<PAGE>
Rule 424(b)(5)
Registration No. 33-65135
PROSPECTUS SUPPLEMENT
- ---------------------
(TO PROSPECTUS DATED JULY 26, 1996)
[LOGO]
3,500,000 UNITS
MERRILL LYNCH & CO., INC.
TOP TEN YIELD MARKET INDEX TARGET-TERM SECURITIES (SERVICE MARK) DUE
AUGUST 15, 2006
"MITTS(REGISTERED SERVICE MARK)"
An aggregate principal amount of $35,000,000 of Top Ten Yield Market Index
Target-Term Securities (Service Mark) due August 15, 2006 (the "Securities" or
"MITTS(Registered Service Mark)") of Merrill Lynch & Co., Inc. (the "Company")
are being offered hereby. Each $10 principal amount of Securities will be deemed
to be a "Unit" for purposes of trading and transfer. Units will be transferable
by the Depository (as hereinafter defined), as more fully described below. The
Securities are debt securities of the Company, which are being issued in
denominations of $10 and integral multiples thereof, will bear no periodic
payments of interest and will mature on August 15, 2006. At maturity, a
beneficial owner of a Security will be entitled to receive, with respect to each
Security, the principal amount thereof plus an interest payment (the
"Supplemental Redemption Amount") based on the percentage increase, if any, in
the Top Ten Yield Index (the "Index") over the Starting Index Value. The
Supplemental Redemption Amount will in no event be less than $2.40 per $10
principal amount of the Securities (the "Minimum Supplemental Redemption
Amount"), representing a minimum yield-to-maturity of 2.16% per annum calculated
on a semi-annual bond equivalent basis. The Index will reflect the price
movements and cash dividends on a portfolio of ten common stocks with the
highest dividend yields in the Dow Jones Industrial Average* (the "DJIA") on
July 26, 1996 that will be reconstituted annually to reflect the stocks having
the highest dividend yields in the DJIA (the "Top Ten Yield Stocks"), as more
particularly described herein. Subject to certain exceptions, the Index will be
reduced each calendar quarter by a value equal to 0.4375% of the then current
Index value. The Securities are not redeemable or callable by the Company prior
to maturity. While at maturity a beneficial owner of a Security will receive the
principal amount of such Security plus the Supplemental Redemption Amount there
will be no other payment of interest, periodic or otherwise.
The Supplemental Redemption Amount payable with respect to a Security at
maturity will equal the product of (A) the principal amount of the applicable
Security, and (B) the percentage increase from the Starting Index Value to the
Ending Index Value, however, in no event will the Supplemental Redemption
Amount be less than the Minimum Supplemental Redemption Amount. The Starting
Index Value, as more particularly described herein, was set to 100 on the date
the Securities were priced by the Company for initial sale to the public ("the
Pricing Date"). The Ending Index Value, as more particularly described herein,
will be the average (arithmetic mean) of the closing values of the Index on
certain days, or, if certain events occur, the closing value of the Index on a
single day prior to the maturity of the Securities.
FOR INFORMATION AS TO THE CALCULATION OF THE SUPPLEMENTAL REDEMPTION AMOUNT
WHICH WILL BE PAID AT MATURITY, THE CALCULATION AND THE COMPOSITION OF THE
INDEX, AND CERTAIN TAX CONSEQUENCES TO BENEFICIAL OWNERS OF THE SECURITIES,
SEE "DESCRIPTION OF SECURITIES", "THE INDEX", AND "CERTAIN UNITED STATES
FEDERAL INCOME TAX CONSIDERATIONS", RESPECTIVELY, IN THIS PROSPECTUS
SUPPLEMENT. FOR OTHER INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE
INVESTORS, SEE "RISK FACTORS" BEGINNING ON PAGE S-6 OF THIS PROSPECTUS
SUPPLEMENT.
Ownership of the Securities will be maintained in book-entry form by or
through the Depository. Beneficial owners of the Securities will not have the
right to receive physical certificates evidencing their ownership except under
the limited circumstances described herein.
The Securities have been approved for listing on the American Stock Exchange
under the symbol "MTT" subject to official notice of issuance.
--------------
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 SUPPLEMENT OR
THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT THE COMPANY(1)
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<S> <C> <C> <C>
Per Unit.................................. $10 $.35 $9.65
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Total..................................... $35,000,000 $1,225,000 $33,775,000
</TABLE>
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(1) Before deduction of expenses payable by the Company.
--------------
The Securities are offered by the Underwriter, subject to prior sale, when,
as, and if issued by the Company and accepted by the Underwriter and subject
to certain other conditions. The Underwriter reserves the right to reject
orders in whole or in part. It is expected that delivery of the Securities
will be made in New York, New York on or about August 12, 1996.
This Prospectus Supplement and the accompanying Prospectus may be used by
the Underwriter in connection with offers and sales related to market-making
transactions in the Securities. 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.
--------------
MERRILL LYNCH & CO.
--------------
The date of this Prospectus Supplement is August 8, 1996.
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"MITTS" is a registered service mark and "Market Index Target-Term Securities"
is a service mark owned by Merrill Lynch & Co., Inc.
* The name "Dow Jones Industrial Average" is the property of Dow Jones &
Company, Inc. which is not affiliated with the Company, has not participated
in any way in the creation of the Securities or in the selection of stocks
included in the Top Ten Yield Portfolio and has not reviewed or approved any
information contained in this Prospectus Supplement.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES
OFFERED HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
----------------
The Commissioner of Insurance of The State of North Carolina has not
approved or disapproved the offering of the Securities made hereby nor has the
Commissioner passed upon the accuracy or adequacy of this Prospectus
Supplement or Prospectus.
S-2
<PAGE>
SUMMARY
"The following summary does not purport to be complete and is qualified in its
entirety by the more detailed information appearing elsewhere in this
Prospectus Supplement and the accompanying Prospectus."
ISSUER...................... Merrill Lynch & Co., Inc.
SECURITIES OFFERED.......... 3,500,000 Units of Top Ten Yield Market Index
Target-Term Securities due August 15, 2006. The
Securities are to be issued as a series of
Senior Debt Securities under the 1983 Indenture
described herein.
LISTING..................... The Securities have been approved for listing on
the American Stock Exchange under the symbol
"MTT", subject to official notice of issuance.
DENOMINATIONS............... A Unit consisting of $10 principal amount of
Securities and integral multiples thereof.
MATURITY.................... August 15, 2006.
PAYMENT AT MATURITY......... At maturity, a beneficial owner of a Security
will be entitled to receive (i) the principal
amount thereof and (ii) the Supplemental
Redemption Amount equal to:
Ending Index Value--Starting Index Value
Principal Amount X ----------------------------------------
Starting Index Value
provided, however, that in no event will the
Supplemental Redemption Amount be less than
$2.40 per $10 principal amount of the Securities
(i.e., the Minimum Supplemental Redemption
Amount). The Minimum Supplemental Redemption
Amount is equivalent to a rate of return of
2.16% per annum calculated on a semi-annual bond
equivalent basis. The Starting Index Value was
set to 100 on the Pricing Date. The Ending Index
Value will equal the average (arithmetic mean)
of the closing value of the Index on certain
days prior to the maturity of the Securities,
or, if Market Disruption Events (as defined
below) occur on certain days, then the Ending
Index Value will equal the closing value of the
Index on a single day.
INDEX....................... The Index on any Index Business Day (as defined
below) will be calculated and disseminated by
the American Stock Exchange, or any successor
thereto (the "AMEX"), and will equal the Top Ten
Yield Portfolio Value plus the Current Quarter
Dividends as of such Index Business Day. The Top
Ten Yield Portfolio Value will equal the sum of
the products of the most recently available
market price and the applicable Share Multiplier
(as defined below) for each Top Ten Yield Stock.
The Current Quarter Dividends will equal the
cash dividends paid on the stocks contained in
the Top Ten Yield Portfolio during the then
current calendar quarter adjusted for the number
of shares of each such stock contained in the
Top Ten Yield Portfolio. At the end of each
S-3
<PAGE>
calendar quarter, the Current Quarter Dividends
for such calendar quarter will be assumed to be
reinvested into the value of the Index by
adjusting the Share Multipliers to reflect such
Current Quarter Dividends. The AMEX has
initially constituted the Top Ten Yield
Portfolio to include approximately equal dollar
amounts of the ten common stocks in the DJIA
having the highest ordinary cash dividend yields
as of July 26, 1996. As of the close of business
on the second Index Business Day prior to each
anniversary date of the date the Securities are
initially issued, subject to adjustment as
described herein, the ten common stocks in the
DJIA then having the highest ordinary cash
dividend yields will be determined and on the
succeeding anniversary date the content of the
Top Ten Yield Portfolio will be adjusted so as
to represent approximately an equal dollar-
weighted portfolio of such ten common stocks. At
the end of each calendar quarter, the Index will
be reduced by a value equal to 0.4375% of the
then current Index, provided that (i) there will
be no reduction at the end of the calendar
quarter ending in September 1996 and the
reduction at the end of the calendar quarter
ending in December 1996 will be increased to
reflect the quarterly rate of 0.4375% prorated
for the period from the date of the issuance of
the Securities through the end of the calendar
quarter in December 1996 and (ii) the Index will
be reduced at the close of business on July 31,
2006 by a value equal to 0.1507% of the closing
value of the Index on such date to reflect the
quarterly rate of 0.4375% for the period from
July 1, 2006 through July 31, 2006. The DJIA is
comprised of 30 common stocks chosen by the
editors of "The Wall Street Journal" (the "WSJ")
as representative of the broad market and of
American industry generally. The companies are
major factors in their industries and their
stocks are typically widely held by individuals
and institutional investors. Changes in the
composition of the DJIA are made entirely by the
editors of the WSJ without consultation with the
companies, any stock exchange or any official
agency or the Company. Dow Jones & Company,
Inc., publisher of the WSJ, is not affiliated
with the Company, has not participated in any
way in the creation of the Securities or in the
selection of stocks to be included in the Top
Ten Yield Portfolio and has not reviewed or
approved any information included in this
Prospectus Supplement. The AMEX will calculate
and disseminate the value of the Index based on
the most recently reported prices of the stocks
underlying the Index (as reported by the
exchange or trading system on which such
underlying stocks are listed or traded), at
approximately 15-second intervals during the
AMEX's business hours and the end of each Index
Business Day via the Consolidated Tape
Association's Network B.
TOP TEN YIELD PORTFOLIO..... The portfolio underlying the Index will consist
of the Top Ten Yield Stocks as adjusted
annually.
INDEX SYMBOL ON REPORTING
SERVICES OPERATED BY
BLOOMBERG, L.P. ........... XMT
S-4
<PAGE>
RISK FACTORS................ The Securities are subject to certain special
considerations. A beneficial owner of the
Securities may receive a Supplemental Redemption
Amount at maturity equal only to the Minimum
Supplemental Redemption Amount, and such Minimum
Supplemental Redemption Amount is below what the
Company would pay as interest as of the date
hereof if the Company issued non-callable senior
debt securities with a similar maturity as that
of the Securities. The return of principal of
the Securities at maturity and the payment of
the Supplemental Redemption Amount may not
reflect the full opportunity costs implied by
inflation or other factors relating to the time
value of money. The yield based on the Index to
the maturity of the Securities will not produce
the same yield as purchasing and holding for a
similar period the stocks underlying the Index.
Although the Index is based on stocks which are
selected based on dividends paid, the Securities
will not pay any interest, periodic or
otherwise, prior to their maturity.
There is little precedent to indicate how the
Securities will trade in the secondary market or
whether such market will be liquid. It is
expected that the secondary market for the
Securities will be affected by the
creditworthiness of the Company and by a number
of other factors. The trading value of the
Securities is expected to depend substantially
on the extent of the appreciation, if any, of
the Index over the Starting Index Value. See
"The Index--Historical Data on the Index" in
this Prospectus Supplement for historical values
of the Index. If, however, Securities are sold
prior to the maturity date at a time when the
Index exceeds the Starting Index Value, the sale
price may be at a substantial discount from the
amount expected to be payable to the beneficial
owner if such excess of the Index over the
Starting Index Value were to prevail until
maturity of the Securities because of the
possible fluctuation of the Index between the
time of such sale and the time that the Ending
Index Value is determined. Furthermore, the
price at which a beneficial owner will be able
to sell Securities prior to maturity may be at a
discount, which could be substantial, from the
principal amount thereof, if, at such time the
Index is below, equal to or not sufficiently
above the Starting Index Value. A discount could
also result from rising interest rates.
The value of the Index and the Supplemental
Redemption Amount, if any, may be adversely
affected by political, economic and other
developments that affect the stocks underlying
the Index.
It is suggested that prospective investors who
consider purchasing the Securities should reach
an investment decision only after carefully
considering the suitability of the Securities in
light of their particular circumstances.
Investors should also consider the tax
consequences of investing in the Securities. See
"Certain United States Federal Income Tax
Considerations" in this Prospectus Supplement.
S-5
<PAGE>
RISK FACTORS
PAYMENT AT MATURITY
"Supplemental Redemption Amount May Equal Minimum Supplemental Redemption
Amount." Investors should be aware that if the Ending Index Value does not
exceed the Starting Index Value by more than 24%, beneficial owners of the
Securities will receive at maturity only the principal amount thereof and the
Minimum Supplemental Redemption Amount, even if the value of the Index at some
point between the issue date and the maturity date of the Securities exceeded
such amounts.
"Yield may be Below Market Interest Rates on the Pricing Date." The Minimum
Supplemental Redemption Amount is below what the Company would pay as interest
as of the Pricing Date if the Company issued non-callable senior debt
securities with a similar maturity as that of the Securities. The return of
principal of the Securities at maturity and the payment of the Minimum
Supplemental Redemption Amount may not reflect the full opportunity costs
implied by inflation or other factors relating to the time value of money.
"Yield on Securities will not Reflect Yield on Securities Underlying the
Index." While the Index does reflect the payment of dividends on the stocks
underlying the Index as described in more detail below, the yield based on the
Index to the maturity of the Securities will not produce the same yield as if
such underlying stocks were purchased and held for a similar period. At the
end of each calendar quarter, the dividends accrued on the stocks underlying
the Index will be incorporated into the Index by adjusting the Share
Multipliers of such stocks and such amounts will thereafter be subject to the
price movements of such stocks. In addition, as described in more detail
below, at the end of each calendar quarter, an amount equal to 0.4375% of the
current value of the Index will be deducted from the value of the Index,
provided that (i) there will be no deduction at the end of the calendar
quarter ending in September 1996 and the deduction at the end of the calendar
quarter ending in December 1996 will be increased to reflect the quarterly
rate of 0.4375% prorated for the period from the date of the issuance of the
Securities through the end of the calendar quarter in December 1996, and (ii)
there will be a prorated amount deducted on July 31, 2006 equal to 0.1507% of
the then current Index value to reflect the quarterly rate of 0.4375% for the
period from July 1, 2006 through July 31, 2006. Although the Index is based on
stocks which are selected based on dividends paid, the Securities will not pay
any interest, periodic or otherwise, prior to their maturity.
"State Law Limit on Interest Paid." Because the 1983 Indenture provides that
the Securities will be governed by and construed in accordance with the laws
of New York, certain usury laws of New York State may apply. Under present New
York law, the maximum rate of interest is 25% per annum on a simple interest
basis. This limit may not apply to Securities in which $2,500,000 or more has
been invested. While the Company believes that New York law would be given
effect by a state or Federal court sitting outside of New York, state laws
frequently regulate the amount of interest that may be charged to and paid by
a borrower (including, in some cases, corporate borrowers). It is suggested
that prospective investors consult their personal advisors with respect to the
applicability of such laws. The Company will covenant for the benefit of the
Holders of the Securities, to the extent permitted by law, not to claim
voluntarily the benefits of any laws concerning usurious rates of interest
against a Holder of the Securities.
TRADING
The Securities have been approved for listing on the AMEX under the symbol
"MTT," subject to official notice of issuance. There is little precedent to
indicate how the Securities will trade in the secondary market or whether such
market will be liquid. It is expected that the secondary market for the
Securities will be affected by the creditworthiness of the Company and by a
number of other factors.
The trading value of the Securities is expected to depend substantially on
the extent of the appreciation, if any, of the Index over the Starting Index
Value. See "The Index--Historical Data on the Index" in this Prospectus
Supplement for historical values of the Index. If, however, Securities are
sold prior to the maturity date at a time when the Index exceeds the Starting
Index Value, the sale price may be at a substantial discount from the amount
expected to be payable to the beneficial owner if such excess of the Index
over the Starting
S-6
<PAGE>
Index Value were to prevail until maturity of the Securities because of the
possible fluctuation of the Index between the time of such sale and the time
that the Ending Index Value is determined. Furthermore, the price at which a
beneficial owner will be able to sell Securities prior to maturity may be at a
discount, which could be substantial, from the principal amount thereof, if,
at such time, the Index is below, equal to, or not sufficiently above the
Starting Index Value. A discount could also result from rising interest rates.
In addition to the value of the Index, the trading value of the Securities
may be affected by a number of interrelated factors, including the
creditworthiness of the Company and those factors listed below. The
relationship among these factors is complex, including how these factors
affect the relative value of the principal amount of the Securities to be
repaid at maturity and the value of the Supplemental Redemption Amount.
Accordingly, investors should be aware that factors other than the level of
the Index are likely to affect the Securities' trading value. The expected
effect on the trading value of the Securities of each of the factors listed
below, assuming in each case that all other factors are held constant, is as
follows:
"Interest Rates." Because the Securities repay at a minimum the principal
amount thereof at maturity, the trading value of the Securities will likely be
affected by changes in interest rates. In general, if U.S. interest rates
increase, the trading value of the Securities is expected to decrease. If U.S.
interest rates decrease, the trading value of the Securities is expected to
increase. Interest rates may also affect the U.S. economy, and, in turn, the
value of the Index. Rising interest rates may lower the value of the Index
and, thus, may decrease the trading value of the Securities. Falling interest
rates may increase the value of the Index and, thus, may increase the trading
value of the Securities.
"Volatility of the Index." If the volatility of the Index increases, the
trading value of the Securities is expected to increase. If the volatility of
the Index decreases, the trading value of the Securities is expected to
decrease.
"Time Remaining to Maturity." The Securities may trade at a value above that
which may be inferred from the level of interest rates and the Index. This
difference will reflect a "time premium" due to expectations concerning the
value of the Index during the period prior to maturity of the Securities. As
the time remaining to maturity of the Securities decreases, however, this time
premium is expected to decrease, thus decreasing the trading value of the
Securities. In addition, the price at which a beneficial owner may be able to
sell Securities prior to maturity may be at a discount, which may be
substantial, from the principal amount of the Securities if the value of the
Index is below, equal to, or not sufficiently above the Starting Index Value.
The impact of the factors specified above, excluding the value of the Index,
may offset, partially or in whole, any increase in the trading value of the
Securities that is attributable to an increase in the value of the Index. For
example, an increase in U.S. interest rates may cause the Securities to trade
at a discount from their initial offering price, even if the Index has
appreciated significantly. In general, assuming all relevant factors are held
constant, the effect on the trading value of the Securities of a given change
in interest rates and/or Index volatility is expected to be less if it occurs
later in the term of the Securities than if it occurs earlier in the term of
the Securities. The effect on the trading value of the Securities of a given
appreciation of the Index in excess of the Starting Index Value is expected to
be greater if it occurs later in the term of the Securities than if it occurs
earlier in the term of the Securities, assuming all other relevant factors are
held constant.
THE INDEX
The value of the Index and the Supplemental Redemption Amount, if any, may
be adversely affected by political, economic and other developments that
affect the Top Ten Yield Stocks. The stocks underlying the Index will be
adjusted annually as more fully described below, see "The Index" in this
Prospectus Supplement.
OTHER CONSIDERATIONS
It is suggested that prospective investors who consider purchasing the
Securities should reach an investment decision only after carefully
considering the suitability of the Securities in light of their particular
circumstances.
S-7
<PAGE>
Investors should also consider the tax consequences of investing in the
Securities. See "Certain United States Federal Income Tax Considerations" in
this Prospectus Supplement.
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated
("MLPF&S") or its affiliates may from time to time engage in transactions
involving the Top Ten Yield Stocks underlying the Index for their proprietary
accounts and for other accounts under their management, which may influence
the value of such stocks and therefore the value of the Securities. MLPF&S and
its affiliates will also be the counterparties to the hedge of the Company's
obligations under the Securities. See "Use of Proceeds" herein. Accordingly,
under certain circumstances, conflicts of interest may arise between MLPF&S's
responsibilities as Calculation Agent with respect to the Securities and its
obligations under its hedge and its status as a subsidiary of the Company.
Under certain circumstances, the duties of MLPF&S as Calculation Agent in
determining the existence of Market Disruption Events could conflict with the
interests of MLPF&S as an affiliate of the issuer of the Securities, Merrill
Lynch & Co., Inc., and with the interests of the holders of the Securities.
S-8
<PAGE>
RECENT DEVELOPMENTS
The following summary of consolidated financial information was derived
from, and is qualified in its entirety by reference to, the financial
statements and other information and data contained in the Company's Annual
Report on Form 10-K for the year ended December 29, 1995 and the Current
Reports on Form 8-K dated July 16, 1996 and July 31, 1996 (the "Current
Reports"). The Current Reports (which include unaudited preliminary results of
operations and certain balance sheet information for the period ended June 28,
1996) will be superceded in their entirety by the Company's Quarterly Report
on Form 10-Q for the quarterly period ended June 28, 1996. See "Incorporation
of Certain Documents by Reference" in the accompanying Prospectus. The
condensed consolidated financial statements contained in the Quarterly 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 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.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------
JUNE 30, JUNE 28,
INCOME STATEMENT INFORMATION 1995 1996
- ---------------------------- --------------- -----------
(IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C>
Revenues............................................ $ 10,789 $ 12,209
Net revenues(1)..................................... $ 4,970 $ 6,641
Earnings before income taxes........................ $ 843 $ 1,369
Net earnings........................................ $ 510 $ 843
Ratio of earnings to fixed charges(2)............... 1.1 1.2
<CAPTION>
AT DECEMBER 29, AT JUNE 28,
BALANCE SHEET INFORMATION(3) 1995 1996
- ---------------------------- --------------- -----------
(IN MILLIONS)
<S> <C> <C>
Total assets........................................ $176,857 $205,175
Long-term borrowings................................ $ 17,340 $ 22,640
Stockholders' equity................................ $ 6,141 $ 6,514
</TABLE>
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(1) Net Revenues are revenues net of interest expense.
(2) 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,
amortization of debt expense, preferred stock dividend requirements of
majority-owned subsidiaries, and that portion of rentals estimated to be
representative of the interest factor.
(3) 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 June 28, 1996, $2,696
million of bank loans and $18,393 million of commercial paper were
outstanding. In addition, certain of the Company's subsidiaries lend
securities and enter into repurchase agreements to obtain financing. At
June 28, 1996, cash deposits for securities loaned and securities sold
under agreements to repurchase amounted to $3,591 million and $62,865
million, respectively. From June 29, 1996 to August 5, 1996, long-term
borrowings, net of repayments and repurchases, increased by approximately
$250 million.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 28, 1996
Global financial markets continued to be buoyant throughout the 1996 first
half, after strong performances in 1995. Issuer and investor demand and lower
interest rates relative to a year ago, led to higher industrywide revenues
from underwriting, trading, commissions and merger and acquisition services.
S-9
<PAGE>
Net earnings for the first six months of 1996 were a record $843 million, up
65% from $510 million reported in the 1995 first half. Earnings per common
share were $4.22 primary and $4.21 fully diluted, compared with $2.48 primary
and $2.46 fully diluted in the 1995 first half. Total revenues for the first
six months of 1996 were a record $12,209 million, up 13% from the 1995 first
half. Net revenues (revenues after interest expense) totaled $6,641 million,
up 34% from the year-ago period.
Commissions revenues rose 35% to a record $1,959 million from $1,450 million
in the 1995 first half. Commissions revenues from listed securities increased
due to higher trading volumes on most major U.S. and international exchanges.
Mutual fund commissions revenues rose to a record level due to strong sales of
U.S. and offshore funds and higher distribution fees.
Interest and dividend revenues decreased to $6,050 million from $6,325
million in the 1995 first half. Interest expense, which includes dividend
expense, decreased to $5,568 million from $5,819 million in the year-ago
period. Net interest and dividend profit declined to $482 million from $506
million in the 1995 first half as a result of reduced levels of interest-
earning assets.
Principal transactions revenues rose to a record $1,891 million, up 47% from
the 1995 first half as increased client activity led to higher revenues in
most product categories. Equities and equity derivatives trading revenues were
up 62% to $637 million. International equities trading revenues benefited from
the addition of trading activity related to Smith New Court PLC ("Smith New
Court"), which was acquired in the 1995 third quarter. Over-the-counter equity
trading revenues rose due to increased client order flow. Taxable fixed-income
trading revenues rose 73% to $509 million primarily due to higher revenues
from mortgage-backed products and corporate bonds. Mortgage-backed securities
trading revenues advanced due primarily to improved liquidity and increased
customer demand compared with the year-ago period. Trading revenues for
corporate bonds advanced due primarily to higher demand for U.S. and U.K. debt
products. Trading revenues from interest rate and currency swaps increased 18%
to $505 million due to higher revenues from both U.S. and non-U.S. dollar-
denominated transactions. Municipal securities revenues increased 19% to $168
million largely due to increased investor demand for tax-exempt investments.
Foreign exchange and commodities trading revenues, in the aggregate, rose 125%
from the 1995 first half to $72 million. Strong customer activity fueled by
increased volatility in exchange rates led to higher foreign exchange trading
revenues.
Investment banking revenues for the 1996 six-month period were a record $958
million, up 64% from $584 million in the 1995 first half due to increased
transaction volumes as well as improved market shares for strategic services.
Revenues from equity, high-yield debt, and corporate bond and preferred stock
underwritings were approximately double those of the 1995 first half.
Strategic services revenues benefited from increased fees from mergers and
acquisitions.
Asset management and portfolio service fees were $1,090 million, up 19% from
$913 million in the first half of 1995, primarily as a result of strong
inflows of client assets. Other revenues were $261 million, up 15% from $228
million reported in the 1995 first half, primarily due to gains on sales from
Real Estate Mortgage Investment Conduit ("REMIC") transactions.
Non-interest expenses were $5,272 million, up 28% from $4,127 million in the
year-ago period. Compensation and benefits expense, which represented
approximately 65% of non-interest expenses, increased 33% from the 1995 first
half due primarily to higher variable compensation related to increased
profitability and business volume. Compensation and benefits expense as a
percentage of net revenues was 51.7% in the 1996 first half compared with
51.9% in the year-ago period.
Occupancy cost increased 4% from the 1995 first half due to international
growth, including the addition of Smith New Court facilities. Other
facilities-related costs, which include communications and equipment rental
expense and depreciation and amortization expense, rose 15% primarily due to
increased levels of business activity, as well as higher depreciation expense
from the purchase of technology-related assets over the past year.
S-10
<PAGE>
Professional fees increased 32% from the year-ago period primarily as a
result of higher systems development costs related to upgrading technology and
processing capabilities. Advertising and market development expenses rose 31%
from the 1995 first half largely due to higher international travel,
advertising and client promotion costs. Brokerage, clearing, and exchange fees
increased 17% from the 1995 first half as a result of higher trading volumes,
particularly in international equity markets. Other expenses increased 20%
from the 1995 first half, primarily due to provisions related to various
business activities and amortization of goodwill.
Income tax expense totaled $526 million for the first half of 1996. The
effective tax rate for the first six months of 1996 was 38.4%, compared with
39.5% in the year-ago period. The decrease in the effective tax rate was
primarily attributable to lower state taxes and expanded international
business activities.
CERTAIN BALANCE SHEET INFORMATION AS OF JUNE 28, 1996
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 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 June 28, 1996, the fair value of long and short non-investment grade
trading inventories amounted to $8,452 million and $1,282 million,
respectively, and in the aggregate (i.e. the sum of long and short trading
inventories) represented 9.0% of aggregate consolidated trading inventories.
At June 28, 1996, the carrying value of extensions of credit provided to
corporations entering into leveraged transactions aggregated $293 million
(excluding unutilized revolving lines of credit and other lending commitments
of $117 million), consisting primarily of senior term and subordinated
financings to 37 medium-sized corporations. At June 28, 1996, the Company had
no bridge loans outstanding. A $90 million bridge loan outstanding on March
29, 1996 was repaid during the 1996 second quarter, and a $100 million bridge
loan commitment made after March 29, 1996 was canceled before June 28, 1996.
Subsequent to June 28, 1996, the Company entered into a bridge loan commitment
for $135 million to a non-investment grade counterparty. The Company intends
to syndicate the loan, if extended, and may retain a residual portion. Direct
equity investments made in conjunction with the Company's investment and
merchant banking activities aggregated $161 million at June 28, 1996,
representing investments in 62 enterprises. At June 28, 1996, the Company held
interests in partnerships, totaling $79 million (recorded on the cost basis),
that invest in highly leveraged transactions and non-investment grade
securities. At June 28, 1996, 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.
Non-investment grade securities were 5.0% of total insurance investments at
June 28, 1996. Non-investment grade securities of insurance subsidiaries are
classified as available-for-sale and are carried at fair value.
At June 28, 1996, the largest non-investment grade concentration consisted
of various sovereign and corporate issues of a South American sovereign
totaling $861 million, which primarily represented hedges of other financial
instruments. No one industry sector accounted for more than 27% of total non-
investment trade positions. At June 28, 1996, the Company held an aggregate
carrying value of $140 million in debt and equity securities of issuers in
various stages of bankruptcy proceedings or in default, of which 70% resulted
from the Company's market making activities in such securities.
S-11
<PAGE>
DESCRIPTION OF SECURITIES
GENERAL
The Securities are to be issued as a series of Senior Debt Securities under
the Senior Indenture, referred to as the "1983 Indenture", which is more fully
described in the accompanying Prospectus. The Securities will mature on August
15, 2006.
While at maturity a beneficial owner of a Security will receive the
principal amount of such Security plus the Supplemental Redemption Amount
there will be no other payment of interest, periodic or otherwise. (See
"Payment at Maturity" below.)
The Securities are not subject to redemption by the Company or at the option
of any beneficial owner prior to maturity. Upon the occurrence of an Event of
Default with respect to the Securities, beneficial owners of the Securities
may accelerate the maturity of the Securities, as described under "Description
of Securities--Events of Default and Acceleration" in this Prospectus
Supplement and "Description of Debt Securities--General-- Events of Default"
in the accompanying Prospectus.
The Securities are to be issued in denominations of whole Units.
PAYMENT AT MATURITY
At maturity, a beneficial owner of a Security will be entitled to receive
the principal amount thereof plus a Supplemental Redemption Amount all as
provided below. If the Ending Index Value does not exceed the Starting Index
Value by more than 24%, a beneficial owner of a Security will be entitled to
receive only the principal amount thereof and the Minimum Supplemental
Redemption Amount.
At maturity, a beneficial owner of a Security will be entitled to receive,
with respect to each such Security, (i) the principal amount thereof ($10 for
each Unit), and (ii) the Supplemental Redemption Amount equal in amount to:
Ending Index Value--Starting Index Value
Principal Amount X ----------------------------------------
Starting Index Value
provided, however, that in no event will the Supplemental Redemption Amount be
less than $2.40 per $10 principal amount of the Securities. The Minimum
Supplemental Redemption Amount is equivalent to a rate of return of 2.16% per
annum calculated on a semi-annual bond equivalent basis. The Starting Index
Value was set to 100 on the Pricing Date. The Ending Index Value will be
determined by Merrill Lynch, Pierce, Fenner & Smith Incorporated (the
"Calculation Agent") and will equal the average (arithmetic mean) of the
closing values of the Index determined on each of the first five Calculation
Days during the Calculation Period. If there are fewer than five Calculation
Days, then the Ending Index Value will equal the average (arithmetic mean) of
the closing values of the Index on such Calculation Days, and if there is only
one Calculation Day, then the Ending Index Value will equal the closing value
of the Index on such Calculation Day. If no Calculation Days occur during the
Calculation Period because of Market Disruption Events, then the Ending Index
Value will equal the closing value of the Index determined on the last
scheduled Index Business Day in the Calculation Period, regardless of the
occurrence of a Market Disruption Event on such day. The "Calculation Period"
means the period from and including the seventh scheduled Index Business Day
prior to the maturity date to and including the second scheduled Index
Business Day prior to the maturity date. "Calculation Day" means any Index
Business Day during the Calculation Period on which a Market Disruption Event
has not occurred. For purposes of determining the Ending Index Value, an
"Index Business Day" is a day on which the New York Stock Exchange and
American Stock Exchange are open for trading and trading generally occurs in
the over-the-counter market for equity securities and the Index is calculated
and published by the AMEX. All determinations made by the Calculation Agent
shall be at the sole discretion of the Calculation Agent and, absent a
determination by the Calculation Agent of a manifest error, shall be
conclusive for all purposes and binding on the Company and beneficial owners
of the Securities.
S-12
<PAGE>
The following table illustrates, for a range of hypothetical Ending Index
Values, (i) the total amount payable at maturity for each $10 principal amount
of Securities, (ii) the pretax annualized rate of return to beneficial owners
of Securities, and (iii) the pretax annualized rate of return of an investment
in the stocks underlying the Index, as adjusted from time to time, that
experience the same price changes and dividend payments necessary to produce
the indicated hypothetical Ending Index Value (which reflects a deduction from
the value of the Index at the end of each calendar quarter equal to 0.4375% of
the then current Index value). The pretax annualized rate of return of the
stocks underlying the Index illustrated below is intended to reflect the
return that might be earned by an investor who seeks to replicate the Index
return by trading in the actual stocks underlying the Index and differs from
the pretax annualized rate of return on the Securities because of the
percentage deducted from the value of the Index each calendar quarter equal to
0.4375% of the then current Index value. Investors seeking to replicate the
Index return by trading in the actual underlying stocks would not incur this
periodic deduction although they might incur commissions and other
transaction-related costs.
<TABLE>
<CAPTION>
TOTAL PRETAX PRETAX ANNUALIZED
PERCENTAGE CHANGE AMOUNT ANNUALIZED RATE OF RATE OF RETURN OF
HYPOTHETICAL ENDING OVER THE STARTING PAYABLE AT RETURN ON THE STOCK UNDERLYING
INDEX VALUE INDEX VALUE MATURITY SECURITIES(1) INDEX(1)(2)
- ------------------- ----------------- ---------- ------------------ -----------------
<S> <C> <C> <C> <C>
50 -50% $12.40 2.16% -5.09%
60 -40% $12.40 2.16% -3.31%
70 -30% $12.40 2.16% -1.80%
80 -20% $12.40 2.16% -0.47%
90 -10% $12.40 2.16% 0.70%
100 0% $12.40 2.16% 1.75%
110 10% $12.40 2.16% 2.71%
120 20% $12.40 2.16% 3.59%
130 30% $13.00 2.64% 4.41%
140 40% $14.00 3.39% 5.16%
150 50% $15.00 4.10% 5.87%
160 60% $16.00 4.76% 6.53%
170 70% $17.00 5.38% 7.15%
180 80% $18.00 5.97% 7.74%
190 90% $19.00 6.52% 8.30%
200 100% $20.00 7.05% 8.84%
210 110% $21.00 7.56% 9.35%
220 120% $22.00 8.04% 9.83%
230 130% $23.00 8.50% 10.30%
240 140% $24.00 8.94% 10.74%
250 150% $25.00 9.37% 11.17%
260 160% $26.00 9.78% 11.58%
270 170% $27.00 10.17% 11.98%
280 180% $28.00 10.56% 12.37%
290 190% $29.00 10.93% 12.74%
300 200% $30.00 11.28% 13.10%
310 210% $31.00 11.63% 13.44%
320 220% $32.00 11.97% 13.78%
330 230% $33.00 12.29% 14.11%
340 240% $34.00 12.61% 14.43%
350 250% $35.00 12.92% 14.74%
360 260% $36.00 13.22% 15.04%
370 270% $37.00 13.51% 15.33%
380 280% $38.00 13.80% 15.62%
390 290% $39.00 14.07% 15.90%
400 300% $40.00 14.34% 16.17%
</TABLE>
- --------
(1) The annualized rates of return specified in the preceding table are
calculated on a semiannual bond equivalent basis.
S-13
<PAGE>
(2) This rate of return assumes, in addition to the price changes and dividend
payments described above, (i) an initial investment of a fixed amount in
the Top Ten Yield Stocks with the allocation of such amount reflecting an
equal dollar-weighted portfolio of such stocks in the Index; (ii) a
reconstruction of this portfolio investment on each Anniversary Date so as
to be an equal-dollar weighted portfolio of the ten common stocks in the
DJIA having the highest Dividend Yield on the second scheduled Index
Business Day prior to each such Anniversary Date; (iii) a compounded
quarterly rate of return on the stocks which is greater than the
compounded quarterly return on the Index by 0.4375% (the amount of the
quarterly deduction applied to the Index), with dividends being reinvested
on a quarterly basis; (iv) no transaction fees or expenses; (v) an
investment term equal to the term of the Securities; and (vi) a final
Index value equal to the Ending Index Value.
The above figures are for purposes of illustration only. The actual
Supplemental Redemption Amount received by investors and the pretax annualized
rate of return resulting therefrom will depend entirely on the actual Ending
Index Value determined by the Calculation Agent as provided herein. Historical
data regarding the Index is included in this Prospectus Supplement under "The
Index--Historical Data on the Index".
ADJUSTMENTS TO THE INDEX; MARKET DISRUPTION EVENTS
If at any time the method of calculating the Index, or the value thereof, is
changed in any material respect, or if the Index is in any other way modified
so that such Index does not, in the opinion of the Calculation Agent, fairly
represent the value of the Index had such changes or modifications not been
made, then, from and after such time, the Calculation Agent shall, at the
close of business in New York, New York, on each date that the closing value
with respect to the Ending Index Value is to be calculated, make such
adjustments as, in the good faith judgment of the Calculation Agent, may be
necessary in order to arrive at a calculation of a value of a stock index
comparable to the Index as if such changes or modifications had not been made,
and calculate such closing value with reference to the Index, as adjusted.
Accordingly, if the method of calculating the Index is modified so that the
value of such Index is a fraction or a multiple of what it would have been if
it had not been modified (e.g., due to a split in the Index), then the
Calculation Agent shall adjust such Index in order to arrive at a value of the
Index as if it had not been modified (e.g., as if such split had not
occurred).
"Market Disruption Event" means either of the following events, as
determined by the Calculation Agent:
(i) the suspension or material limitation (limitations pursuant to New
York Stock Exchange Rule 80A (or any applicable rule or regulation enacted
or promulgated by the New York Stock Exchange or any other self regulatory
organization or the Securities and Exchange Commission of similar scope as
determined by the Calculation Agent) on trading during significant market
fluctuations shall be considered "material" for purposes of this
definition), in the trading of one or more of the Top Ten Yield Stocks (as
defined below) on any exchange in the United States or in the over-the-
counter market for more than two hours of trading or during the period one-
half hour prior to the close of such trading, or
(ii) the suspension or material limitation (whether by reason of
movements in price otherwise exceeding levels permitted by the relevant
exchange or otherwise) in option contracts related to one or more of the
Top Ten Yield Stocks traded on any exchange for more than two hours of
trading or during the period one-half hour prior to the close of such
trading.
For the purposes of this definition, a limitation on the hours in a trading
day and/or number of days of trading will not constitute a Market Disruption
Event if it results from an announced change in the regular business hours of
the relevant exchange.
DISCONTINUANCE OF THE INDEX
If the AMEX discontinues publication of the Index and the AMEX or another
entity publishes a successor or substitute index that the Calculation Agent
determines, in its sole discretion, to be comparable to such Index (any such
index being referred to hereinafter as a "Successor Index"), then, upon the
Calculation Agent's
S-14
<PAGE>
notification of such determination to the Trustee and the Company, the
Calculation Agent will substitute the Successor Index as calculated by the
AMEX or such other entity for the Index and calculate the Ending Index Value
as described above under "Payment at Maturity". Upon any selection by the
Calculation Agent of a Successor Index, the Company shall cause notice thereof
to be given to Holders of the Securities.
If the AMEX discontinues publication of the Index and a Successor Index is
not selected by the Calculation Agent or is no longer published on any of the
Calculation Days, the value to be substituted for the Index for any such
Calculation Day used to calculate the Supplemental Redemption Amount at
maturity will be a value computed by the Calculation Agent for each
Calculation Day in accordance with the procedures last used to calculate the
Index prior to any such discontinuance. If a Successor Index is selected or
the Calculation Agent calculates a value as a substitute for the Index as
described below, such Successor Index or value shall be substituted for the
Index for all purposes, including for purposes of determining whether a Market
Disruption Event exists.
If the AMEX discontinues publication of the Index prior to the period during
which the Supplemental Redemption Amount is to be determined and the
Calculation Agent determines that no Successor Index is available at such
time, then on each Business Day until the earlier to occur of (i) the
determination of the Ending Index Value and (ii) a determination by the
Calculation Agent that a Successor Index is available, the Calculation Agent
shall determine the value that would be used in computing the Supplemental
Redemption Amount as described in the preceding paragraph as if such day were
a Calculation Day. The Calculation Agent will cause notice of each such value
to be published not less often than once each month in the WSJ (or another
newspaper of general circulation), and arrange for information with respect to
such values to be made available by telephone. Notwithstanding these
alternative arrangements, discontinuance of the publication of the Index may
adversely affect trading in the Securities.
EVENTS OF DEFAULT AND ACCELERATION
In case an Event of Default with respect to any Securities shall have
occurred and be continuing, the amount payable to a beneficial owner of a
Security upon any acceleration permitted by the Securities, with respect to
each $10 principal amount thereof, will be equal to: (i) the initial issue
price ($10), plus (ii) an additional amount of contingent interest calculated
as though the date of early repayment were the maturity date of the
Securities. The Minimum Supplemental Redemption Amount with respect to any
such early redemption date will be an amount equal to the interest which would
have accrued on the Securities from and including the date of original
issuance to but excluding the date of early redemption at an annualized rate
of 2.16%, calculated on a semi-annual bond equivalent basis. See "Description
of Securities--Payment at Maturity" in this Prospectus Supplement. If a
bankruptcy proceeding is commenced in respect of the Company, the claim of the
beneficial owner of a Security may be limited, under Section 502(b)(2) of
Title 11 of the United States Code, to the principal amount of the Security
plus an additional amount of contingent interest calculated as though the date
of the commencement of the proceeding were the maturity date of the
Securities.
In case of default in payment at the maturity date of the Securities
(whether at their stated maturity or upon acceleration), from and after the
maturity date the Securities shall bear interest, payable upon demand of the
beneficial owners thereof, at the rate of 7.76% per annum (to the extent that
payment of such interest shall be legally enforceable) on the unpaid amount
due and payable on such date in accordance with the terms of the Securities to
the date payment of such amount has been made or duly provided for.
DEPOSITORY
Upon issuance, all Securities will be represented by one or more fully
registered global securities (the "Global Securities"). Each such Global
Security will be deposited with, or on behalf of, The Depository Trust Company
("DTC"), as Depository, registered in the name of DTC or a nominee thereof.
Unless and until it is exchanged in whole or in part for Securities in
definitive form, no Global Security may be transferred except as a whole by
the Depository to a nominee of such Depository or by a nominee of such
Depository to such
S-15
<PAGE>
Depository or another nominee of such Depository or by such Depository or any
such nominee to a successor of such Depository or a nominee of such successor.
DTC has advised the Company as follows: DTC 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. DTC 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. DTC's Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations, and certain other organizations.
DTC 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 DTC 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 Securities must be made by or through Participants, which will
receive a credit on the records of DTC. The ownership interest of each actual
purchaser of each Security ("Beneficial Owner") is in turn to be recorded on
the Participants' or Indirect Participants' records. Beneficial Owners will
not receive written confirmation from DTC of their purchase, but Beneficial
Owners are expected to receive written confirmations 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 interests in such Global
Security will be shown on, and the transfer of such ownership interests will
be effected only through, records maintained by DTC (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 Securities.
"So long as DTC, or its nominee, is the registered owner of a Global
Security, DTC or its nominee, as the case may be, will be considered the sole
owner or Holder of the Securities represented by such Global Security for all
purposes under the 1983 Indenture. Except as provided below, Beneficial Owners
in a Global Security will not be entitled to have the Securities represented
by such Global Securities registered in their names, will not receive or be
entitled to receive physical delivery of the Securities in definitive form and
will not be considered the owners or Holders thereof under the 1983 Indenture,
including for purposes of receiving any reports delivered by the Company or
the Trustee pursuant to the 1983 Indenture." Accordingly, each Person owning a
beneficial interest in a Global Security must rely on the procedures of DTC
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 1983 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 Security
desires to give or take any action which a Holder is entitled to give or take
under the 1983 Indenture, DTC 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 and other
communications by DTC 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 the principal of, and any Supplemental Redemption Amount with
respect to, Securities registered in the name of DTC or its nominee will be
made to DTC or its nominee, as the case may be, as the Holder of the Global
Securities representing such Securities. 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
S-16
<PAGE>
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 DTC, upon receipt of any payment of
principal or any Supplemental Redemption Amount in respect of a Global
Security, will credit the accounts of the Participants with payment in amounts
proportionate to their respective holdings in principal amount of beneficial
interest in such Global Security as shown on the records of DTC. 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) any Depository is at any time unwilling or unable to continue as
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 Securities shall be exchangeable or (z) an Event
of Default has occurred and is continuing with respect to the Securities, the
Global Securities will be exchangeable for Securities in definitive form of
like tenor and of an equal aggregate principal amount, in denominations of $10
and integral multiples thereof. Such definitive Securities shall be registered
in such name or names as the Depository shall instruct the Trustee. It is
expected that such instructions may be based upon directions received by the
Depository from Participants with respect to ownership of beneficial interests
in such Global Securities.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Securities will be made by the Underwriter in immediately
available funds. All payments of principal and the Supplemental Redemption
Amount, if any, will be made by the Company in immediately available funds so
long as the Securities are maintained in book-entry form.
S-17
<PAGE>
THE INDEX
TOP TEN YIELD INDEX
The value of the Index on any Index Business Day will be calculated and
disseminated by the AMEX and will equal the Top Ten Yield Portfolio Value plus
the Current Quarter Dividends (as defined below) as of such Index Business
Day. The Top Ten Yield Portfolio Value will equal the sum of the products of
the most recently available market price and the applicable Share Multiplier
for each Top Ten Yield Stock. The AMEX will generally calculate and
disseminate the value of the Index based on the most recently reported prices
of the stocks underlying the Index (as reported by the exchange or trading
system on which such underlying stocks are listed or traded), at approximately
15-second intervals during the AMEX's business hours and the end of each Index
Business Day via the Consolidated Tape Association's Network B.
"Initial Determination of Top Ten Yield Portfolio"
The initial stocks in the Top Ten Yield Portfolio and their respective
Dividend Yields and Share Multipliers are shown below, and have been
determined by the AMEX to be the ten common stocks in the DJIA having the
highest Dividend Yield on July 26, 1996 (the "Initial Stocks"). "Dividend
Yield" for each common stock is determined by the AMEX by annualizing the last
quarterly or semi-annual ordinary cash dividend for which the ex-dividend date
has occurred, excluding any extraordinary dividend as determined by the AMEX
in its sole discretion, and dividing the result by the last available sale
price for each stock on its primary exchange on the date such Dividend Yield
is to be determined.
<TABLE>
<CAPTION>
DIVIDEND
YIELD
ON INITIAL
JULY 26, SHARE
NAME OF ISSUER 1996 MULTIPLIER
-------------- -------- ----------
<S> <C> <C>
Philip Morris Companies, Inc.......................... 3.92% 0.09479
Texaco Inc............................................ 3.80 0.11511
Exxon Corporation..................................... 3.80 0.12121
J.P. Morgan & Co. Incorporated........................ 3.79 0.11111
Chevron Corporation................................... 3.46 0.17021
General Motors Corporation............................ 3.35 0.19656
Minnesota Mining & Manufacturing Company.............. 2.85 0.15094
E.I. Du Pont de Nemours and Company................... 2.83 0.11994
International Paper Company........................... 2.64 0.25157
AT&T Company.......................................... 2.55 0.18141
</TABLE>
The average (mean) dividend yield of the ten Initial Stocks contained in the
Index as of July 26, 1996 was 3.30%.
The initial Share Multiplier for each Initial Stock was determined by the
AMEX and indicates the number of shares of each such Initial Stock, or portion
thereof, given the closing market price of such Initial Stock on the Pricing
Date, required to be included in the calculation of the original Top Ten Yield
Portfolio Value so that each Initial Stock represents approximately an equal
percentage of the starting value of the Index (i.e., 100) as of the Pricing
Date. The respective Share Multipliers will remain constant unless adjusted
for certain corporate events, quarterly dividend adjustments and annual
reconstitutions as described below. The initial Share Multipliers for each of
the Initial Stocks are set forth in the above table.
"Annual Top Ten Yield Portfolio Reconstitution"
As of the close of business on each Anniversary Date through the applicable
Anniversary Date in 2005, the content of the Top Ten Yield Portfolio shall be
reconstituted so as to include the ten common stocks in the DJIA having the
highest Dividend Yield (the "New Stocks") on the second scheduled Index
Business Day prior to such Anniversary Date (the "Annual Determination Date"),
provided, however that the AMEX will only add a stock having characteristics
as of such Annual Determination Date that will permit the Index to remain
within
S-18
<PAGE>
certain criteria specified in the AMEX rules and within the applicable rules
of the Securities and Exchange Commission. Such criteria and rules will apply
only on an Annual Determination Date to exclude a proposed New Stock. If a
proposed New Stock does not meet such criteria or rules, the AMEX will replace
it with the common stock in the DJIA with the next highest Dividend Yield
which does meet such criteria and rules. These criteria currently provide,
among other things, (1) that each component stock must have a minimum market
value of at least $75 million, except that up to 10% of the component
securities in the Index may have a market value of $50 million; (2) that each
component stock must have an average monthly trading volume in the preceding
six months of not less than 1,000,000 shares, except that up to 10% of the
component stocks in the Index may have an average monthly trading volume of
500,000 shares or more in the last six months; (3) 90% of the Index's
numerical Index value and at least 80% of the total number of component stocks
will meet the then current criteria for standardized option trading set forth
in the rules of the AMEX; and (4) all component stocks will either be listed
on the AMEX, the New York Stock Exchange, or traded through the facilities of
the National Association of Securities Dealers Automated Quotation System and
reported as National Market System securities.
The Share Multiplier for each New Stock will be determined by the AMEX and
will indicate the number of shares of each New Stock, given the closing market
price of such New Stock on the Anniversary Date, required to be included in
the calculation of the Top Ten Yield Portfolio Value so that each New Stock
represents approximately an equal percentage of a value equal to the Index in
effect at the close of business on such Anniversary Date. As an example, if
the Index in effect at the close of business on an Anniversary Date equaled
200, then each of the ten New Stocks relating to such Anniversary Date would
be allocated a portion of the value of the Index equal to 20 and if the
closing market price of one such New Stock on the Anniversary was 40, the
applicable Share Multiplier would be 0.5. If the Index equaled 80, then each
of the ten New Stocks would be allocated a portion of the value of the Index
equal to 8 and if the closing market price of one such New Stock on the
Anniversary was 40, the applicable Share Multiplier would be 0.2. The last
Anniversary Date on which such reconstitution will occur will be the
Anniversary Date in 2005, which will be approximately one year prior to the
maturity date of the Securities. "Anniversary Date" shall mean the anniversary
date of the date the Securities are initially issued; provided, however, that
if such date is not an Index Business Day or a Market Disruption Event occurs
on such date, then the Anniversary Date for such year shall mean the
immediately succeeding Index Business Day on which a Market Disruption Event
does not occur. "Top Ten Yield Stock" at any time shall mean the stocks
contained in the Top Ten Yield Portfolio at such time.
DOW JONES INDUSTRIAL AVERAGE
The DJIA is comprised of 30 common stocks chosen by the editors of the WSJ
as representative of the broad market of American industry generally. The
companies are major factors in their industries and their stocks are typically
widely held by individuals and institutional investors. Changes in the
composition of the DJIA are made entirely by the editors of the WSJ without
consultation with the companies, the stock exchange or any official agency or
the Company. For the sake of continuity, changes are made infrequently. Most
substitutions have been the result of mergers, but from time to time, changes
may be made to achieve a better representation. The components of the DJIA may
be changed at any time for any reason. Dow Jones & Company, Inc., publisher of
the WSJ, is not affiliated with the Company, has not participated in any way
in the creation of the Securities or in the selection of stocks to be included
in the Top Ten Yield Portfolio and has not reviewed or approved any
information included in this Prospectus Supplement.
The first DJIA, consisting of 12 stocks, was published in the WSJ in 1896.
The list grew to 20 stocks in 1916 and to 30 stocks on October 1, 1928. For
two periods of 17 consecutive years each, there were no changes to the list;
March 15, 1939-July 2, 1956 and June 2, 1959-August 8, 1976.
The Company or its affiliates may presently or from time to time engage in
business with one or more of the issuers of the Top Ten Yield Portfolio
stocks, including extending loans to, or making equity investments in, such
issuers or providing advisory services to such issuers, including merger and
acquisition advisory services. In the course of such business, the Company or
its affiliates may acquire non-public information with respect to such issuers
and, in addition, one or more affiliates of the Company may publish research
reports with respect to such issuers. The Company does not make any
representation to any purchaser of Securities with respect to any matters
whatsoever relating to such issuers. Any prospective purchaser of Securities
should undertake an independent investigation of the issuers of the Top Ten
Yield Portfolio stocks as in its judgment is appropriate to make an informed
decision with respect to an investment in the Securities. The composition of
the Index does not reflect any investment or sell recommendations of the
Company or its affiliates.
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<PAGE>
CASH DIVIDENDS
"Current Quarter Dividend"
As described above, the value of the Index will include an amount reflecting
Current Quarter Dividends. "Current Quarter Dividends" for any day will be
determined by the AMEX and will equal the sum of the Dividend Payment for each
Top Ten Yield Stock. The "Dividend Payment" with respect to a Top Ten Yield
Stock for any day will equal the sum of the products of (i) each dividend paid
by the issuer of such Top Ten Yield Stock on one share of such Top Ten Yield
Stock during the Current Quarter (not including any reinvestment thereof)
multiplied by (ii) the Share Multiplier applicable to such Top Ten Yield Stock
at the time each such dividend is paid. A dividend will be considered paid by
an issuer at the open of business on the ex-dividend date (i.e., generally,
the trading day on which the market price of the stock reflects the payment of
the dividend). "Current Quarter" shall mean the period from and including
August 9, 1996 through December 31, 1996, and after December 31, 1996, from
and including the first day of the then current calendar quarter containing
the day on which the applicable Dividend Payment is being determined to and
including the day on which the applicable Dividend Payment is being
determined.
"Quarterly Stock Dividend"
As of the first day of the start of each calendar quarter, the AMEX will
allocate the Current Quarter Dividends as of the end of the immediately
preceding calendar quarter to each then outstanding Top Ten Yield Stock. The
amount of the Current Quarter Dividends allocated to each Top Ten Yield Stock
will equal the percentage of the value of such Top Ten Yield Stock contained
in the Top Ten Yield Portfolio relative to the value of the entire Top Ten
Yield Portfolio based on the closing market price on the last Index Business
Day in the immediately preceding calendar quarter. The Share Multiplier of
each such outstanding Top Ten Yield Stock will be increased to reflect the
number of shares, or portion of a share, that the amount of the Current
Quarter Dividend allocated to such Top Ten Yield Stock can purchase of each
such Top Ten Yield Stock based on the closing market price on the last Index
Business Day in the immediately preceding calendar quarter.
"Quarterly Deduction"
At the end of each calendar quarter, the Index will be reduced by a value
equal to 0.4375% of the then current Index, provided that (i) there will be no
deduction at the end of the calendar quarter ending in September 1996 and the
deduction at the end of the calendar quarter ending in December 1996 will be
increased to reflect the quarterly rate of 0.4375% prorated for the period
from the date of the issuance of the Securities through the end of the
calendar quarter in December 1996 and (ii) the Index will be reduced at the
close of business on July 31, 2006 by a value equal to 0.1507% of the closing
value of the Index on such date. With respect to the period ending December
31, 1996, the quarterly rate of 0.4375% will be prorated by multiplying it by
a factor equal to the result of dividing the number of days in the period from
the date the Securities are issued through the calendar quarter ending in
December 1996 by 90.
ADJUSTMENTS TO THE SHARE MULTIPLIER AND TOP TEN YIELD PORTFOLIO
The Share Multiplier with respect to any Top Ten Yield Stock and the Top Ten
Yield Portfolio will be adjusted as follows:
1. If a Top Ten Yield Stock is subject to a stock split or reverse stock
split, then once such split has become effective, the Share Multiplier
relating to such Top Ten Yield Stock will be adjusted to equal the product
of the number of shares issued with respect to one such share of such Top
Ten Yield Stock and the prior multiplier.
2. If a Top Ten Yield Stock is subject to a stock dividend (issuance of
additional shares of the Top Ten Yield Stock) that is given equally to all
holders of shares of the issuer of such Top Ten Yield Stock, then once the
dividend has become effective and such Top Ten Yield Stock is trading ex-
dividend, the Share Multiplier will be adjusted so that the new Share
Multiplier shall equal the former Share Multiplier plus the product of the
number of shares of such Top Ten Yield Stock issued with respect to one
such share of such Top Ten Yield Stock and the prior multiplier.
S-20
<PAGE>
3. If the issuer of a Top Ten Yield Stock is being liquidated or is
subject to a proceeding under any applicable bankruptcy, insolvency or
other similar law, such Top Ten Yield Stock will continue to be included in
the Top Ten Yield Portfolio so long as a Market Price for such Top Ten
Yield Stock is available. If a market price is no longer available for a
Top Ten Yield Stock for whatever reason, including the liquidation of the
issuer of such Top Ten Yield Stock or the subjection of the issuer of such
Top Ten Yield Stock to a proceeding under any applicable bankruptcy,
insolvency or other similar law, then the value of such Top Ten Yield Stock
will equal zero in connection with calculating the Top Ten Yield Portfolio
Value for so long as no market price is available, and no attempt will be
made to immediately find a replacement stock or increase the value of the
Top Ten Yield Portfolio to compensate for the deletion of such Top Ten
Yield Stock. If a market price is no longer available for a Top Ten Yield
Stock as described above, the Top Ten Yield Portfolio Value will be
computed based on the remaining Top Ten Yield Stocks for which market
prices are available and no new stock will be added to the Top Ten Yield
Portfolio until the annual reconstitution of the Top Ten Yield Portfolio.
As a result, there may be periods during which the Top Ten Yield Portfolio
contains fewer than ten Top Ten Yield Stocks.
4. If the issuer of a Top Ten Yield Stock has been subject to a merger or
consolidation and is not the surviving entity or is nationalized, then a
value for such Top Ten Yield Stock will be determined at the time such
issuer is merged or consolidated or nationalized and will equal the last
available market price for such Top Ten Yield Stock and that value will be
constant until the Top Ten Yield Portfolio is reconstituted. At such time,
no adjustment will be made to the Share Multiplier of such Top Ten Yield
Stock.
5. If the issuer of a Top Ten Yield Stock issues to all of its
shareholders equity securities that are publicly traded of an issuer other
than the issuer of the Top Ten Yield Stock, then such new equity securities
will be added to the Top Ten Yield Portfolio as a new Top Ten Yield Stock.
The Share Multiplier for such new Top Ten Yield Stock will equal the
product of the original Share Multiplier with respect to the Top Ten Yield
Stock for which the new Top Ten Yield Stock is being issued (the "Original
Top Ten Yield Stock") and the number of shares of the new Top Ten Yield
Stock issued with respect to one share of the Original Top Ten Yield Stock.
No adjustments of any Share Multiplier of a Top Ten Yield Stock will be
required unless such adjustment would require a change of at least 1% in the
Share Multiplier then in effect. The Share Multiplier resulting from any of
the adjustments specified above will be rounded to the nearest ten-thousandth
with five hundred-thousandths being rounded upward.
The AMEX expects that no adjustments to the Share Multiplier of any Top Ten
Yield Stock or to the Top Ten Yield Portfolio will be made other than those
specified above, however, the AMEX may at its discretion make adjustments to
maintain the value of the Index if certain events would otherwise alter the
value of the Index despite no change in the market prices of the Top Ten Yield
Stocks.
S-21
<PAGE>
HISTORICAL DATA ON THE INDEX
The following table sets forth the hypothetical level of the Index at the
end of each month (the "Historical Month-End Closing Level"), in the period
from December 1990 through July 1996. All historical data presented in the
following table were calculated by the AMEX and are presented as if the Index
had existed during such periods. Such closing levels have been calculated
hypothetically on the same basis that the Index will be calculated in the
future. The Historical Month-End Closing Level was set to 100 on December 31,
1990 to provide an illustration of past movements of the Historical Month-End
Closing Level only. The Starting Index Value was set to 100 on the Pricing
Date. These historical data on the Index are not necessarily indicative of the
future performance of the Index or what the value of the Securities may be.
Any historical upward or downward trend in the level of the Index during any
period set forth below is not any indication that the Index is more or less
likely to increase or decrease at any time during the term of the Securities.
<TABLE>
<CAPTION>
HISTORICAL
MONTH-END
CLOSING LEVEL
-------------
<S> <C>
1990
December....................... 100.000
1991
January........................ 105.017
February....................... 109.378
March.......................... 112.316
April.......................... 111.611
May............................ 120.019
June........................... 119.357
July........................... 127.480
August......................... 130.556
September...................... 128.730
October........................ 131.882
November....................... 124.176
December....................... 132.077
1992
January........................ 135.960
February....................... 139.752
March.......................... 137.901
April.......................... 144.984
May............................ 146.354
June........................... 146.185
July........................... 148.778
August......................... 144.956
September...................... 143.682
October........................ 134.859
November....................... 139.183
December....................... 139.263
1993
January........................ 143.793
February....................... 149.681
March.......................... 155.556
April.......................... 155.560
May............................ 161.113
June........................... 162.360
July........................... 164.893
</TABLE>
S-22
<PAGE>
<TABLE>
<CAPTION>
HISTORICAL
MONTH-END
CLOSING LEVEL
-------------
<S> <C>
August......................... 171.989
September...................... 171.541
October........................ 176.273
November....................... 174.022
December....................... 172.954
1994
January........................ 184.201
February....................... 173.171
March.......................... 161.583
April.......................... 168.558
May............................ 172.321
June........................... 167.535
July........................... 173.081
August......................... 184.392
September...................... 182.675
October........................ 184.698
November....................... 175.399
December....................... 177.193
1995
January........................ 180.949
February....................... 188.948
March.......................... 199.454
April.......................... 203.920
May............................ 211.468
June........................... 209.433
July........................... 211.050
August......................... 208.037
September...................... 220.240
October........................ 219.307
November....................... 235.317
December....................... 238.268
1996
January........................ 245.639
February....................... 245.700
March.......................... 250.238
April.......................... 254.413
May............................ 260.989
June........................... 261.964
July........................... 261.806
</TABLE>
S-23
<PAGE>
The following graph sets forth the hypothetical historical performance of the
Index at the end of each month from December 1990 through July 1996. Past
movements of the Index are not necessarily indicative of the future Index
values.
HYPOTHETICAL HISTORICAL MONTH-END CLOSING LEVELS
[The graph sets forth the hypothetical historical month-end closing levels of
the Index from December 1990 through July 1996, with the vertical axis
specifying the month-end closing level of the Index in a range from 0 to 300 in
increments of 20 and the horizontal axis specifying the time period in
increments of 3 months from December 1990 to July 1996.]
Source: Prepared by the Company from data obtained from the AMEX.
S-24
<PAGE>
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
Set forth in full below is the opinion of Brown & Wood LLP, counsel to the
Company, as to certain United States Federal income tax consequences of the
purchase, ownership and disposition of the Securities. Such opinion is based
upon laws, regulations, rulings and decisions now in effect (or, in the case
of certain regulations, in final form but not yet effective), all of which are
subject to change (including retroactive changes in effective dates) or
possible differing interpretations. The discussion below deals only with
Securities 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 Securities as a hedge against currency
risks or as a position in a "straddle" for tax purposes. It also does not deal
with holders other than original purchasers (except where otherwise
specifically noted herein). The following discussion also assumes that the
issue price of the Securities, as determined for United States Federal income
tax purposes, equals the principal amount thereof. Persons considering the
purchase of the Securities should consult their own tax advisors concerning
the application of the United Stated Federal income tax laws to their
particular situations as well as any consequences of the purchase, ownership
and disposition of the Securities arising under the laws of any other taxing
jurisdiction.
As used herein, the term "U.S. Holder" means a beneficial owner of a
Security 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 Security
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 Security that is not a U.S. Holder.
GENERAL
There are no statutory provisions, regulations (except possibly the Final
Regulations as described below), published rulings or judicial decisions
addressing or involving the characterization, for United States Federal income
tax purposes, of the Securities or securities with terms substantially the
same as the Securities. However, although the matter is not free from doubt,
under current law, each Security should be treated as a debt instrument of the
Company for United States Federal income tax purposes. The Company currently
intends to treat each Security as a debt instrument of the Company for United
States Federal income tax purposes and, where required, intends to file
information returns with the Internal Revenue Service ("IRS") in accordance
with such treatment, in the absence of any change or clarification in the law,
by regulation or otherwise, requiring a different characterization of the
Securities. Prospective investors in the Securities should be aware, however,
that the IRS is not bound by the Company's characterization of the Securities
as indebtedness and the IRS could possibly take a different position as to the
proper characterization of the Securities for United States Federal income tax
purposes. The following discussion of the principal United States Federal
income tax consequences of the purchase, ownership and disposition of the
Securities is based upon the assumption that each Security will be treated as
a debt instrument of the Company for United States Federal income tax
purposes. If the Securities are not in fact treated as debt instruments of the
Company for United States Federal income tax purposes, then the United States
Federal income tax treatment of the purchase, ownership and disposition of the
Securities could differ from the treatment discussed below with the result
that the timing and character of income, gain or loss recognized in respect of
a Security could differ from the timing and character of income, gain or loss
recognized in respect of a Security had the Securities in fact been treated as
debt instruments of the Company for United States Federal income tax purposes.
U.S. HOLDERS
Under general principles of current United States Federal income tax law,
payments of interest on a debt instrument generally will be taxable to a U.S.
Holder as ordinary interest income at the time such payments are accrued or
are received (in accordance with the U.S. Holder's regular method of tax
accounting). Despite the
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<PAGE>
foregoing, nonperiodic payments of interest on a debt instrument generally
will be treated as original issue discount, for United States Federal income
tax purposes, and will be includible in income by a U.S. Holder as ordinary
interest as it accrues over the term of the debt instrument under a constant
yield method in advance of receipt of the cash payments attributable to such
income, regardless of the U.S. Holder's regular method of tax accounting.
Under these principles, the Minimum Supplemental Redemption Amount (i.e., a
nonperiodic payment of interest) generally would be treated as original issue
discount, for United States Federal income tax purposes, and would be
includible in income by a U.S. Holder as ordinary interest as it accrues over
the entire term of the Securities under a constant yield method in advance of
receipt of the Supplemental Redemption Amount, regardless of the U.S. Holder's
regular method of tax accounting. The excess of the Supplemental Redemption
Amount over the Minimum Supplemental Redemption Amount (the "Additional
Interest Amount"), if any, would be treated as contingent interest and
generally would be includible in income by a U.S. Holder as ordinary interest
on the date the Supplemental Redemption Amount is accrued (i.e., generally
when the Supplemental Redemption Amount becomes fixed in amount and becomes
unconditionally payable) or when such amount is received (in accordance with
the U.S. Holder's regular method of tax accounting). In addition, if the
amount payable at maturity with respect to a Security exceeds the sum of the
principal amount thereof and the Minimum Supplemental Redemption Amount, then
such Security would be treated as having been retired at maturity in exchange
for an amount equal to the sum of the principal amount thereof and the Minimum
Supplemental Redemption Amount.
Upon the sale, exchange or retirement of a Security, 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 and such
U.S. Holder's adjusted tax basis in the Security. A U.S. Holder's adjusted tax
basis in a Security generally will equal such U.S. Holder's initial investment
in the Security increased by any original issue discount included in income by
the U.S. Holder. Such gain or loss generally should be capital gain or loss
and should be long-term capital gain or loss if the Security has been 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 the IRS could assert that
any amounts realized upon the sale or exchange of a Security prior to its
maturity in excess of the sum of the principal amount thereof and the amount
of original issue discount that has accrued on the Security as of the date of
such sale or exchange constitutes ordinary interest income (subject to the
bond premium rules, as discussed below). Nonetheless, although the matter is
not free from doubt, under current law, any gain realized upon the sale or
exchange of a Security prior to its maturity should be treated entirely as
capital gain (subject to the market discount rules, as discussed below).
Prospective investors in the Securities should be aware that on June 11,
1996, the Treasury Department issued final regulations (the "Final
Regulations") concerning the proper United States Federal income tax treatment
of contingent payment debt instruments such as the Securities. The Final
Regulations, however, only apply to debt instruments issued on or after August
13, 1996. Accordingly, since the Securities will have been issued on or prior
to August 12, 1996, the Final Regulations will not apply to the Securities. In
general, the Final 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 above). Specifically, the Final
Regulations generally require a U.S. Holder of such an instrument to include
future contingent and noncontingent interest payments in income as such
interest accrues based upon a projected payment schedule. Moreover, in
general, under the Final Regulations, any gain recognized by a U.S. Holder on
the sale, exchange, or retirement of a contingent payment debt instrument will
be treated as ordinary income and all or a portion of any loss realized could
be treated as ordinary loss as opposed to capital loss (depending upon the
circumstances). The Final Regulations provide no definitive guidance as to
whether or not an instrument is properly characterized as a debt instrument
for United States Federal income tax purposes.
The Company, where required, currently intends to file information returns
with the IRS treating each Security as a debt instrument of the Company for
United States Federal income tax purposes (as discussed above)
S-26
<PAGE>
and reporting contingent and noncontingent interest on, if any, and gross
proceeds received upon the sale, exchange or retirement of each Security in
accordance with general principles of current United States Federal income tax
law (as described above), in the absence of any change or clarification in the
law, by regulation or otherwise, requiring a different treatment of the
Securities.
MARKET DISCOUNT AND PREMIUM
Under current law, if a U.S. Holder purchases a Security for an amount that
is less than the Security's issue price (i.e., the Security's stated principal
amount), or, in the case of a subsequent purchaser, its adjusted issue price
as of the purchase date (i.e., the Security's stated principal amount
increased by any previously accrued original issue discount), the amount of
the difference will be treated as "market discount," unless such difference is
less than a specified "de minimis" amount.
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
Security 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 Security at the
time of such disposition. Market discount will be considered to accrue ratably
during the period from the date of acquisition to the Security's maturity,
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 Security with market discount until the Security's
maturity or certain earlier dispositions of the Security, because a current
deduction is only allowed to the extent the interest expense exceeds an
allocable portion of 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 treatment as ordinary income of gain upon the disposition of the
Security and regarding the deferral of interest deductions will not apply.
Generally, such currently included market discount is treated as ordinary
interest for United States Federal income tax purposes and a U.S. Holder would
increase its tax basis in the Security 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.
Under current law, a U.S. Holder that purchases a Security for an amount
that is greater than its adjusted issue price as of the purchase date will be
considered to have purchased the Note at an "acquisition premium". The
"adjusted issue price" of a Security equals the sum of the issue price of the
Security plus the amount of original issue discount that has previously
accrued with respect to the Security. Under the acquisition premium rules, the
amount of original issue discount which such U.S. Holder must include in its
gross income with respect to such Security for any taxable year (or portion
thereof in which the U.S. Holder holds the Security) will be reduced (but not
below zero) by the portion of the acquisition premium properly allocable to
the period.
Under current law, if a U.S. Holder purchases a Security for an amount that
is greater than its stated redemption price at maturity (i.e., the sum of the
Security's stated principal amount and the Minimum Supplemental Redemption
Amount), such U.S. Holder will be considered to have purchased the Security
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 Security and may offset interest otherwise required to
be included in respect of the Security during any taxable year by the
amortized amount of such excess for the taxable year. A U.S. Holder generally
will reduce its tax basis in the Security by the amount of any interest offset
taken. Such election, if made, would apply to all debt instruments held by the
U.S. Holder at the beginning of the first taxable year to which such election
applies and to all debt instruments acquired by such U.S. Holder thereafter.
Such election would also be irrevocable once made, unless the U.S. Holder
making such an election obtains the express consent of the IRS to revoke such
election. If a U.S. Holder does not elect to amortize premium on a Security
until a taxable year after the taxable year in which the U.S. Holder acquires
the
S-27
<PAGE>
Security, the amount of bond premium must be reduced as if it had been
amortized from the acquisition date (with no corresponding reduction to the
U.S. Holder's tax basis). In such event, such a reduction in the bond premium
could result in a capital loss upon the sale, exchange or retirement of the
Security. In addition, it is not entirely clear under the bond premium rules
as to whether a U.S. Holder may use amortized premium allocable to a
particular taxable year as an offset to interest required to be included in
respect of a Security during any subsequent taxable year.
NON-U.S. HOLDERS
A non-U.S. Holder will not be subject to United States Federal income taxes
on payments of principal, premium (if any) or interest (including original
issue discount, if any) on a Security, unless such non-U.S. Holder is a direct
or indirect 10% or greater shareholder of the Company, a controlled foreign
corporation related to the Company or a bank receiving interest described in
section 881(c)(3)(A) of the Internal Revenue Code of 1986, as amended.
However, income allocable to non-U.S. Holders will generally be subject to
annual tax reporting on IRS Form 1042S. For a non-U.S. Holder to qualify for
the exemption from taxation, the last United States payor in the chain of
payment prior to payment to a non-U.S. Holder (the "Withholding Agent") must
have received in the year in which a payment of interest or principal occurs,
or in either of the two preceding calendar years, a statement that (i) is
signed by the beneficial owner of the Security under penalties of perjury,
(ii) certifies that such owner is not a U.S. Holder and (iii) provides the
name and address of the beneficial owner. The statement may be made on an IRS
Form W-8 or a substantially similar form, and the beneficial owner must inform
the Withholding Agent of any change in the information on the statement within
30 days of such change. If a Security is held through a securities clearing
organization or certain other financial institutions, the organization or
institution may provide a signed statement to the Withholding Agent. However,
in such case, the signed statement must be accompanied by a copy of the IRS
Form W-8 or the substitute form provided by the beneficial owner to the
organization or institution. The Treasury Department is considering
implementation of further certification requirements aimed at determining
whether the issuer of a debt obligation is related to holders thereof.
Generally, a non-U.S. Holder will not be subject to Federal income taxes on
any amount which constitutes capital gain upon retirement or disposition of a
Security, provided the gain is not effectively connected with the conduct of a
trade or business in the United States by the non-U.S. Holder. Certain other
exceptions may be applicable, and a non-U.S. Holder should consult its tax
advisor in this regard.
Under current law, a Security will not be includible in the estate of a non-
U.S. Holder unless the individual is a direct or indirect 10% or greater
shareholder of the Company or, at the time of such individual's death,
payments in respect of such Security would have been effectively connected
with the conduct by such individual of a trade or business in the United
States.
BACKUP WITHHOLDING
Backup withholding of United States Federal income tax at a rate of 31% may
apply to payments made in respect of the Securities to registered owners who
are not "exempt recipients" and who fail to provide certain identifying
information (such as the registered owner's taxpayer identification number) in
the required manner. Generally, individuals are not exempt recipients, whereas
corporations and certain other entities generally are exempt recipients.
Payments made in respect of the Securities to a U.S. Holder must be reported
to the IRS, unless the U.S. Holder is an exempt recipient or establishes an
exemption. Compliance with the identification procedures described in the
preceding section would establish an exemption from backup withholding for
those non-U.S. Holders who are not exempt recipients.
S-28
<PAGE>
In addition, upon the sale of a Security to (or through) a broker, the
broker must withhold 31% of the entire purchase price, unless either (i) the
broker determines that the seller is a corporation or other exempt recipient
or (ii) the seller provides, in the required manner, certain identifying
information and, in the case of a non-U.S. Holder, certifies that such seller
is a non-U.S. Holder (and certain other conditions are met). Such a sale must
also be reported by the broker to the IRS, unless either (i) the broker
determines that the seller is an exempt recipient or (ii) the seller certifies
its non-U.S. status (and certain other conditions are met). Certification of
the registered owner's non-U.S. status would be made normally on an IRS Form
W-8 under penalties of perjury, although in certain cases it may be possible
to submit other documentary evidence.
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.
USE OF PROCEEDS
The net proceeds from the sale of the Securities will be used as described
under "Use of Proceeds" in the attached Prospectus and to hedge market risks
of the Company affecting the value of the Supplemental Redemption Amount.
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter") has
agreed, subject to the terms and conditions of the Underwriting Agreement and
a Terms Agreement, to purchase from the Company $35,000,000 aggregate
principal amount of Securities. The Underwriting Agreement provides that the
obligations of the Underwriter are subject to certain conditions precedent and
that the Underwriter will be obligated to purchase all of the Securities if
any are purchased.
The Underwriter has advised the Company that it proposes initially to offer
all or part of the Securities directly to the public at the offering price set
forth on the cover page of this Prospectus Supplement. After the initial
public offering, the public offering price and concession may be changed.
The underwriting of the Securities will conform to the requirements set
forth in the applicable sections of Rule 2720 of the Conduct Rules of the
National Association of Securities Dealers, Inc.
VALIDITY OF SECURITIES
The validity of the Securities will be passed upon for the Company and for
the Underwriter by Brown & Wood LLP, New York, New York.
S-29
<PAGE>
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR BY THE UNDERWRITER. NEITHER THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER AND
THEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.................................................................... S-3
Risk Factors............................................................... S-6
Recent Developments........................................................ S-9
Description of Securities.................................................. S-12
The Index.................................................................. S-18
Certain United States Federal Income Tax Considerations.................... S-25
Use of Proceeds............................................................ S-29
Underwriting............................................................... S-29
Validity of Securities..................................................... S-29
</TABLE>
PROSPECTUS
<TABLE>
<S> <C>
Available Information....................................................... 2
Incorporation of Certain Documents by Reference............................. 2
Merrill Lynch & Co. Inc..................................................... 3
Use of Proceeds............................................................. 3
Summary Financial Information............................................... 4
Description of Debt Securities.............................................. 7
Description of Debt Warrants................................................ 11
Description of Currency Warrants............................................ 12
Description of Index Warrants............................................... 13
Plan of Distribution........................................................ 18
Experts..................................................................... 18
</TABLE>
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[LOGO]
3,500,000 UNITS
MERRILL LYNCH & CO., INC.
TOP TEN YIELD MARKET INDEX
TARGET-TERM SECURITIES (SERVICE MARK)
DUE AUGUST 15, 2006
"MITTS(REGISTERED SERVICE MARK)"
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PROSPECTUS SUPPLEMENT
----------------------
MERRILL LYNCH & CO.
AUGUST 8, 1996
"MITTS" IS A REGISTERED SERVICE MARK AND "MARKET INDEX TARGET-TERM
SECURITIES" IS A SERVICE MARK OWNED BY MERRILL LYNCH & CO., INC.
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