amount of
cash (if the Company elects to pay and discharge the STRYPES with cash) per
STRYPES:
<TABLE>
<CAPTION>
NUMBER OF
MATURITY PRICE SHARES OF
OF MGIC MGIC
COMMON STOCK COMMON STOCK AMOUNT OF CASH
-------------- ------------ --------------
<S> <C> <C>
$38.00 1.0000 $38.00
43.00 1.0000 43.00
48.00 1.0000 48.00
53.00 0.9057 48.00
57.60 0.8333 48.00
63.00 0.8333 52.50
</TABLE>
DILUTION ADJUSTMENTS
The Payment Rate Formula is subject to adjustment if MGIC Investment shall:
(i) pay a stock dividend or make a distribution with respect to MGIC Common
Stock in shares of such stock; (ii) subdivide or split the
20
<PAGE>
outstanding shares of MGIC Common Stock into a greater number of shares; (iii)
combine the outstanding shares of MGIC Common Stock into a smaller number of
shares; (iv) issue by reclassification of shares of MGIC Common Stock any
shares of common stock of MGIC Investment; (v) issue rights or warrants to all
holders of MGIC Common Stock entitling them to subscribe for or purchase
shares of MGIC Common Stock at a price per share less than the then current
market price of the MGIC Common Stock (other than rights to purchase MGIC
Common Stock pursuant to a plan for the reinvestment of dividends or
interest); or (vi) pay a dividend or make a distribution to all holders of
MGIC Common Stock of evidences of its indebtedness or other assets (excluding
any stock dividends or distributions referred to in clause (i) above or any
cash dividends other than any Extraordinary Cash Dividends (as defined below))
or issue to all holders of MGIC Common Stock rights or warrants to subscribe
for or purchase any of its securities (other than those referred to in clause
(v) above). In the case of the events referred to in clauses (i), (ii), (iii)
and (iv) above, the Payment Rate Formula shall be adjusted so that each holder
of any STRYPES shall thereafter be entitled to receive, upon payment and
discharge of such STRYPES on the Maturity Date, the number of shares of MGIC
Common Stock which such holder would have owned or been entitled to receive
immediately following any event described above had such STRYPES been paid and
discharged immediately prior to such event or any record date with respect
thereto. Nevertheless, the Maturity Price shall equal the average Closing
Price per share of MGIC Common Stock on the 20 Trading Days immediately prior
to, but not including, the second Trading Day preceding the Maturity Date. In
the case of the event referred to in clause (v) above, the Payment Rate
Formula shall be adjusted by multiplying each of the Share Components in the
Payment Rate Formula in effect immediately prior to the date of issuance of
the rights or warrants referred to in clause (v) above, by a fraction, of
which the numerator shall be the number of shares of MGIC Common Stock
outstanding on the date of issuance of such rights or warrants, immediately
prior to such issuance, plus the number of additional shares of MGIC Common
Stock offered for subscription or purchase pursuant to such rights or
warrants, and of which the denominator shall be the number of shares of MGIC
Common Stock outstanding on the date of issuance of such rights or warrants,
immediately prior to such issuance, plus the number of additional shares of
MGIC Common Stock which the aggregate offering price of the total number of
shares of MGIC Common Stock so offered for subscription or purchase pursuant
to such rights or warrants would purchase at the market price (determined as
the average Closing Price per share of MGIC Common Stock on the 20 Trading
Days immediately prior to the date such rights or warrants are issued), which
shall be determined by multiplying such total number of shares by the exercise
price of such rights or warrants and dividing the product so obtained by such
market price. To the extent that shares of MGIC Common Stock are not delivered
after the expiration of such rights or warrants, the Payment Rate Formula
shall be readjusted to the Payment Rate Formula which would then be in effect
had such adjustments for the issuance of such rights or warrants been made
upon the basis of delivery of only the number of shares of MGIC Common Stock
actually delivered. In the case of the event referred to in clause (vi) above,
the Payment Rate Formula shall be adjusted by multiplying each of the Share
Components in the Payment Rate Formula in effect on the record date, by a
fraction of which the numerator shall be the market price per share of the
MGIC Common Stock on the record date for the determination of stockholders
entitled to receive the dividend or distribution referred to in clause (vi)
above (such market price being determined as the average Closing Price per
share of MGIC Common Stock on the 20 Trading Days immediately prior to such
record date), and of which the denominator shall be such market price per
share of MGIC Common Stock less the fair market value (as determined by the
Board of Directors of the Company, whose determination shall be conclusive,
and described in a resolution adopted with respect thereto) as of such record
date of the portion of the assets or evidences of indebtedness so distributed
or of such subscription rights or warrants applicable to one share of MGIC
Common Stock. An "Extraordinary Cash Dividend" means, with respect to any
consecutive 12-month period, all cash dividends on the MGIC Common Stock
during such period to the extent such dividends exceed on a per share basis
10% of the average Closing Price of the MGIC Common Stock over such period
(less any such dividends for which a prior adjustment to the Payment Rate
Formula was previously made). All adjustments to the Payment Rate Formula will
be calculated to the nearest 1/10,000th of a share of MGIC Common Stock (or if
there is not a nearest 1/10,000th of a share to the next lower 1/10,000th of a
share). No adjustment in the Payment Rate Formula shall be required unless
such adjustment would require an increase or decrease of at least one percent
therein; provided, however, that any adjustments which by reason of the
foregoing are not required to be made shall be carried forward and taken into
account in any subsequent adjustment. If an adjustment is made to the
21
<PAGE>
Payment Rate Formula as described above, an adjustment will also be made to
the Maturity Price solely to determine which of clauses (a), (b) or (c) of the
Payment Rate Formula will apply on the Maturity Date. The required adjustment
to the Maturity Price will be made by multiplying each of the Closing Prices
used in determining the Maturity Price by a fraction of which the numerator
shall be the Share Component in clause (c) of the Payment Rate Formula
immediately after such adjustment described above and of which the denominator
shall be the Share Component in clause (c) of the Payment Rate Formula
immediately before such adjustment described above. Each such adjustment to
the Payment Rate Formula shall be made successively.
In the event of (A) any consolidation or merger of MGIC Investment, or any
surviving entity or subsequent surviving entity of MGIC Investment (a "MGIC
Successor"), with or into another entity (other than a merger or consolidation
in which MGIC Investment is the continuing corporation and in which the MGIC
Common Stock outstanding immediately prior to the merger or consolidation is
not exchanged for cash, securities or other property of MGIC Investment or
another corporation), (B) any sale, transfer, lease or conveyance to another
corporation of the property of MGIC Investment or any MGIC Successor as an
entirety or substantially as an entirety, (C) any statutory exchange of
securities of MGIC Investment or any MGIC Successor with another corporation
(other than in connection with a merger or acquisition) or (D) any
liquidation, dissolution or winding up of MGIC Investment or any MGIC
Successor (any such event described in clause (A), (B), (C) or (D), a
"Reorganization Event"), the Payment Rate Formula used to determine the amount
payable on the Maturity Date for each STRYPES will be adjusted to provide that
each holder of STRYPES will receive on the Maturity Date for each STRYPES cash
in an amount equal to (a) if the Transaction Value (as defined below) is
greater than or equal to the Threshold Appreciation Price, .8333 multiplied by
the Transaction Value, (b) if the Transaction Value is less than the Threshold
Appreciation Price but greater than the Initial Price, the Initial Price and
(c) if the Transaction Value is less than or equal to the Initial Price, the
Transaction Value. "Transaction Value" means (i) for any cash received in any
such Reorganization Event, the amount of cash received per share of MGIC
Common Stock, (ii) for any property other than cash or securities received in
any such Reorganization Event, an amount equal to the market value on the
Maturity Date of such property received per share of MGIC Common Stock as
determined by a nationally recognized independent investment banking firm
retained for this purpose by the Company and (iii) for any securities received
in any such Reorganization Event, an amount equal to the average Closing Price
per unit of such securities on the 20 Trading Days immediately prior to the
second Trading Day preceding the Maturity Date multiplied by the number of
such securities received for each share of MGIC Common Stock. Notwithstanding
the foregoing, in the event that property or securities, or a combination of
cash, on the one hand, and property or securities, on the other, are received
in such Reorganization Event, the Company may, at its option, in lieu of
delivering cash as described above, deliver the amount of cash, securities and
other property, received per share of MGIC Common Stock in such Reorganization
Event determined in accordance with clause (i), (ii) or (iii) above, as
applicable. If the Company elects to deliver securities or other property,
holders of the STRYPES will be responsible for the payment of any and all
brokerage and other transaction costs upon any subsequent sale of such
securities or other property. The kind and amount of securities with which the
STRYPES shall be paid and discharged after consummation of such transaction
shall be subject to adjustment as described in the immediately preceding
paragraph following the date of consummation of such transaction.
No adjustments will be made for certain other events, such as offerings of
MGIC Common Stock by MGIC Investment for cash or in connection with
acquisitions. Likewise, no adjustments will be made for any sales of MGIC
Common Stock by NML.
The Company is required, within ten Business Days following the occurrence
of an event that requires an adjustment to the Payment Rate Formula (or if the
Company is not aware of such occurrence, as soon as practicable after becoming
so aware), to provide written notice to the Trustee and to the holders of the
STRYPES of the occurrence of such event and a statement in reasonable detail
setting forth the adjusted Payment Rate Formula and the method by which the
adjustment to the Payment Rate Formula was determined, provided that, in
respect of any adjustment to the Maturity Price, such notice will only
disclose the factor by which each of the Closing Prices used in determining
the Maturity Price is to be multiplied in order to determine the Payment Rate
on the Maturity Date. Until the Maturity Date, the Payment Rate itself cannot
be determined.
22
<PAGE>
FRACTIONAL SHARES
No fractional shares of MGIC Common Stock will be delivered if the Company
pays and discharges the STRYPES by delivering shares of MGIC Common Stock. In
lieu of any fractional share otherwise deliverable in respect of all STRYPES
of any holder on the Maturity Date, such holder shall be entitled to receive
an amount in cash equal to the value of such fractional share at the Maturity
Price.
REDEMPTION, SINKING FUND AND PAYMENT PRIOR TO MATURITY
The STRYPES are not subject to redemption by the Company prior to the
Maturity Date and do not contain sinking fund or other mandatory redemption
provisions. The STRYPES are not subject to payment prior to the Maturity Date
at the option of the holder.
RANKING
The STRYPES will be unsecured obligations and will rank pari passu with all
other unsecured and unsubordinated indebtedness of the Company. At March 31,
1995, the Company had long-term borrowings outstanding of $14,484,523,000. In
addition, at March 31, 1995, there were $538,157,000 of bank loans and
$14,821,594,000 of commercial paper outstanding.
The Company had no secured debt at March 31, 1995. At such date,
collateralized financing transactions of the Company's subsidiaries consisted
of $5,406,241,000 of cash deposits for securities loaned and $57,110,193,000
of securities sold under agreements to repurchase. See Note 5 to "Summary
Financial Information."
There are no contractual restrictions on the ability of the Company or its
subsidiaries to incur additional secured or unsecured debt. However,
borrowings by certain subsidiaries, including MLPF&S, are restricted by net
capital requirements under the Exchange Act and under rules of certain
exchanges and other regulatory bodies.
Since the Company is a holding company, the right of the Company, and hence
the right of creditors of the Company (including the holders of the STRYPES),
to participate in any distribution of the assets of any subsidiary upon its
liquidation or reorganization or otherwise is necessarily subject to the prior
claims of creditors of the subsidiary, except to the extent that claims of the
Company itself as a creditor of the subsidiary may be recognized. In addition,
dividends, loans and advances from certain subsidiaries, including MLPF&S, to
the Company are restricted by net capital requirements under the Exchange Act
and under rules of certain exchanges and other regulatory bodies.
PURCHASE CONTRACT
Pursuant to the Purchase Contract described under "Certain Arrangements With
NML," the Company will purchase from NML immediately prior to the Maturity
Date of the STRYPES a number of shares of MGIC Common Stock equal to the
number required by the Company to pay and discharge all of the STRYPES
(including any STRYPES issued pursuant to the over-allotment option granted by
the Company to the Underwriter). In lieu of delivering shares of MGIC Common
Stock, NML has the option, exercisable in its sole discretion, to require that
obligations under the Purchase Contract be satisfied by a cash payment or net
cash settlement based upon the value of such number of shares of MGIC Common
Stock at the Maturity Price. Such option, if exercised by NML, must be
exercised with respect to all shares of MGIC Common Stock deliverable pursuant
to the Purchase Contract.
In the event NML does not perform under the Purchase Contract, the Company
will be required to otherwise acquire shares of MGIC Common Stock for delivery
to the holders of the STRYPES, unless it elects to exercise its option to
deliver cash with an equal value.
23
<PAGE>
SECURITIES DEPOSITORY
Upon issuance, all STRYPES will be represented by one or more fully
registered global securities (the "Global Notes"). Each such Global Note will
be deposited with, or on behalf of, The Depository Trust Company, as
Securities Depository, and registered in the name of the Securities Depository
or a nominee thereof. Unless and until it is exchanged in whole or in part for
STRYPES in definitive form under the limited circumstances described below, no
Global Note may be transferred except as a whole by the Securities Depository
to a nominee of such Securities Depository or by a nominee of such Securities
Depository to such Securities Depository or another nominee of such Securities
Depository or by such Securities Depository or any such nominee to a successor
of such Securities Depository or a nominee of such successor.
The Securities Depository has advised the Company as follows: The Securities
Depository is a limited-purpose trust company organized under the Banking Law
of the State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. The Securities Depository was
created to hold securities of its participants ("Participants") and to
facilitate the clearance and settlement of securities transactions among its
Participants in such securities through electronic book-entry changes in
accounts of the Participants, thereby eliminating the need for physical
movement of securities certificates. The Securities Depository's Participants
include securities brokers and dealers (including MLPF&S), banks, trust
companies, clearing corporations, and certain other organizations.
The Securities Depository is owned by a number of Participants and by the
New York Stock Exchange, Inc., the American Stock Exchange, Inc. and the
National Association of Securities Dealers, Inc. Access to the Securities
Depository book-entry system is also available to others, such as banks,
brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly
("Indirect Participants").
Purchases of STRYPES must be made by or through Participants, which will
receive a credit on the records of the Securities Depository. The ownership
interest of each actual purchaser of each STRYPES ("Beneficial Owner") is in
turn to be recorded on the Participants' or Indirect Participants' records.
Beneficial Owners will not receive written confirmations from the Securities
Depository of their purchase, but Beneficial Owners are expected to receive
written confirmation providing details of the transaction, as well as periodic
statements of their holdings, from the Participant or Indirect Participant
through which the Beneficial Owner entered into the transaction. Ownership of
beneficial interest in such Global Note will be shown on, and the transfer of
such ownership interests will be effected only through, records maintained by
the Securities Depository (with respect to interests of Participants) and on
the records of Participants (with respect to interests of persons held through
Participants). The laws of some states may require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
limits and such laws may impair the ability to own, transfer or pledge
beneficial interests in Global Notes.
So long as the Securities Depository, or its nominee, is the registered
owner of a Global Note, the Securities Depository or its nominee, as the case
may be, will be considered the sole owner or holder of the STRYPES represented
by such Global Note for all purposes under the Indenture. Except as provided
below, Beneficial Owners in a Global Note will not be entitled to have the
STRYPES represented by such Global Notes registered in their names, will not
receive or be entitled to receive physical delivery of the STRYPES in
definitive form and will not be considered the owners or holders thereof under
the Indenture. Accordingly, each Person owning a beneficial interest in a
Global Note must rely on the procedures of the Securities Depository and, if
such Person is not a Participant, on the procedures of the Participant through
which such Person owns its interest, to exercise any rights of a holder under
the Indenture. The Company understands that under existing industry practices,
in the event that the Company requests any action of holders or that an owner
of a beneficial interest in such a Global Note desires to give or take any
action which a holder is entitled to give or take under the Indenture, the
Securities Depository would authorize the Participants holding the relevant
beneficial interests to give or take such action, and such Participants would
authorize Beneficial Owners owning through such Participants to give or take
such action or would otherwise act upon the instructions of beneficial owners.
Conveyance of notices
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and other communications by the Securities Depository to Participants, by
Participants to Indirect Participants, and by Participants and Indirect
Participants to Beneficial Owners will be governed by arrangements among them,
subject to any statutory or regulatory requirements as may be in effect from
time to time.
Payment of any amount with respect to STRYPES registered in the name of the
Securities Depository or its nominee will be made to the Securities Depository
or its nominee, as the case may be, as the holder of the Global Notes
representing such STRYPES. None of the Company, the Trustee or any other agent
of the Company or agent of the Trustee will have any responsibility or
liability for any aspect of the records relating to or payments made on
account of beneficial ownership interests or for supervising or reviewing any
records relating to such beneficial ownership interests. The Company expects
that the Securities Depository, upon receipt of any payment in respect of a
Global Note, will credit the accounts of the Participants with payment in
amounts proportionate to their respective holdings of beneficial interest in
such Global Note as shown on the records of the Securities Depository. The
Company also expects that payments by Participants to Beneficial Owners will
be governed by standing customer instructions and customary practices, as is
now the case with securities held for the accounts of customers in bearer form
or registered in "street name", and will be the responsibility of such
Participants.
If (x) the Securities Depository is at any time unwilling or unable to
continue as Securities Depository and a successor depository is not appointed
by the Company within 60 days, (y) the Company executes and delivers to the
Trustee a Company Order to the effect that the Global Notes shall be
exchangeable or (z) an Event of Default has occurred and is continuing with
respect to the STRYPES, the Company will issue STRYPES in definitive form in
exchange for all of the Global Notes representing the STRYPES. Such definitive
STRYPES shall be registered in such name or names as the Securities Depository
shall instruct the Trustee. It is expected that such instructions may be based
upon directions received by the Securities Depository from Participants with
respect to ownership of beneficial interests in such Global Notes.
MERGER AND CONSOLIDATION
The Company may consolidate or merge with or into any other corporation, and
the Company may sell, lease or convey all or substantially all of its assets
to any corporation, provided that (i) the corporation (if other than the
Company) formed by or resulting from any such consolidation or merger or which
shall have received such assets shall be a corporation organized and existing
under the laws of the United States of America or a state thereof and shall
assume the due and punctual delivery or payment of the shares of MGIC Common
Stock (or cash with an equal value) in respect of, and interest on, the
STRYPES and the due and punctual performance and observance of all of the
covenants and conditions of the Indenture to be performed or observed by the
Company, and (ii) the Company or such successor corporation, as the case may
be, shall not immediately thereafter be in default under the Indenture.
Except as provided above, there are no "event risk" or similar provisions of
the Indenture or the STRYPES that are intended to afford protection to holders
in the event of a merger or other significant corporate event involving the
Company.
LIMITATIONS UPON LIENS
The Indenture provides that the Company may not, and may not permit any
Subsidiary (defined in the Indenture as any corporation of which at the time
of determination the Company and/or one or more Subsidiaries owns or controls
directly or indirectly more than 50% of the shares of Voting Stock) to,
create, assume, incur or permit to exist any indebtedness for borrowed money
secured by a pledge, lien or other encumbrance (except for certain liens
specifically permitted by the Indenture) on the Voting Stock owned directly or
indirectly by the Company of any Subsidiary (other than a Subsidiary which, at
the time of incurrence of such secured indebtedness, has a net worth of less
than $3,000,000) without making effective provision whereby the Outstanding
STRYPES will be secured equally and ratably with such secured indebtedness.
LIMITATIONS ON DISPOSITION OF VOTING STOCK OF, AND MERGER AND SALE OF ASSETS
BY, MLPF&S
The Indenture provides that the Company may not sell, transfer or otherwise
dispose of any Voting Stock of MLPF&S or permit MLPF&S to issue, sell or
otherwise dispose of any of its Voting Stock, unless, after giving
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effect to any such transaction, MLPF&S remains a Controlled Subsidiary
(defined in the Indenture to mean a corporation more than 80% of the
outstanding shares of Voting Stock of which are owned directly or indirectly
by the Company). In addition, the Indenture provides that the Company may not
permit MLPF&S to (i) merge or consolidate, unless the surviving company is a
Controlled Subsidiary, or (ii) convey or transfer its properties and assets
substantially as an entirety, except to one or more Controlled Subsidiaries.
EVENTS OF DEFAULT
Each of the following will constitute an Event of Default under the
Indenture with respect to the STRYPES: (a) failure to pay and discharge the
STRYPES with MGIC Common Stock or, if the Company so elects, to pay an
equivalent amount in cash in lieu thereof when due; (b) failure to pay any
interest on any STRYPES when due, continued for 30 days; (c) failure to
perform any other covenant of the Company in the Indenture, continued for 60
days after written notice has been given to the Company by the Trustee, or to
the Company and the Trustee by the holders of at least 10% of the aggregate
issue price of the Outstanding STRYPES, as provided in the Indenture; and (d)
certain events in bankruptcy, insolvency or reorganization of the Company.
If an Event of Default (other than an Event of Default described in clause
(d) of the immediately preceding paragraph) with respect to the STRYPES shall
occur and be continuing, either the Trustee or the holders of at least 25% of
the aggregate issue price of the Outstanding STRYPES by notice as provided in
the Indenture may declare an amount equal to the issue price of all the
STRYPES to be immediately due and payable in cash. If an Event of Default
described in said clause (d) shall occur, an amount equal to the issue price
of all the STRYPES will become immediately due and payable in cash without any
declaration or other action on the part of the Trustee or any holder. After
such acceleration, but before a judgment or decree based on acceleration, the
holders of a majority of the aggregate issue price of the Outstanding STRYPES
may, under certain circumstances, rescind and annul such acceleration if all
Events of Default, other than the non-payment of the amount equal to the issue
price of all the STRYPES due by reason of such acceleration, have been cured
or waived as provided in the Indenture. See "Modification and Waiver" below.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing, the
Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request or direction of any of the holders of
STRYPES, unless such holders shall have offered to the Trustee reasonable
security or indemnity against the costs, expenses and liabilities which might
be incurred by it in compliance with such request or direction. Subject to
such provisions for the indemnification of the Trustee, the holders of a
majority of the aggregate issue price of the STRYPES will have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee with respect to the STRYPES.
The Company will be required to furnish to the Trustee annually a statement
by certain of its officers as to whether or not the Company, to their
knowledge, is in default in the fulfillment of any of its obligations under
the Indenture and, if so, specifying all such known defaults.
The STRYPES and other series of Senior Debt Securities issued under the
Indenture do not have the benefit of any cross-default provisions with other
indebtedness of the Company.
MODIFICATION AND WAIVER
Modifications of and amendments to the Indenture affecting the STRYPES may
be made by the Company and the Trustee with the consent of the holders of 66
2/3% of the aggregate issue price of the Outstanding STRYPES; provided,
however, that no such modification or amendment may, without the consent of
the holder of each Outstanding STRYPES affected thereby, (a) change the
Maturity Date or the Stated Maturity of any installment of interest on any
STRYPES or reduce the amount of MGIC Common Stock payable with respect to any
STRYPES (or reduce the amount of cash payable in lieu thereof), (b) reduce the
amount of interest payable on any STRYPES or reduce the amount of cash payable
with respect to any STRYPES upon acceleration of the Maturity thereof, (c)
change the place or currency of payment of interest on, or any amount of cash
payable with
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respect to, any STRYPES, (d) impair the right to institute suit for the
enforcement of any payment on or with respect to any STRYPES, including the
payment of MGIC Common Stock with respect to any STRYPES, (e) reduce the
percentage of the aggregate issue price of Outstanding STRYPES, the consent of
whose holders is required to modify or amend the Indenture, (f) reduce the
percentage of the aggregate issue price of Outstanding STRYPES necessary for
waiver of compliance with certain provisions of the Indenture or for waiver of
certain defaults or (g) modify such provisions with respect to modification
and waiver.
The holders of a majority of the aggregate issue price of the STRYPES may
waive compliance by the Company with certain restrictive provisions of the
Indenture. The holders of a majority of the aggregate issue price of the
STRYPES may waive any past default under the Indenture, except a default in
the payment of MGIC Common Stock with respect to any STRYPES, or the payment
of cash payable in lieu thereof, or in the payment of interest and certain
covenants and provisions of the Indenture which cannot be amended without the
consent of the holder of each Outstanding STRYPES affected.
GOVERNING LAW
The Indenture and the STRYPES will be governed by, and construed in
accordance with, the laws of the State of New York.
LISTING
The STRYPES have been approved for listing on the NYSE, subject to official
notice of issuance.
CERTAIN ARRANGEMENTS WITH NML
Pursuant to the Purchase Contract, the Company is obligated to purchase from
NML immediately prior to maturity of the STRYPES, at an aggregate purchase
price equal to the total issue price for the STRYPES, less the total
underwriting discount, plus an adjustment for an interest differential factor,
a number of shares of MGIC Common Stock equal to the number required by the
Company to pay and discharge all of the STRYPES (including any STRYPES issued
pursuant to the over-allotment option granted by the Company to the
Underwriter). In lieu of delivering shares of MGIC Common Stock, NML has the
option, exercisable in its sole discretion, to require that obligations under
the Purchase Contract be satisfied by a cash payment or net cash settlement
based upon the value of such number of shares of MGIC Common Stock at the
Maturity Price. Such option, if exercised by NML, must be exercised with
respect to all shares of MGIC Common Stock deliverable pursuant to the
Purchase Contract. The Company has agreed with NML that, without the prior
consent of NML, it will not amend the Indenture to increase the consideration
that NML is obligated to deliver pursuant to the Purchase Contract. The
Company has also agreed to pay and discharge the STRYPES by delivering to the
holders thereof on the Maturity Date the form of consideration that it
receives from NML under the Purchase Contract.
The Purchase Contract does not contain any restriction on the ability of NML
to sell, pledge or otherwise convey all or any portion of the MGIC Common
Stock held by it, and no such shares of MGIC Common Stock will be pledged or
otherwise held in escrow for use at maturity of the STRYPES. In the event of a
significant sale, pledge or conveyance by NML, or an insolvency or liquidation
of NML (in which case the MGIC Common Stock, if any, owned by NML will be
subject to the claims of policyholders and/or creditors of NML), the Company
may be more likely to deliver to a holder of STRYPES cash in lieu of MGIC
Common Stock.
Until such time, if any, as NML shall have delivered shares of MGIC Common
Stock to the Company at maturity of the STRYPES pursuant to the terms of the
Purchase Contract, NML will retain all ownership rights with respect to the
MGIC Common Stock held by it (including, without limitation, voting rights and
rights to receive any dividends or other distributions in respect thereof).
NML has no obligations with respect to the STRYPES or amounts to be paid to
holders thereof, including any obligation to take the needs of the Company or
of holders of the STRYPES into consideration in determining whether to deliver
shares of MGIC Common Stock or cash or for any other reason. The Purchase
Contract
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between the Company and NML is a commercial transaction and does not create
any rights in, or for the benefit of, any third party, including any holder of
STRYPES.
In the event NML does not perform under the Purchase Contract, the Company
will be required to otherwise acquire shares of MGIC Common Stock for delivery
to the holders of the STRYPES, unless it elects to exercise its option to
deliver cash with an equal value.
For more information regarding the relationship between NML and MGIC
Investment and the MGIC Common Stock that may be delivered to the holders of
STRYPES on the Maturity Date, see the MGIC Prospectus which accompanies this
Prospectus.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
Set forth in full below is the opinion of Brown & Wood, counsel to the
Company, as to certain United States Federal income tax consequences of the
purchase, ownership and disposition of the STRYPES. Such 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 retroactive changes in effective dates) or possible differing
interpretations. The discussion below deals only with STRYPES 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, tax-exempt entities, or
persons holding STRYPES as a hedge against currency risks or as a position in
a "straddle" for tax purposes. It also does not deal with holders of STRYPES
other than original purchasers thereof (except where otherwise specifically
noted herein). The following discussion also does not address the tax
consequences of investing in the STRYPES arising under the laws of any state,
local or foreign jurisdiction. Persons considering the purchase of the STRYPES
should consult their own tax advisors concerning the application of the United
States Federal income tax laws to their particular situations as well as any
consequences of the purchase, ownership and disposition of the STRYPES arising
under the laws of any other taxing jurisdiction.
As used herein, the term "U.S. Holder" means a beneficial owner of a STRYPES
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 STRYPES is
effectively connected with the conduct of a United States trade or business.
As used herein, the term "non-U.S. Holder" means a beneficial owner of a
STRYPES that is not a U.S. Holder.
GENERAL
There are no statutory provisions, regulations (except possibly the Proposed
Regulations as described below), published rulings or judicial decisions
addressing or involving the characterization, for United States Federal income
tax purposes, of the STRYPES or securities with terms substantially the same
as the STRYPES. Accordingly, the proper United States Federal income tax
characterization and treatment of the STRYPES is uncertain. Pursuant to the
terms of the Indenture, the Company and any holder of a STRYPES agree to treat
each STRYPES as a unit (a "Unit") consisting of (i) a debt instrument (the
"Debt Instrument") with a fixed principal amount unconditionally payable on
the Maturity Date equal to the issue price of the STRYPES and bearing interest
at the stated interest rate on the STRYPES and (ii) a forward purchase
contract (the "Forward Contract") pursuant to which the holder agrees to use
the principal payment due on the Debt Instrument to purchase on the Maturity
Date the MGIC Common Stock which the Company is obligated to deliver at that
time (subject to the Company's right to deliver cash with an equal value in
lieu of the MGIC Common Stock). Therefore, the Company currently intends to
treat each STRYPES as a Unit consisting of the Debt Instrument and the Forward
Contract 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 and treatment of the STRYPES for United States Federal income
tax purposes. In the opinion of Brown & Wood,
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counsel to the Company, such characterization and tax treatment of the
STRYPES, although not the only reasonable characterization and tax treatment,
is based on reasonable interpretations of law currently in effect and, even if
successfully challenged by the IRS, will not result in the imposition of
penalties.
Prospective investors in the STRYPES should be aware, however, that no
ruling is being requested from the IRS with respect to the STRYPES, the IRS is
not bound by the characterization of each STRYPES by the Company and the
holders thereof as a Unit consisting of the Debt Instrument and the Forward
Contract, and the IRS could possibly assert a different position as to the
proper United States Federal income tax characterization and treatment of the
STRYPES. For instance, it is possible that the IRS could assert that each
STRYPES should be treated entirely as a single debt instrument of the Company
for United States Federal income tax purposes. Except where otherwise
specifically provided herein, the following discussion of the principal United
States Federal income tax consequences of the purchase, ownership and
disposition of the STRYPES is based upon the assumption that each STRYPES will
be characterized and treated as a Unit consisting of the Debt Instrument and
the Forward Contract for United States Federal income tax purposes. As
discussed in greater detail herein, if the STRYPES are not in fact ultimately
characterized and treated as a Unit consisting of the Debt Instrument and the
Forward Contract for United States Federal income tax purposes, then the
United States Federal income tax treatment of the purchase, ownership and
disposition of the STRYPES could significantly differ from the treatment
discussed immediately below with the result that the timing and character of
income, gain or loss recognized on a STRYPES could significantly differ from
the timing and character of income, gain or loss recognized on a STRYPES had
each STRYPES in fact been characterized and treated as a Unit consisting of
the Debt Instrument and the Forward Contract for United States Federal income
tax purposes.
U.S. HOLDERS
As previously discussed, pursuant to the terms of the Indenture, the Company
and any holder of a STRYPES agree to treat each STRYPES as a Unit consisting
of the Debt Instrument and the Forward Contract. Consistent with this
treatment of the STRYPES, pursuant to the terms of the Indenture, a U.S.
Holder of a STRYPES will be required to include currently in income payments
denominated as interest that are made with respect to a STRYPES in accordance
with such U.S. Holder's regular method of tax accounting. Furthermore,
pursuant to the agreement contained in the Indenture to treat each STRYPES as
a Unit consisting of the Debt Instrument and the Forward Contract, any holder
of a STRYPES agrees to allocate the purchase price paid by such holder to
acquire the STRYPES between the two components of the Unit (i.e., the Debt
Instrument and the Forward Contract) based upon their relative fair market
values (as determined on the purchase date). The portion of the total purchase
price so allocated by the holder to each component of the Unit will generally
constitute the holder's initial tax basis for each such component of the Unit.
Accordingly, in the event that the fair market value of the Debt Instrument
(as determined on the purchase date) exceeds the purchase price paid by the
holder to acquire the STRYPES, the holder would be deemed to have acquired the
Debt Instrument for an amount equal to the fair market value of the Debt
Instrument (as determined on the purchase date) and would be deemed to have
assumed the Forward Contract component of the STRYPES in exchange for a
payment in an amount equal to the excess of the fair market value of the Debt
Instrument (as determined on the purchase date) over the purchase price paid
by the holder to acquire the STRYPES. In such event, such deemed payment
received by the holder in respect of the Forward Contract should only be
includible in income by the holder as an additional amount realized with
respect to the Forward Contract on the earlier of the sale or other
disposition of the STRYPES by the holder or the Maturity Date (which would
increase the amount of gain or decrease the amount of loss realized with
respect to the Forward Contract). Pursuant to the terms of the Indenture, with
respect to acquisitions of STRYPES in connection with the original issuance
thereof, the Company and the holders agree to allocate the entire initial
purchase price of a STRYPES (i.e., the issue price of a STRYPES) to the Debt
Instrument component and to allocate no portion of the initial purchase price
of a STRYPES to the Forward Contract component. Based upon the foregoing,
pursuant to the agreement to treat each STRYPES as a Unit consisting of the
Debt Instrument and the Forward Contract, a holder who acquires a STRYPES in
connection with the original issuance thereof, will have agreed to treat such
acquisition of the STRYPES by the holder as a purchase of the Debt Instrument
by the holder for $48.00. In addition, based upon the foregoing, pursuant to
the agreement to treat each STRYPES as a Unit consisting of the Debt
Instrument and the Forward Contract, a holder who acquires a STRYPES in
connection with the original issuance thereof will have agreed to treat the
entering into of the Forward Contract component as not involving any initial
payments between the holder and the Company pursuant thereto.
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Under general principles of current United States Federal income tax law,
payments of interest on a debt instrument (e.g., the Debt Instrument)
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). In addition, a debt instrument
will be treated as having been issued with original issue discount for United
States Federal income tax purposes to the extent that the stated redemption
price at maturity of the debt instrument (generally the debt instrument's
stated principal amount) exceeds the debt instrument's issue price, if such
excess equals or exceeds a de minimis amount (generally 1/4 of 1% of the debt
instrument's stated redemption price at maturity multiplied by the number of
complete years to maturity from its issue date). Pursuant to the agreement to
treat each STRYPES as a Unit consisting of the Debt Instrument and the Forward
Contract, each such Debt Instrument component will be treated for these
purposes as having an issue price equal to $48.00. Since the stated redemption
price at maturity of each such Debt Instrument component (i.e., $48.00) equals
its issue price (i.e., $48.00), the Debt Instrument component of each Unit
will not be treated as having been issued with any original issue discount.
Under the foregoing principles and in accordance with the agreement to treat
each STRYPES as a Unit consisting of the Debt Instrument and the Forward
Contract, the quarterly interest payments payable with respect to the STRYPES
at the stated interest rate of 6 1/2% of the issue price of the STRYPES per
annum (the "Interest Payments") generally will be taxable to a U.S. Holder as
ordinary interest income on the respective dates that such Interest Payments
are accrued or are received (in accordance with the U.S. Holder's regular
method of tax accounting). On the Maturity Date, pursuant to the agreement to
treat each STRYPES as a Unit consisting of the Debt Instrument and the Forward
Contract, a U.S. Holder will recognize capital gain or loss with respect to
the Debt Instrument in an amount equal to the difference, if any, between the
principal amount of the Debt Instrument (i.e., the issue price of the STRYPES)
and such U.S. Holder's adjusted tax basis in the Debt Instrument. Such capital
gain or loss will generally be long-term capital gain or loss if the STRYPES
has been held by the U.S. Holder for more than one year as of the Maturity
Date. In addition, pursuant to the agreement to treat each STRYPES as a Unit
consisting of the Debt Instrument and the Forward Contract, on the Maturity
Date, if the Company delivers MGIC Common Stock upon payment of the STRYPES, a
U.S. Holder will generally not realize any taxable gain or loss on the
exchange, pursuant to the Forward Contract, of the principal amount of the
Debt Instrument for the MGIC Common Stock. However, a U.S. Holder will
generally be required to recognize taxable gain or loss with respect to any
cash received in lieu of fractional shares. The amount of such gain or loss
recognized by a U.S. Holder will be equal to the difference, if any, between
the amount of cash received by the U.S. Holder and the portion of the sum of
the principal amount of the Debt Instrument and the U.S. Holder's tax basis in
the Forward Contract that is allocable to the fractional shares. Any such
taxable gain or loss will be treated as short-term capital gain or loss. A
U.S. Holder will have an initial tax basis in any MGIC Common Stock received
on the Maturity Date in an amount equal to the sum of the principal amount of
the Debt Instrument and the U.S. Holder's tax basis in the Forward Contract
less the portion of such sum that is allocable to any fractional shares (as
described above) and will realize taxable gain or loss with respect to such
MGIC Common Stock received on the Maturity Date only upon the subsequent sale
or disposition by the U.S. Holder of such MGIC Common Stock. In addition, a
U.S. Holder's holding period for any MGIC Common Stock received by such U.S.
Holder on the Maturity Date will begin on the day immediately following the
Maturity Date and will not include the period during which the U.S. Holder
held such STRYPES.
Alternatively, pursuant to the agreement to treat the STRYPES as a Unit
consisting of the Debt Instrument and the Forward Contract, if the Company
pays the STRYPES in cash on the Maturity Date, a U.S. Holder will recognize
taxable gain or loss on the Maturity Date with respect to the Forward Contract
(in addition to any gain or loss recognized with respect to the Debt
Instrument as described above) in an amount equal to the difference, if any,
between the total amount of cash received by such U.S. Holder on the Maturity
Date and an amount equal to the sum of the principal amount of the Debt
Instrument and the U.S. Holder's tax basis in the Forward Contract. It is
uncertain whether such gain or loss would be treated as capital or ordinary.
If such gain or loss is properly treated as capital, then such gain or loss
will be treated as long-term capital gain or loss if the STRYPES has been held
by the U.S. Holder for more than one year as of the Maturity Date. If such
gain or loss is properly
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treated as ordinary gain or loss, it is possible that the deductibility of any
loss recognized on the Maturity Date with respect to the Forward Contract by a
U.S. Holder who is an individual could be subject to the limitations
applicable to miscellaneous itemized deductions provided for under Section
67(a) of the Internal Revenue Code of 1986, as amended (the "Code"). In
general, Section 67(a) of the Code provides that an individual may only deduct
miscellaneous itemized deductions for a particular taxable year to the extent
that the aggregate amount of the individual's miscellaneous itemized
deductions for such taxable year exceed two percent of the individual's
adjusted gross income for such taxable year (although, the miscellaneous
itemized deductions allowable to high-income individuals are generally subject
to further limitations). Prospective investors in the STRYPES are urged to
consult their own tax advisors concerning the character of any gain or loss
realized on the Maturity Date with respect to the Forward Contract in the
event that the Company elects to pay the STRYPES in cash on the Maturity Date
as well as the deductibility of any such loss.
Pursuant to the agreement to treat each STRYPES as a Unit consisting of the
Debt Instrument and the Forward Contract, upon the sale or other disposition
of a STRYPES prior to the Maturity Date, a U.S. Holder generally will be
required to allocate the total amount realized by such U.S. Holder upon such
sale or other disposition between the two components of the Unit (i.e., the
Debt Instrument and the Forward Contract) based upon their relative fair
market values (as determined on the date of disposition). Accordingly, in the
event that the fair market value of the Debt Instrument (as determined on the
date of disposition) exceeds the actual amount realized by the U.S. Holder
upon the sale or other disposition of a STRYPES prior to the Maturity Date,
the U.S. Holder would be deemed to have sold the Debt Instrument for an amount
equal to the fair market value of the Debt Instrument (as determined on the
date of disposition) and would be deemed to have made a payment to the
purchaser of the STRYPES in exchange for such purchaser's assumption of the
Forward Contract in an amount equal to the excess of the fair market value of
the Debt Instrument (as determined on the date of disposition) over the actual
amount realized by the U.S. Holder upon such sale or disposition of the
STRYPES. A U.S. Holder will generally be required to recognize taxable gain or
loss with respect to each such component in an amount equal to the difference,
if any, between (or, in some cases, the sum of) the amount realized (or paid)
with respect to each such component upon the sale or disposition of the
STRYPES (as determined in the manner described above) and the U.S. Holder's
adjusted tax basis in each such component. Any such gain or loss will
generally be treated as long-term capital gain or loss if the U.S. Holder has
held the STRYPES for more than one year at the time of disposition.
As previously discussed, prospective investors in the STRYPES should be
aware that the IRS is not bound by the characterization of the STRYPES by the
Company and the holders thereof as a Unit consisting of the Debt Instrument
and the Forward Contract, and the IRS could possibly assert a different
position as to the proper United States Federal income tax characterization
and treatment of the STRYPES. For instance, it is possible that the IRS could
assert that each STRYPES should be treated entirely as a single debt
instrument of the Company for United States Federal income tax purposes.
If the STRYPES were ultimately characterized and treated entirely as debt
instruments of the Company for United States Federal income tax purposes, then
the timing and character of income, gain or loss recognized on a STRYPES would
differ from the timing and character of income, gain or loss recognized on a
STRYPES had each STRYPES in fact been characterized and treated for United
States Federal income tax purposes as a Unit consisting of the Debt Instrument
and the Forward Contract. If the STRYPES were ultimately characterized and
treated entirely as indebtedness of the Company for United States Federal
income tax purposes, under general principles of current United States Federal
income tax law, the Interest Payments generally would be taxable to a U.S.
Holder as ordinary interest income on the respective dates that such Interest
Payments are accrued or are received (in accordance with the U.S. Holder's
regular method of tax accounting). Under this same analysis and treatment of
each STRYPES as a single debt instrument of the Company for United States
Federal income tax purposes, under general principles of current United States
Federal income tax law, if the fair market value (as determined on the
Maturity Date) of the amount of MGIC Common Stock or cash payable on the
Maturity Date with respect to a STRYPES exceeds the issue price thereof, such
excess would be treated as contingent interest and generally would be
includible in income by a U.S. Holder as ordinary interest on the Maturity
Date
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(regardless of the U.S. Holder's regular method of tax accounting). In
addition, if the fair market value (as determined on the Maturity Date) of the
amount of MGIC Common Stock or cash payable on the Maturity Date with respect
to a STRYPES exceeds the issue price thereof, then such STRYPES would be
treated as having been retired on the Maturity Date in exchange for an amount
equal to the issue price thereof. If, however, the fair market value (as
determined on the Maturity Date) of the amount of MGIC Common Stock or cash
payable on the Maturity Date with respect to a STRYPES is equal to or less
than the issue price thereof, then such STRYPES would be treated as having
been retired on the Maturity Date in exchange for an amount equal to the fair
market value (as determined on the Maturity Date) of the entire amount payable
on the Maturity Date with respect to such STRYPES and no portion of the amount
payable on the Maturity Date with respect to such STRYPES would be treated as
contingent interest. A U.S. Holder's initial tax basis in any MGIC Common
Stock received by such U.S. Holder on the Maturity Date of a STRYPES would
equal the fair market value (as determined on the Maturity Date) of the MGIC
Common Stock received by such U.S. Holder. Furthermore, a U.S. Holder's
holding period for any MGIC Common Stock received by such U.S. Holder on the
Maturity Date of a STRYPES would begin on the day immediately following the
Maturity Date and would not include the period during which the U.S. Holder
held such STRYPES.
Moreover, under this analysis and treatment of each STRYPES as a single debt
instrument of the Company for United States Federal income tax purposes, upon
the sale, exchange or retirement of a STRYPES, 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 the sale, exchange or retirement (other than
amounts representing accrued and unpaid Interest Payments) and such U.S.
Holder's adjusted tax basis in the STRYPES. A U.S. Holder's adjusted tax basis
in a STRYPES generally would equal such U.S. Holder's initial investment in
the STRYPES (as adjusted pursuant to the market discount and bond premium
rules described below). Such gain or loss generally would be long-term capital
gain or loss if the STRYPES were held by the U.S. Holder for more than one
year (subject to the market discount rules, as discussed below). It is
possible, however, that under this analysis and treatment of the STRYPES the
IRS could assert that any amounts realized upon the sale or exchange of a
STRYPES prior to the Maturity Date in excess of the STRYPES's issue price
constitutes ordinary interest income (subject to the bond premium rules, as
discussed below). Nonetheless, if the STRYPES were ultimately characterized
and treated entirely as indebtedness of the Company for United States Federal
income tax purposes, although the matter is not free from doubt, in the
opinion of Brown & Wood, counsel to the Company, under current law, any gain
realized upon the sale or exchange of a STRYPES prior to the Maturity Date
should be treated entirely as capital gain (subject to the market discount
rules, as discussed below).
Prospective investors in the STRYPES should also be aware that on December
15, 1994, the Treasury Department issued proposed regulations (the "Proposed
Regulations") concerning the proper United States Federal income tax treatment
of contingent payment debt instruments. In the event that the STRYPES were
characterized and treated entirely as debt instruments of the Company for
United States Federal income tax purposes, the STRYPES would be treated as
contingent payment debt instruments. The Proposed Regulations, however, are
proposed to only be effective 60 days after the date on which the Proposed
Regulations are published as final Treasury regulations. Accordingly, due to
the proposed prospective effective date of the Proposed Regulations, if
ultimately adopted in their current form, the Proposed Regulations would not
apply to the STRYPES even if the STRYPES were characterized and treated
entirely as debt instruments of the Company for United States Federal income
tax purposes. Furthermore, proposed Treasury regulations are not binding upon
either the IRS or taxpayers prior to becoming effective as temporary or final
regulations. In general, if ultimately adopted in their current form, the
Proposed Regulations would cause the timing and character of income, gain or
loss reported on a contingent payment debt instrument to substantially differ
from the timing and character of income, gain or loss reported on a contingent
payment debt instrument under general principles of current United States
Federal income tax law (as described immediately above). Prospective investors
in the STRYPES are urged to consult their own tax advisers concerning the
effect, if any, of the Proposed Regulations on their investment in the
STRYPES.
Prospective investors in the STRYPES should also be aware that it is
possible that the ultimate characterization and treatment of the STRYPES for
United States Federal income tax purposes could differ from
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the possible characterizations and treatments described herein with the result
that the ultimate United States Federal income tax treatment of the purchase,
ownership and disposition of the STRYPES could significantly differ from any
of the treatments described herein.
Despite the foregoing, as previously discussed, pursuant to the agreement
contained in the Indenture to treat each STRYPES as a Unit consisting of the
Debt Instrument and the Forward Contract, the Company, where required,
currently intends to file information returns with the IRS treating each
STRYPES as a Unit consisting of the Debt Instrument and the Forward Contract
for United States Federal income tax purposes (as described above), in the
absence of any change or clarification in the law, by regulation or otherwise,
requiring another characterization and treatment of the STRYPES for United
States Federal income tax purposes.
MARKET DISCOUNT AND PREMIUM
In general, if a U.S. Holder purchases a debt instrument (e.g., the Debt
Instrument component of a Unit) for an amount that is less than the principal
amount thereof, the amount of the difference will be treated as "market
discount," unless such difference is less than a specified de minimis amount
(generally 1/4 of 1% of the debt instrument's stated principal amount
multiplied by the number of complete years to maturity from the date the U.S.
Holder purchased such debt instrument).
Under the market discount rules, a U.S. Holder will be required to treat any
gain realized on the sale, exchange, retirement or other disposition of a debt
instrument as ordinary income to the extent of the lesser of (i) the amount of
such realized gain or (ii) the market discount which has not previously been
included in income and is treated as having accrued on such debt instrument at
the time of such payment or disposition. Market discount will be considered to
accrue ratably during the period from the date of acquisition to the maturity
of the debt instrument, unless the U.S. Holder elects to accrue market
discount on the basis of semiannual compounding.
A U.S. Holder may be required to defer the deduction of all or a portion of
the interest paid or accrued on any indebtedness incurred or maintained to
purchase or carry a debt instrument with market discount until the maturity of
the debt instrument or its earlier disposition in a taxable transaction and
certain nontaxable transactions, because a current deduction is only allowed
to the extent that the interest expense exceeds an allocable portion of the
market discount. A U.S. Holder may elect to include market discount in income
currently as it accrues (on either a ratable or semiannual compounding basis),
in which case the rules described above regarding the deferral of interest
deductions will not apply. Generally, such currently included market discount
is treated as ordinary interest income for United States Federal income tax
purposes and a U.S. Holder would increase its tax basis in a debt instrument
by the amount of any such currently included market discount. Such an election
will apply to all debt instruments acquired by the U.S. Holder on or after the
first day of the first taxable year to which such election applies and may be
revoked only with the consent of the IRS.
In general, if a U.S. Holder purchases a debt instrument for an amount that
is greater than the principal amount thereof, such U.S. Holder will be
considered to have purchased the debt instrument with "amortizable bond
premium" equal in amount to such excess. A U.S. Holder may elect to amortize
such premium using a constant yield method over the remaining term of the debt
instrument and may offset ordinary interest otherwise required to be included
in respect of the debt instrument during any taxable year by the amortized
amount of such premium for such year (or, prior years, if such amortized
premium for prior years has not yet offset interest) and would reduce its tax
basis in the debt instrument by the amount of any such interest offset taken.
Such election, if made, would apply to all debt instruments held by the U.S.
Holder at the beginning of the taxable year to which such election applies and
to all debt instruments acquired by the U.S. Holder thereafter. Such election
would also be irrevocable once made, unless the U.S. Holder making such an
election obtains the express written consent of the IRS to revoke such
election.
MISCELLANEOUS TAX MATTERS
Special tax rules may apply to persons holding a STRYPES as part of a
"synthetic security" or other integrated investment, or as part of a straddle,
hedging transaction or other combination of offsetting positions.
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For instance, Section 1258 of the Code may possibly require certain U.S.
Holders of the STRYPES who enter into hedging transactions or offsetting
positions with respect to the STRYPES to treat all or a portion of any gain
realized on the STRYPES as ordinary income in instances where such gain may
have otherwise been treated as capital gain. U.S. Holders hedging their
positions with respect to the STRYPES or otherwise holding their STRYPES in a
manner described above should consult their own tax advisors regarding the
applicability of Section 1258 of the Code, or any other provision of the Code,
to their investment in the STRYPES.
NON-U.S. HOLDERS
Based on the treatment of each STRYPES as a Unit consisting of the Debt
Instrument and the Forward Contract, in the case of a non-U.S. Holder,
payments made with respect to the STRYPES should not be subject to United
States withholding tax, provided that such non-U.S. Holder complies with
applicable certification requirements. Any capital gain realized upon the sale
or other disposition of a STRYPES by a non-U.S. Holder will generally not be
subject to United States Federal income tax if (i) such gain is not
effectively connected with a United States trade or business of such non-U.S.
Holder and (ii) in the case of an individual non-U.S. Holder, such individual
is not present in the United States for 183 days or more in the taxable year
of the sale or other disposition, or the gain is not attributable to a fixed
place of business maintained by such individual in the United States and such
individual does not have a "tax home" (as defined for United States Federal
income tax purposes) in the United States.
As discussed above, alternative characterizations of the STRYPES for United
States Federal income tax purposes are possible. Should an alternative
characterization of the STRYPES, by reason of a change or clarification of the
law, by regulation or otherwise, cause payments with respect to the STRYPES to
become subject to withholding tax, the Company will withhold tax at the
statutory rate. Prospective non-U.S. Holders of the STRYPES should consult
their own tax advisors in this regard.
BACKUP WITHHOLDING AND INFORMATION REPORTING
A beneficial owner of a STRYPES may be subject to information reporting and
to backup withholding at a rate of 31 percent of certain amounts paid to the
beneficial owner unless such beneficial owner provides proof of an applicable
exemption or a correct taxpayer identification number, and otherwise complies
with applicable requirements of the backup withholding rules.
Any amounts withheld under the backup withholding rules from a payment to a
beneficial owner would be allowed as a refund or a credit against such
beneficial owner's United States Federal income tax provided the required
information is furnished to the IRS.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Company has agreed to sell to Merrill Lynch, Pierce, Fenner & Smith
Incorporated (the "Underwriter"), and the Underwriter has agreed to purchase
from the Company, 5,000,000 STRYPES. Under the terms and conditions of the
Underwriting Agreement, the Underwriter is committed to take and pay for all
of the STRYPES, if any are taken.
The Underwriter has advised the Company that it proposes initially to offer
the STRYPES directly to the public at the public offering price set forth on
the cover page of this Prospectus, and to certain dealers at such price less a
concession not to exceed $.87 per STRYPES. The Underwriter may allow, and such
dealers may reallow, a discount not to exceed $.10 per STRYPES to certain
other dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
The Company has granted the Underwriter an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 750,000
additional STRYPES at the public offering price set forth on the cover page of
this Prospectus, less the underwriting discount. The Underwriter may exercise
this option only to cover over-allotments, if any, made on the sale of the
STRYPES offered hereby.
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<PAGE>
MGIC Investment and its executive officers have agreed not to offer, sell,
contract to sell or otherwise dispose of, directly or indirectly, any shares
of MGIC Common Stock, securities convertible into, exchangeable for or
repayable with such shares or rights or warrants to acquire such shares, for a
period of 90 days after the date of this Prospectus without the prior written
consent of the Underwriter. The foregoing agreement of MGIC Investment does
not apply to MGIC Common Stock offered to MGIC Investment's employees under
its existing employee benefit plans nor does it apply to rights with respect
to MGIC Common Stock under a shareholder rights plan. NML has agreed not to
offer, sell, contract to sell or otherwise dispose of, directly or indirectly,
or cause to be filed a registration statement under the Securities Act with
respect to, any shares of MGIC Common Stock, securities convertible into,
exchangeable for or repayable with such shares or rights or warrants to
acquire such shares, for a period of 90 days after the date of this Prospectus
without the prior written consent of the Underwriter.
European Reinsurance Company of Zurich ("European Reinsurance"), a
stockholder of MGIC Investment, will be offering for sale 90,000 shares of
MGIC Common Stock. Pursuant to an agreement between European Reinsurance and
the Underwriter, such offering will not commence earlier than 30 days after
the date of this Prospectus unless the consent of the Underwriter is obtained.
The underwriting of the STRYPES will conform to the requirements set forth
in the applicable sections of Schedule E to the By-Laws of the National
Association of Securities Dealers, Inc.
The STRYPES have been approved for listing on the NYSE, subject to official
notice of issuance.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act relating to this
Prospectus (including the documents incorporated by reference herein).
VALIDITY OF THE STRYPES
The validity of the STRYPES offered hereby will be passed upon for the
Company and for the Underwriter by Brown & Wood, New York, New York.
EXPERTS
The consolidated financial statements and related financial statement
schedules of the Company and its subsidiaries included or incorporated by
reference in the Company's 1994 Annual Report on Form 10-K, and incorporated
by reference in this Prospectus, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports incorporated by reference
herein. The information under the caption "Summary Financial Information" for
each of the five years in the period ended December 30, 1994 included in this
Prospectus and the Selected Financial Data under the captions "Operating
Results," "Financial Position" and "Common Share Data" for each of the five
years in the period ended December 30, 1994 included in the 1994 Annual Report
to Stockholders of the Company, and incorporated by reference herein, has been
derived from consolidated financial statements audited by Deloitte & Touche
LLP, as set forth in their reports incorporated by reference herein. Such
consolidated financial statements and related financial statement schedules,
such Summary Financial Information and Selected Financial Data appearing or
incorporated by reference in this Prospectus and the Registration Statement of
which this Prospectus is a part, have been included or incorporated herein by
reference in reliance upon such reports of Deloitte & Touche LLP given upon
their authority as experts in accounting and auditing.
With respect to unaudited interim financial information for the periods
included in any of the Quarterly Reports on Form 10-Q which may be
incorporated herein by reference, Deloitte & Touche LLP have applied limited
procedures in accordance with professional standards for a review of such
information. However, as stated in their report included in any such Quarterly
Report on Form 10-Q and incorporated by reference herein, they did not audit
and they do not express an opinion on such interim financial information.
Accordingly, the degree of reliance on their reports on such information
should be restricted in light of the limited nature of the review procedures
applied. Deloitte & Touche LLP are not subject to the liability provisions of
Section 11 of the Securities Act for any such report on unaudited interim
financial information because any such report is not a "report" or a "part" of
the registration statement prepared or certified by an accountant within the
meaning of Sections 7 and 11 of the Securities Act.
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NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING DESCRIBED HEREIN, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURI-
TIES OTHER THAN THOSE SPECIFICALLY OFFERED HEREBY OR OF ANY SECURITIES OFFERED
HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE AN OF-
FER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PRO-
SPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information...................................................... 2
Incorporation of Certain Documents by Reference............................ 2
Prospectus Summary......................................................... 3
Risk Factors............................................................... 7
Merrill Lynch & Co., Inc................................................... 10
Summary Financial Information.............................................. 11
MGIC Investment Corporation................................................ 17
Price Range of MGIC Common Stock and Dividends............................. 18
Use of Proceeds............................................................ 18
Description of the STRYPES................................................. 19
Certain Arrangements With NML.............................................. 27
Certain United States Federal Income Tax Considerations.................... 28
Underwriting............................................................... 34
Validity of the STRYPES.................................................... 35
Experts.................................................................... 35
</TABLE>
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5,000,000 STRYPES
LOGO
MERRILL LYNCH & CO., INC.
6 1/2% STRYPES SM
DUE AUGUST 15, 1998
PAYABLE WITH SHARES OF COMMON STOCK
OF MGIC INVESTMENT CORPORATION
(OR CASH WITH AN EQUAL VALUE)
---------------
PROSPECTUS
---------------
MERRILL LYNCH & CO.
JULY 20, 1995
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