<PAGE>
Rule 424(b)(5)
Registration No. 33-65135
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT, DATED JULY 26, 1996
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JULY 26, 1996)
[LOGO]
2,500,000 UNITS
MERRILL LYNCH & CO., INC.
TOP TEN YIELD MARKET INDEX TARGET-TERM SECURITIES SM DUE AUGUST , 2006
"MITTS(R)"
An aggregate principal amount of $25,000,000 of Top Ten Yield Market Index
Target-Term Securities SM due August , 2006 (the "Securities" or "MITTS(R)")
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 , 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 a specified amount determined on the date the
Securities are priced by the Company for initial sale to the public (the
"Pricing Date") between $2.30 to $2.80 per $10 principal amount of the
Securities (the "Minimum Supplemental Redemption Amount"), representing a
minimum yield-to-maturity of between 2.08% to 2.48%, per annum. 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, will be set to 100 on 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.
Application will be made to list the Securities 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(1) DISCOUNT(1) THE COMPANY(2)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Unit.................................. $10 $ $
- ----------------------------------------------------------------------------------------------------
Total..................................... $ $ $
</TABLE>
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- -------------------------------------------------------------------------------
(1) The "Price to Public" and "Underwriting Discount" for any single
transaction to purchase 100,000 to (but not including) 500,000 Units will
be $ per Unit and $ per Unit, respectively, and the "Price to
Public" and "Underwriting Discount" for any single transaction to purchase
500,000 Units or more will be $ per Unit and $ per Unit,
respectively.
(2) 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 , 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 , 1996.
- -------
"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.......... 2,500,000 Units of Top Ten Yield Market Index
Target-Term Securities due August , 2006. The
Securities are to be issued as a series of
Senior Debt Securities under the 1983 Indenture
described herein.
LISTING..................... Application will be made to list the Securities
on the AMEX under the symbol "MTT".
DENOMINATIONS............... A Unit consisting of $10 principal amount of
Securities and integral multiples thereof.
MATURITY.................... August , 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 a
specified amount determined on the Pricing Date
between $2.30 to $2.80 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 between 2.08% to 2.48% per
annum (the actual rate will be determined on the
Pricing Date), calculated on a semi-annual bond
equivalent basis. The Starting Index Value will
be 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 will
initially constitute 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 include 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 between 23% to 28% (depending on the value
of the Minimum Supplemental Redemption Amount determined on the Pricing Date),
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
Application will be made to list the Securities on the AMEX under the symbol
"MTT". 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 certain consolidated financial information
concerning the Company was derived from, and is qualified in its entirety by
reference to, the financial statements, condensed financial statements, and
other information and data contained in the Company's Annual Report on Form
10-K for the year ended December 29, 1995, the Quarterly Report on Form 10-Q
for the quarterly period ended March 29, 1996 (the "Quarterly Report"), and
the Current Report on Form 8-K dated July 16, 1996 (the "Current Report"). The
Current Report (which includes unaudited preliminary results of operations for
the period ended June 28, 1996) will be superseded in its 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 and Current Report are unaudited; however,
in the opinion of management of the Company, all adjustments (consisting only
of normal recurring accruals) necessary for a fair statement of the results of
operations have been included.
The Company conducts its business in highly volatile markets. Consequently,
the Company's results can be affected by many factors, including general
market conditions, the liquidity of secondary markets, the level and
volatility of interest rates and currency values, the valuation of securities
positions, competitive conditions, and the size, number, and timing of
transactions. In periods of unfavorable market activity, profitability can be
adversely affected because certain expenses remain relatively fixed. As a
result, net earnings and revenues can vary significantly from period to
period. Thus, interim results may not necessarily be representative of the
full year results of operations.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
INCOME STATEMENT INFORMATION ----------------------------
JUNE 30, JUNE 28,
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 --
<CAPTION>
BALANCE SHEET INFORMATION(3)
AT DECEMBER 29, AT MARCH 29,
1995 1996
(IN MILLIONS) --------------- ------------
<S> <C> <C>
Total assets............................... $176,857 $195,884
Long-term borrowings....................... $ 17,340 $ 20,226
Stockholders' equity....................... $ 6,141 $ 6,364
</TABLE>
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(1) Net revenues are revenues net of interest expense.
(2) The ratio of earnings to fixed charges for the six months ended June 28,
1996 is not available as of the date of this Prospectus Supplement. The
ratio of earnings to fixed charges for the three months ended March 29,
1996 was 1.2. 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) Balance Sheet information as of June 28, 1996 is not available as of the
date of this Prospectus Supplement. To finance its diverse activities, the
Company and certain of its subsidiaries borrow substantial amounts of
short-term funds on a regular basis. Although the amount of short-term
borrowings significantly varies with the level of general business
activity, on March 29, 1996, $526 million of bank loans and $17,222
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 March 29, 1996, cash deposits for
securities loaned and securities sold under agreements to repurchase
amounted to $3,768 million and $61,657 million, respectively. From March
30, 1996 to July 26, 1996, long-term borrowings, net of repayments and
repurchases, increased by approximately $2,653 million.
S-9
<PAGE>
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. Although inflationary fears fueled
market volatility and a moderate increase in interest rates beginning in March
1996, interest rates remained low in the 1996 first half relative to the year-
ago period, and U.S. equity markets reached record price levels. Strong market
conditions stimulated increased issuer and investor demand for underwriting,
trading, and merger and acquisition services.
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.
Commission 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 were up due 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 as
investor demand for tax-exempt investments improved. Foreign exchange and
commodities trading revenues, in the aggregate, rose 125% from the 1995 first
half to $72 million as foreign exchange trading revenues continued to benefit
from the strengthening of the U.S. dollar versus other major currencies.
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 share 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 1995 first half, primarily due to gains on sales of
investments and 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
S-10
<PAGE>
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 costs 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.
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 and
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 MARCH 29, 1996
Balance Sheet information as of June 28, 1996 is not available as of the
date of this Prospectus Supplement.
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,
marketmaking, and derivative structuring activities. These activities are
subject to additional risks related to the creditworthiness of the issuers and
the liquidity of the market for such securities.
At March 29, 1996, the fair value of long and short non-investment grade
trading inventories amounted to $6,026 million and $529 million, respectively,
and in the aggregate (i.e., the sum of long and short trading inventories)
represented 6.6% of aggregate consolidated trading inventories.
At March 29, 1996, the carrying value of extensions of credit provided to
corporations entering into leveraged transactions aggregated $517 million
(excluding unutilized revolving lines of credit and other lending commitments
of $75 million), consisting primarily of senior term and subordinated
financings to 34 medium-sized corporations. In addition, at March 29, 1996,
the Company had an outstanding bridge loan of $90 million, and as of May 6,
1996, the Company had an outstanding bridge loan commitment for $100 million.
Direct equity investments made in conjunction with the Company's investment
and merchant banking activities aggregated $189 million at March 29, 1996,
representing investments in 62 enterprises. At March 29, 1996, the Company
held interests in partnerships, totaling $82 million, that invest in highly
leveraged transactions and non-investment grade securities. At March 29, 1996,
the Company also committed to invest an additional $83 million in partnerships
that invest in leveraged transactions.
The Company's insurance subsidiaries hold non-investment grade securities.
Non-investment grade securities were 4.7% of total insurance investments at
March 29, 1996. Non-investment grade securities of insurance subsidiaries are
classified as available-for-sale and are carried at fair value.
At March 29, 1996, the largest non-investment grade concentration consisted
of various issues of a South American sovereign totaling $764 million, which
primarily represented on-balance-sheet hedges for off-balance-sheet financial
instruments. No one industry sector accounted for more than 31% of total non-
investment grade positions. At March 29, 1996, the Company held an aggregate
carrying value of $169 million in debt and equity securities of issuers in
various stages of bankruptcy proceedings or in default, of which 80% resulted
from the Company's marketmaking 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
, 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 between 23% to 28% (depending on the value of the Minimum
Supplemental Redemption Amount determined on the Pricing Date), 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 a specified amount determined on the Pricing Date between $2.30 to
$2.80 per $10 principal amount of the Securities. The Minimum Supplemental
Redemption Amount is equivalent to a rate of return of between 2.08% to 2.48%
per annum (the actual rate will be determined on the Pricing Date), calculated
on a semi-annual bond equivalent basis. The Starting Index Value will be 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% $12.55 2.28% -5.09%
60 -40% $12.55 2.28% -3.31%
70 -30% $12.55 2.28% -1.80%
80 -20% $12.55 2.28% -0.47%
90 -10% $12.55 2.28% 0.70%
100 0% $12.55 2.28% 1.75%
110 10% $12.55 2.28% 2.71%
120 20% $12.55 2.28% 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 8.95% 10.74%
250 150% $25.00 9.38% 11.17%
260 160% $26.00 9.79% 11.58%
270 170% $27.00 10.18% 11.98%
280 180% $28.00 10.57% 12.37%
290 190% $29.00 10.94% 12.74%
300 200% $30.00 11.29% 13.10%
310 210% $31.00 11.64% 13.44%
320 220% $32.00 11.98% 13.78%
330 230% $33.00 12.30% 14.11%
340 240% $34.00 12.62% 14.43%
350 250% $35.00 12.93% 14.74%
360 260% $36.00 13.23% 15.04%
370 270% $37.00 13.52% 15.33%
380 280% $38.00 13.81% 15.62%
390 290% $39.00 14.08% 15.90%
400 300% $40.00 14.35% 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) a ten year
maturity of the Securities from the date of issuance; 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 %, 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 % 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 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>
CURRENT
DIVIDEND
NAME OF ISSUER YIELD
-------------- --------
<S> <C>
Philip Morris Companies, Inc..................................... 3.92
Texaco Inc....................................................... 3.80
Exxon Corporation................................................ 3.80
J.P. Morgan & Co. Incorporated................................... 3.79
Chevron Corporation.............................................. 3.46
General Motors Corporation....................................... 3.35
Minnesota Mining & Manufacturing Company......................... 2.85
E.I. Du Pont de Nemours and Company.............................. 2.83
International Paper Company...................................... 2.64
AT&T Company..................................................... 2.55
</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 will be determined by
the AMEX and will indicate 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.
"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").
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
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<PAGE>
Yield Portfolio Value so that each New Stock represents 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.
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
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<PAGE>
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 the date on which
the Securities are initially issued by the Company 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 Calculation
Agent 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.
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
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<PAGE>
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 one thousandth
with five ten-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.
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<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 June 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 will be 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>
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<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
</TABLE>
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<PAGE>
The following graph sets forth the hypothetical historical performance of the
Index at the end of each month from December 1990 through June 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 June 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 June 1996.]
Source: Prepared by the Company from data obtained from the AMEX.
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<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, if the Securities are issued on or prior to August 12,
1996, the Final Regulations will not apply to the Securities. However, if the
Securities are issued on or after August 13, 1996, then the Final Regulations
will 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.
In particular, in the event that the Final Regulations were to apply to the
Securities, the Company has determined that the projected payment schedule for
the Securities will consist of payment on the maturity date of the principal
amount thereof and a Supplemental Redemption Amount equal to $ (i.e., a
Minimum
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<PAGE>
Supplemental Redemption Amount equal to $ and an Additional Interest Amount
equal to $ ). This represents an estimated yield on the Securities equal to
% per annum (or % per annum, in the event that the issue price of the
Securities is less than the principal amount thereof, as discussed below).
Accordingly, during the term of the Securities, a U.S. Holder of a Security
would be required to include in income as ordinary interest an amount equal to
the sum of the daily portions of interest on the Security that are deemed to
accrue at this estimated yield for each day during the taxable year (or
portion of the taxable year) on which the U.S. Holder held such Security. The
amount of interest that would be deemed to accrue in any accrual period (i.e.,
generally each six month period during which the Securities are outstanding)
would equal the product of this estimated yield (properly adjusted for the
length of the accrual period) and the Security's adjusted issue price (as
defined below) at the beginning of the accrual period. The daily portions of
interest would be determined by allocating to each day in the accrual period
the ratable portion of the interest that is deemed to accrue during the
accrual period. In general, for these purposes, a Security's adjusted issue
price would equal the Security's issue price (i.e., $10), increased by the
interest previously accrued on the Security. At maturity of a Security, in the
event that the Additional Interest Amount exceeds $ , a U.S. Holder would
be required to include the excess of the Additional Interest Amount over $
in income as ordinary interest on the maturity date. Alternatively, in the
event that the Additional Interest Amount is less than $ , the excess of
$ over the Additional Interest Amount would be treated first as an offset
to any interest otherwise includible in income by the U.S. Holder for the
taxable year in which the maturity date occurs to the extent of the amount of
such includible interest. A U.S. Holder would be permitted to recognize and
deduct, as an ordinary loss that is not subject to the limitations applicable
to miscellaneous itemized deductions, any remaining portion of the excess of
$ over the Additional Interest Amount that is not treated as an interest
offset pursuant to the foregoing rules. Upon the sale or exchange of a
Security prior to the maturity date, a U.S. Holder would be required to
recognize taxable gain or loss in an amount equal to the difference, if any,
between the amount realized by the U.S. Holder upon such sale or exchange and
the U.S. Holder's adjusted tax basis in the Security as of the date of
disposition. A U.S. Holder's adjusted tax basis in a Security generally would
equal such U.S. Holder's initial investment in the Security increased by any
interest previously included in income with respect to the Security by the
U.S. Holder. Any such taxable gain generally would be treated as ordinary
income. Any such taxable loss generally would be treated as ordinary loss to
the extent of the U.S. Holder's total interest inclusions on the Security. Any
remaining loss generally would be treated as long-term or short-term capital
loss (depending upon the U.S. Holder's holding period for the Security). U.S.
Holders purchasing a Security at a price that differs from the adjusted issue
price of the Security as of the purchase date (e.g., subsequent purchasers)
are subject to special rules providing for certain adjustments to the
foregoing and such U.S. Holders should consult their own tax advisors
concerning these rules. Moreover, all prospective investors in the Securities
should consult their own tax advisors concerning the effect, if any, of the
Final Regulations on their investment in the Securities.
In the event that the Securities are issued on or prior to August 12, 1996,
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) 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.
Alternatively, in the event that the Securities are issued on or after August
13, 1996, 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) 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 the Final Regulations.
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.
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<PAGE>
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.
ADDITIONAL ORIGINAL ISSUE DISCOUNT
Prospective investors in the Securities should be aware that if a
significant percentage of the total aggregate amount of the Securities
originally issued is sold at a discount from the principal amount thereof
(e.g., pursuant to the discounts noted on the cover of this Prospectus
Supplement), then the issue price of the Securities, as determined for United
States Federal income tax purposes, may be less than the principal amount of
the Securities and the Securities may be issued with an amount of original
issue discount equal to the sum of (a) the excess of the principal amount of
the Securities over the issue price thereof and (b) the Minimum Supplemental
Redemption Amount under current law. In such event, if a U.S. Holder purchases
a Security for an amount equal to the principal amount thereof, such U.S.
Holder would be treated as having acquired the Security at an acquisition
premium under current law.
S-28
<PAGE>
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.
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.
S-29
<PAGE>
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 $25,000,000 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 prices
set forth on the cover page of this Prospectus Supplement and to certain
dealers at such prices less a concession not in excess of % of the principal
amount of the Securities. 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-30
<PAGE>
PROSPECTUS
[LOGO]
MERRILL LYNCH & CO., INC.
DEBT SECURITIES AND WARRANTS
Merrill Lynch & Co., Inc. (the "Company") intends to sell from time to time
up to $2,690,978,981 aggregate principal amount (or net proceeds in the case of
warrants and in the case of securities issued at an original issue discount),
or its equivalent in such foreign currencies or units of two or more
currencies, based on the applicable exchange rate at the time of offering, as
shall be designated by the Company at the time of offering, of its senior debt
securities ("Senior Debt Securities"), subordinated debt securities
("Subordinated Debt Securities" and, together with the Senior Debt Securities,
the "Debt Securities"), warrants to purchase Debt Securities ("Debt Warrants"),
warrants entitling the holders thereof to receive from the Company a payment or
delivery determined by reference to decreases or increases in the level of an
index or portfolio based on one or more equity or debt securities (including
the price or yield of such securities), any statistical measure of economic or
financial performance (including any consumer price, currency or mortgage
index) or the price or value of any commodity or a combination thereof (the
"Index Warrants") and warrants to receive from the Company the cash value in
U.S. dollars of the right to purchase ("Currency Call Warrants") or to sell
("Currency Put Warrants" and, together with the Currency Call Warrants, the
"Currency Warrants") such foreign currencies or units of two or more currencies
as shall be designated by the Company at the time of offering. The Debt
Securities, Debt Warrants, Index Warrants and Currency Warrants, which are
collectively called the "Securities", may be offered either jointly or
separately and will be offered to the public on terms determined by market
conditions at the time of sale and set forth in a prospectus supplement.
The Securities will be unsecured and, except in the case of Subordinated Debt
Securities, will rank equally with all other unsecured and unsubordinated
indebtedness of the Company. The Subordinated Debt Securities will be
subordinated to all existing and future Senior Indebtedness of the Company.
Each issue of Securities may vary, where applicable, as to aggregate
principal amount, maturity date, public offering or purchase price, interest
rate or rates, if any, and timing of payments thereof, provision for
redemption, sinking fund requirements, if any, exercise provisions, currencies
of denomination or currencies otherwise applicable thereto and any other
variable terms and method of distribution. The accompanying Prospectus
Supplement (the "Prospectus Supplement") sets forth the specific terms with
regard to the Securities in respect of which this Prospectus is being
delivered. The Company may elect to deliver to purchasers of Securities an
abbreviated term sheet setting forth a description of the Securities being
offered, or a summary thereof (a "Terms Sheet"), instead of a Prospectus
Supplement. This Prospectus may be delivered prior to or concurrently with a
Terms Sheet.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------
The Securities may be sold directly or through Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") as agent or may be
offered and reoffered through, or through underwriting syndicates managed or
co-managed by, one or more of the following: MLPF&S; Bear, Stearns & Co. Inc.;
Donaldson, Lufkin & Jenrette Securities Corporation; CS First Boston
Corporation; Goldman, Sachs & Co.; Lehman Brothers Inc.; Morgan Stanley & Co.
Incorporated; Nomura Securities International, Inc.; PaineWebber Incorporated;
and Salomon Brothers Inc, or directly to purchasers by the Company. The Company
has entered into agreements with such firms with respect to the Securities
providing for agency sales of the Securities through MLPF&S or the purchase and
offering from time to time by one or more of such firms, either alone or with
the several members of any syndicate formed by them. Additional agreements
respecting the distribution of the Securities may be entered into from time to
time by the Company. Securities may not be sold without delivery of a
Prospectus Supplement describing such issue of Securities and the method and
terms of offering thereof or of a Terms Sheet.
-----------
The date of this Prospectus is July 26, 1996.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy and information statements and
other information filed by the Company can be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional
Offices of the Commission: Midwest Regional Office, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511 and Northeast Regional Office, Seven
World Trade Center, New York, New York 10048. Copies of such material can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. Reports, proxy and
information statements and other information concerning the Company may also be
inspected at the offices of the New York Stock Exchange, the American Stock
Exchange, the Chicago Stock Exchange and the Pacific Stock Exchange. The
Commission maintains a Web site at http://www.sec.gov containing reports, proxy
and information statements and other information regarding registrants,
including the Company, that file electronically with the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended December 29, 1995
and Current Reports on Form 8-K dated January 17, 1996, January 22, 1996,
February 7, 1996, February 29, 1996, March 1, 1996, March 12, 1996, March 18,
1996, April 1, 1996, April 15, 1996, May 1, 1996, May 13, 1996, May 15, 1996,
May 28, 1996 (as amended by Form 8-K/A filed June 7, 1996), July 9, 1996 and
July 16, 1996 filed pursuant to Section 13 of the Exchange Act, are hereby
incorporated by reference into this Prospectus.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date hereof and prior to the
termination of the offering of the Securities shall be deemed to be
incorporated by reference into this Prospectus and to be a part hereof from the
date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent that
a statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Prospectus.
THE COMPANY WILL PROVIDE WITHOUT CHARGE TO EACH PERSON TO WHOM THIS
PROSPECTUS IS DELIVERED, ON WRITTEN OR ORAL REQUEST OF SUCH PERSON, A COPY
(WITHOUT EXHIBITS OTHER THAN EXHIBITS SPECIFICALLY INCORPORATED BY REFERENCE)
OF ANY OR ALL DOCUMENTS INCORPORATED BY REFERENCE INTO THIS PROSPECTUS.
REQUESTS FOR SUCH COPIES SHOULD BE DIRECTED TO MR. GREGORY T. RUSSO, SECRETARY,
MERRILL LYNCH & CO., INC., 100 CHURCH STREET, 12TH FLOOR, NEW YORK, NEW YORK
10080-6512; TELEPHONE NUMBER (212) 602-8435.
2
<PAGE>
MERRILL LYNCH & CO., INC.
Merrill Lynch & Co., Inc. is a holding company that, through its subsidiaries
and affiliates, provides investment, financing, insurance, and related services
on a global basis. Its principal subsidiary, MLPF&S, one of the largest
securities firms in the world, is a leading broker in securities, options
contracts, and commodity and financial futures contracts; a leading dealer in
options and in corporate and municipal securities; a leading investment banking
firm that provides advice to, and raises capital for, its clients; and an
underwriter of selected insurance products. Other subsidiaries provide
financial services on a global basis similar to those of MLPF&S and are engaged
in such other activities as international banking, lending, and providing other
investment and financing services. Merrill Lynch International, through
subsidiaries and affiliates, provides investment, financing, and related
services outside the United States and Canada. Merrill Lynch Asset Management,
LP and Fund Asset Management, LP together constitute one of the largest mutual
fund managers in the world and provide investment advisory services. Merrill
Lynch Government Securities Inc. is a primary dealer in obligations issued or
guaranteed by the U.S. Government and its agencies. Merrill Lynch Capital
Services, Inc., Merrill Lynch Derivative Products, Inc., and Merrill Lynch
Capital Markets PLC are the Company's primary derivative product dealers and
enter into interest rate and currency swaps and other derivative transactions
as intermediaries and as principals. The Company's insurance underwriting
operations consist of the underwriting of life insurance and annuity products.
Banking, trust, and mortgage lending operations conducted through subsidiaries
of the Company include issuing certificates of deposit, offering money market
deposit accounts, making secured loans, and providing foreign exchange
facilities and other related services.
The principal executive office of the Company is located at World Financial
Center, North Tower, 250 Vesey Street, New York, New York 10281; its telephone
number is (212) 449-1000.
USE OF PROCEEDS
The Company intends to use the net proceeds from the sale of the Securities
for general corporate purposes. Such uses may include the funding of
investments in, or extensions of credit to, its subsidiaries, the funding of
assets held by the Company or its subsidiaries, including securities
inventories, customer receivables and loans (including business loans, home
equity loans and loans in connection with investment banking-related merger and
acquisition activities) and the lengthening of the average maturity of the
Company's borrowings (including the refunding of maturing indebtedness). The
precise amount and timing of investments in, and extensions of credit to, its
subsidiaries will depend upon their funding requirements and the availability
of other funds to the Company and its subsidiaries. Pending such applications,
the net proceeds will be temporarily invested or applied to the reduction of
short-term indebtedness. A substantial portion of the proceeds from the sale of
any Currency Warrants or Index Warrants may be used to hedge market risks with
respect to such Warrants. Management of the Company expects that it will, on a
recurrent basis, engage in additional financings as the need arises to finance
the growth of the Company or to lengthen the average maturity of its
borrowings. To the extent that Securities being purchased for resale by MLPF&S
are not resold, the aggregate proceeds to the Company and its subsidiaries
would be reduced.
3
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following summary of consolidated financial information was derived
from, and is qualified in its entirety by reference to, the financial
statements and other information and data contained in the Company's Annual
Report on Form 10-K for the year ended December 29, 1995. See "Incorporation
of Certain Documents by Reference." The year-end results include 52 weeks for
1991, 1992, 1994, and 1995 and 53 weeks for 1993.
The Company conducts its business in highly volatile markets. Consequently,
the Company's results can be affected by many factors, including general
market conditions, the liquidity of secondary markets, the level and
volatility of interest rates and currency values, the valuation of securities
positions, competitive conditions, and the size, number, and timing of
transactions. In periods of unfavorable market activity, profitability can be
adversely affected because certain expenses remain relatively fixed. As a
result, net earnings and revenues can vary significantly from period to
period.
<TABLE>
<CAPTION>
YEAR ENDED LAST FRIDAY IN DECEMBER
---------------------------------------------
1991 1992 1993 1994 1995
------- -------- -------- -------- --------
(IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C>
Revenues..................... $12,353 $ 13,413 $ 16,588 $ 18,234 $ 21,513
Net revenues................. $ 7,246 $ 8,577 $ 10,558 $ 9,625 $ 10,265
Earnings before income taxes
and cumulative effect of
changes in accounting
principles(1)............... $ 1,017 $ 1,621 $ 2,425 $ 1,730 $ 1,811
Cumulative effect of changes
in accounting principles
(net of applicable income
taxes)(1)................... -- $ (58) $ (35) -- --
Net earnings(1).............. $ 696 $ 894 $ 1,359 $ 1,017 $ 1,114
Ratio of earnings to fixed
charges(2).................. 1.2 1.3 1.4 1.2 1.2
Total assets(3).............. $86,259 $107,024 $152,910 $163,749 $176,857
Long-term borrowings(4)...... $ 7,964 $ 10,871 $ 13,469 $ 14,863 $ 17,340
Stockholders' equity......... $ 3,818 $ 4,569 $ 5,486 $ 5,818 $ 6,141
</TABLE>
- --------
(1) Net earnings for 1992 have been reduced by $58 million to reflect the
adoption of Statement of Financial Accounting Standards ("SFAS") No. 106,
"Employers' Accounting for Postretirement Benefits Other than Pensions," and
SFAS No. 109, "Accounting for Income Taxes." Net earnings for 1993 have been
reduced by $35 million to reflect the adoption of SFAS No. 112, "Employers'
Accounting for Postemployment Benefits."
(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) In 1994, the Company adopted Financial Accounting Standards Board
("FASB") Interpretation No. 39, "Offsetting of Amounts Related to Certain
Contracts," and FASB Interpretation No. 41, "Offsetting of Amounts Related
to Certain Repurchase and Reverse Repurchase Agreements," which increased
assets and liabilities at December 30, 1994 by approximately $8,500
million.
(4) 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 varies significantly
with the level of general business activity, on December 29, 1995, $1,022
million of bank loans and $16,969 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
December 29, 1995, cash deposits for securities loaned and securities sold
under agreements to repurchase amounted to $2,857 million and $56,817
million, respectively.
FISCAL YEAR 1995
Global financial markets, which steadily weakened during most of 1994,
generally improved during 1995, led by a more stable U.S. economy, declining
interest rates, and heightened investor activity. Inflationary fears eased
throughout 1995 as key U.S. economic statistics indicated slow to moderate
growth. The Federal Reserve decreased short-term interest rates in July and
December 1995 following seven rate increases between
4
<PAGE>
February 1994 and February 1995. Investors reacted favorably to these events
and were more active in stock and bond markets during 1995. Net earnings for
the 1995 fourth quarter were $303 million, up 1% from the 1995 third quarter
and up 88% from the 1994 fourth quarter.
Net earnings for 1995 were $1,114 million, up 10% from 1994 net earnings of
$1,017 million. Earnings per common share were $5.44 primary and $5.42 fully
diluted in 1995, compared with $4.75 primary and $4.74 fully diluted in 1994.
Total revenues were a record $21,513 million, up 18% from 1994. Net revenues
(revenues after interest expense) totaled $10,265 million in 1995, up 7% from
1994.
Commission revenues increased 9% to a record $3,126 million from $2,871
million in 1994, due primarily to higher levels of listed and over-the-counter
securities transactions and mutual fund commissions, partially offset by lower
revenues from commodities. Commissions from listed and over-the-counter
securities increased due primarily to higher trading volumes on most major U.S.
and international exchanges. Mutual fund commissions increased due primarily to
higher distribution and redemption fees. Distribution fees from deferred-charge
funds increased due to strong fund sales in prior periods and higher asset
levels. Redemption fees increased as clients repositioned invested assets.
Interest and dividend revenues increased 28% to $12,221 million from $9,578
million in 1994. Interest expense, which includes dividend expense, increased
31% from 1994 to $11,248 million. Net interest and dividend profit was $973
million, virtually unchanged from $969 million in 1994, with increases in net
interest-earning assets offset by declining interest spreads due to the
flattening of the U.S. Treasury yield curve. The change in the yield curve
resulted from long-term interest rates falling more than short-term rates
during 1995.
Principal transactions revenues increased 8% from 1994 to $2,519 million in
1995. Increases in equities and equity derivatives and taxable fixed-income
trading revenues were partially offset by decreases in trading revenues from
municipal securities, foreign exchange and commodities, and interest rate and
currency swaps. Equities and equity derivatives trading revenues, in the
aggregate, increased 46% to $912 million, due primarily to improved volumes in
the convertible, over-the-counter, and international equities markets,
partially offset by lower equity derivatives trading revenues. Taxable fixed-
income trading revenues increased 10% to $516 million due, in part, to higher
revenues from corporate bonds and preferred stock, high-yield bonds, and non-
U.S. governments and agencies securities. Trading revenues from mortgage-backed
products were negatively affected by reduced market liquidity, leading to a
loss. Nevertheless, trading results from mortgage-backed products, which
include related net interest revenues, were positive. U.S. Government and
agencies securities trading revenues were down from 1994 due to tighter spreads
between U.S. Treasury securities and related futures hedges, as well as reduced
retail investor demand attributable to lower interest rates. Municipal
securities revenues decreased 28% to $273 million as a result of decreased
investor demand for tax-exempt investments as investors remained wary of
potential tax law changes and sought higher returns in equity and taxable
fixed-income securities. Foreign exchange and commodities revenues, in the
aggregate, declined 22% to $86 million. Commodities trading revenues decreased
due to lower volumes. Increases in foreign exchange trading revenues resulted
from higher customer volume caused by the strengthening of the U.S. dollar
versus other major currencies during 1995. Interest rate and currency swaps
revenues declined 2% to $732 million. Decreases in U.S. dollar-denominated
transactions were substantially offset by increased revenues in non-dollar-
denominated transactions, particularly in Japanese and European markets.
Investment banking revenues were $1,308 million, up 5% from $1,240 million in
1994. Strategic services revenues, which include fees for merger and
acquisition activity, debt restructuring, and other advisory services,
increased, as companies worldwide sought strategic partners to promote growth
while cutting costs and increasing efficiencies. Underwriting revenues were
down, as lower revenues from equities, private placements, high-yield debt, and
mortgage-backed securities underwriting were partially offset by increased
underwriting revenues from corporate bonds and preferred stock and defined
asset funds.
5
<PAGE>
Asset management and portfolio service fees rose 9% in 1995 to a record
$1,890 million from $1,739 million in 1994, as a result of higher fees earned
from asset management and other fee-based services. Other revenues decreased 5%
from 1994 to $449 million, due to lower net realized investment gains in 1995
compared with 1994.
Non-interest expenses were $8,454 million, up 7% from $7,895 million in the
year-ago period. Compensation and benefits expense, which represented
approximately 62% of non-interest expenses, increased 6% due primarily to
increased production-related and incentive compensation and the addition of
Smith New Court PLC ("Smith New Court") employees. Compensation and benefits
expense as a percentage of net revenues was 51.3% in 1995, compared with 51.5%
in 1994.
Occupancy costs increased 3% from 1994 primarily due to international growth.
Other facilities-related costs, which include communications and equipment
rental expense and depreciation and amortization expenses, rose 13% primarily
due to expanded use of market data services, as well as higher depreciation
expense from the purchase of technology-related assets over the past year.
Professional fees increased 16% from the year-ago period, due to higher legal
fees and systems development costs related to upgrading technology and
processing capabilities in customer, trading, and transaction processing
systems. Advertising and market development expenses increased 6% from 1994 as
a result of increased advertising, international travel, and sales promotion
primarily related to international growth. Brokerage, clearing, and exchange
fees increased 7% as a result of higher securities volume, particularly in
international markets. Other expenses increased 4% from 1994, due primarily to
a $26 million first quarter charge for the write-off of assets related to a
technology contract and $14 million of goodwill amortization related to Smith
New Court.
Income tax expense totaled $697 million in 1995. The effective tax rate in
1995 was 38.5%, compared with 41.2% in 1994. The decrease in the effective tax
rate was attributable to lower state income taxes, expanded international
business activities in jurisdictions with lower tax rates, and increases in
deductions for dividends received.
In 1995 the Company acquired Smith New Court, a U.K.-based global securities
firm, for approximately $800 million. The Company recorded approximately $530
million of goodwill related to the acquisition, which is being amortized on a
straight-line basis over 15 years. The Company's 1995 results include those of
Smith New Court since mid-August 1995.
CERTAIN BALANCE SHEET INFORMATION AS OF DECEMBER 29, 1995
The Company believes that its equity base is adequate relative to the level
and composition of its assets and the mix of its business.
In the normal course of business, the Company underwrites, trades, and holds
non-investment grade securities in connection with its investment banking,
market-making, and derivative structuring activities. These activities are
subject to risks related to the creditworthiness of the issuers of, and the
liquidity of the market for, such securities, in addition to the usual risks
associated with investing in, financing, underwriting, and trading in
investment grade instruments.
At December 29, 1995, the fair value of long and short non-investment grade
trading inventories amounted to $5,489 million and $353 million, respectively,
and in the aggregate (i.e. the sum of long and short trading inventories)
represented 6.3% of aggregate consolidated trading inventories.
At December 29, 1995, the carrying value of extensions of credit provided to
corporations entering into leveraged transactions aggregated $489 million
(excluding unutilized revolving lines of credit and other lending commitments
of $127 million), consisting primarily of senior term and subordinated
financings to 30
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medium-sized corporations. At December 29, 1995, the Company had no bridge
loans outstanding. Loans to highly leveraged corporations are carried at unpaid
principal balances less a reserve for estimated losses. The allowance for loan
losses is estimated based on a review of each loan, and consideration of
economic, market, and credit conditions. Direct equity investments made in
conjunction with the Company's investment and merchant banking activities
aggregated $211 million at December 29, 1995, representing investments in 62
enterprises. Equity investments in privately-held companies for which sale is
restricted by government or contractual requirements are carried at the lower
of cost or estimated net realizable value. At December 29, 1995, the Company
held interests in partnerships, totaling $91 million (recorded on the cost
basis), that invest in highly leveraged transactions and non-investment grade
securities. At December 29, 1995, the Company also committed to invest an
additional $79 million in partnerships that invest in leveraged transactions.
The Company's insurance subsidiaries hold non-investment grade securities.
Non-investment grade securities were 4.2% of total insurance investments at
December 29, 1995. Non-investment grade securities of insurance subsidiaries
are classified as available-for-sale and are carried at fair value.
At December 29, 1995, the largest non-investment grade concentration
consisted of various issues of a South American sovereign totaling $674
million, of which $672 million represented on-balance-sheet hedges for off-
balance-sheet financial instruments. No one industry sector accounted for more
than 35% of total non-investment grade positions. At December 29, 1995, the
Company held an aggregate carrying value of $164 million in debt and equity
securities of issuers in various stages of bankruptcy proceedings or in
default, of which 75% resulted from the Company's market-making activities in
such securities.
DESCRIPTION OF DEBT SECURITIES
Unless otherwise specified in a Prospectus Supplement, the Senior Debt
Securities are to be issued under an indenture (the "1983 Indenture"), dated as
of April 1, 1983, as amended and restated, between the Company and The Chase
Manhattan Bank, formerly known as Chemical Bank (successor by merger to
Manufacturers Hanover Trust Company), as trustee or issued under an indenture
(the "1993 Indenture"), dated as of October 1, 1993 between the Company and The
Chase Manhattan Bank (successor by merger to The Chase Manhattan Bank, N.A.),
as trustee (each, a "Senior Debt Trustee"). The 1983 Indenture and the 1993
Indenture are referred to herein as the "Senior Indentures". The Subordinated
Debt Securities are to be issued under an indenture (the "Subordinated
Indenture"), between the Company and The Chase Manhattan Bank, formerly known
as Chemical Bank, as trustee (the "Subordinated Debt Trustee"). The Senior Debt
Securities and Subordinated Debt Securities may also be issued under one or
more other indentures (each, a "Subsequent Indenture") and have one or more
other trustees (each, a "Subsequent Trustee"). Any Subsequent Indenture
relating to Senior Debt Securities will have terms and conditions identical in
all material respects to the above-referenced Senior Indentures and any
Subsequent Indenture relating to Subordinated Debt Securities will have terms
and conditions identical in all material respects to the above-referenced
Subordinated Indenture, including, but not limited to, the applicable terms and
conditions described below. Any Subsequent Indenture relating to a series of
Debt Securities, and the trustee with respect thereto, will be identified in
the applicable Prospectus Supplement. The Senior Indentures, the Subordinated
Indenture and any Subsequent Indentures (whether senior or subordinated) are
referred to herein as the "Indentures"; and the Senior Debt Trustees, the
Subordinated Debt Trustee and any Subsequent Trustees are referred to herein as
the "Trustees". A copy of each Indenture is filed (or, in the case of a
Subsequent Indenture, will be filed) as an exhibit to the registration
statements relating to the Securities (collectively, the "Registration
Statement"). The following summaries of certain provisions of the Indentures do
not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all provisions of the respective Indentures,
including the definitions therein of certain terms.
GENERAL
Each Indenture provides that Debt Securities (Senior Debt Securities in the
case of the Senior Indentures or a Subsequent Indenture for Senior Debt
Securities, and Subordinated Debt Securities in the case of the
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Subordinated Indenture or a Subsequent Indenture for Subordinated Debt
Securities) may be issued thereunder, without limitation as to aggregate
principal amount, in one or more series, by the Company from time to time upon
satisfaction of certain conditions precedent, including the delivery by the
Company to the applicable Trustee of a resolution of the Board of Directors,
or the Executive Committee thereof, of the Company which fixes or provides for
the establishment of terms of such Debt Securities, including: (1) the
aggregate principal amount of such Debt Securities and whether there is any
limit upon the aggregate principal amount of such Debt Securities that may be
subsequently issued; (2) the date on which such Debt Securities will mature;
(3) the principal amount payable with respect to such Debt Securities whether
at maturity or upon earlier acceleration, and whether such principal amount
will be determined with reference to an index, formula or other method; (4)
the rate or rates per annum (which may be fixed or variable) at which such
Debt Securities will bear interest, if any; (5) the dates on which such
interest, if any, will be payable; (6) the provisions for redemption of such
Debt Securities, if any, the redemption price and any remarketing arrangements
relating thereto; (7) the sinking fund requirements, if any, with respect to
such Debt Securities; (8) whether such Debt Securities are denominated or
provide for payment in United States dollars or a foreign currency or units of
two or more of such foreign currencies; (9) the form (registered or bearer or
both) in which such Debt Securities may be issued and any restrictions
applicable to the exchange of one form for another and to the offer, sale and
delivery of such Debt Securities in either form; (10) whether and under what
circumstances the Company will pay additional amounts ("Additional Amounts")
in respect of such Debt Securities held by a person who is not a U.S. person
(as defined in the Prospectus Supplement, as applicable) in respect of
specified taxes, assessments or other governmental charges and whether the
Company has the option to redeem the affected Debt Securities rather than pay
such Additional Amounts; (11) whether such Debt Securities are to be issued in
global form; (12) the title of the Debt Securities and the series of which
such Debt Securities shall be a part; and (13) the denominations of such Debt
Securities. Reference is made to the Prospectus Supplement for the terms of
the Debt Securities being offered thereby, including whether such Debt
Securities are Senior Debt Securities or Subordinated Debt Securities. The
Company may elect to deliver to purchasers of Securities a Terms Sheet instead
of a Prospectus. This Prospectus may be delivered prior to or concurrently
with a Terms Sheet. Debt Securities may also be issued under the Indentures
upon the exercise of Debt Warrants. See "Description of Debt Warrants".
Nothing in the Indentures or in the terms of the Debt Securities will prohibit
the issuance of securities representing subordinated indebtedness that is
senior or junior to the Subordinated Debt Securities.
The Debt Securities will be issued, to the extent provided in the Prospectus
Supplement, in fully registered form without coupons, and/or in bearer form
with or without coupons, and in denominations set forth in the Prospectus
Supplement. No service charge will be made for any registration of transfer of
registered Debt Securities or exchange of Debt Securities, but the Company may
require payment of a sum sufficient to cover any tax or other governmental
charges that may be imposed in connection therewith. Each Indenture provides
that Debt Securities issued thereunder may be issued in global form. If any
series of Debt Securities is issuable in global form, the applicable
Prospectus Supplement will describe the circumstances, if any, under which
beneficial owners of interest in any such global Debt Securities may exchange
such interests for Debt Securities of such series and of like tenor and
principal amount in any authorized form and denomination. Principal of, and
any premium, Additional Amounts and interest on, a global Debt Security will
be payable in the manner described in the applicable Prospectus Supplement.
The provisions of the Indentures described above provide the Company with
the ability, in addition to the ability to issue Debt Securities with terms
different from those of Debt Securities previously issued, to "reopen" a
previous issue of a series of Debt Securities and issue additional Debt
Securities of such series.
The Senior Debt Securities will be unsecured and will rank pari passu with
all other unsecured and unsubordinated indebtedness of the Company. The
Subordinated Debt Securities will be unsecured and will be subordinated to all
existing and future Senior Indebtedness (as defined below) of the Company.
Since the Company is a holding company, the right of the Company, and hence
the right of creditors of the Company (including the Holders of the Debt
Securities), to participate in any distribution of the assets of any
subsidiary upon its liquidation or reorganization or otherwise is necessarily
subject to the prior claims of creditors of
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the subsidiary, except to the extent that claims of the Company itself as a
creditor of the subsidiary may be recognized. In addition, dividends, loans and
advances from certain subsidiaries, including MLPF&S, to the Company are
restricted by net capital requirements under the Securities Exchange Act of
1934 and under rules of certain exchanges and other regulatory bodies.
Principal and any interest, premium and Additional Amounts will be payable in
the manner, at the places and subject to the restrictions set forth in the
applicable Indenture, the Debt Securities and the Prospectus Supplement
relating thereto, provided that payment of any interest and any Additional
Amounts may be made at the option of the Company by check mailed to the holders
of registered Debt Securities at their registered addresses.
Debt Securities may be presented for exchange, and registered Debt Securities
may be presented for transfer, in the manner, at the places and subject to the
restrictions set forth in the applicable Indenture, the Debt Securities and the
Prospectus Supplement relating thereto. Debt Securities in bearer form and the
coupons, if any, pertaining thereto will be transferable by delivery. No
service charge will be made for any transfer or exchange of Debt Securities,
but the Company may require payment of a sum sufficient to cover any tax or
other governmental charge payable in connection therewith.
"MERGER AND CONSOLIDATION"
The Company may consolidate or merge with or into any other corporation, and
the Company may sell, lease or convey all or substantially all of its assets to
any corporation, provided that (i) the corporation (if other than the Company)
formed by or resulting from any such consolidation or merger or which shall
have received such assets shall be a corporation organized and existing under
the laws of the United States of America or a state thereof and shall assume
payment of the principal of, and any premium, Additional Amounts or interest
on, the Debt Securities and the performance and observance of all of the
covenants and conditions of the Indentures to be performed or observed by the
Company, and (ii) the Company or such successor corporation, as the case may
be, shall not immediately thereafter be in default under the Indentures.
"MODIFICATION AND WAIVER"
Modification and amendment of each Indenture may be effected by the Company
and the applicable Trustee with the consent of the Holders of at least 66 2/3%
in principal amount of the Outstanding Debt Securities of each series issued
pursuant to such Indenture and affected thereby, provided that no such
modification or amendment may, without the consent of the Holder of each
Outstanding Debt Security affected thereby, (a) change the Stated Maturity of,
or any installment of interest or Additional Amounts on, any Debt Security or
any premium payable on the redemption thereof, or change the Redemption Price;
(b) reduce the principal amount of, or the interest or Additional Amounts
payable on, any Debt Security or reduce the amount of principal which could be
declared due and payable prior to the Stated Maturity; (c) change the place or
currency of any payment of principal of, or any premium, interest or Additional
Amounts on, any Debt Security; (d) impair the right to institute suit for the
enforcement of any payment on or with respect to any Debt Security; (e) reduce
the percentage in principal amount of the Outstanding Debt Securities of any
series, the consent of whose Holders is required to modify or amend such
Indenture; or (f) modify the foregoing requirements or reduce the percentage of
Outstanding Debt Securities necessary to waive any past default to less than a
majority. No modification or amendment of the Subordinated Indenture or any
Subsequent Indenture for Subordinated Debt Securities may adversely affect the
rights of any Holder of Senior Indebtedness without the consent of such Holder.
Except with respect to certain fundamental provisions, the Holders of at least
a majority in principal amount of Outstanding Debt Securities of any series
may, with respect to such series, waive past defaults under the applicable
Indenture and waive compliance by the Company with certain provisions of such
Indenture.
"EVENTS OF DEFAULT"
Under each Indenture, the following will be Events of Default with respect to
Debt Securities of any series issued thereunder: (a) default in the payment of
any interest or Additional Amounts upon any Debt
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Security of that series when due, and such default has continued for 30 days;
(b) default in the payment of any principal of or premium, if any, on any Debt
Security of that series when due; (c) default in the deposit of any sinking
fund payment, when due, in respect of any Debt Security of that series; (d)
default in the performance of any other covenant of the Company contained in
such Indenture for the benefit of such series or in the Debt Securities of such
series, and such default has continued for 60 days after written notice as
provided in such Indenture; (e) certain events in bankruptcy, insolvency or
reorganization; and (f) any other Event of Default provided with respect to
Debt Securities of that series. The applicable Trustee or the Holders of 25% in
principal amount of the Outstanding Debt Securities of that series may declare
the principal amount (or such lesser amount as may be provided for in the Debt
Securities of that series) of all Outstanding Debt Securities of that series
and the interest accrued thereon and Additional Amounts payable in respect
thereof, if any, to be due and payable immediately if an Event of Default with
respect to Debt Securities of such series shall occur and be continuing at the
time of declaration. At any time after a declaration of acceleration has been
made with respect to Debt Securities of any series but before a judgment or
decree for payment of money due has been obtained by the applicable Trustee,
the Holders of a majority in principal amount of the Outstanding Debt
Securities of that series may rescind any declaration of acceleration and its
consequences, provided that all payments due (other than those due as a result
of acceleration) have been made and all Events of Default have been remedied or
waived. Any Event of Default with respect to Debt Securities of any series may
be waived by the Holders of a majority in principal amount of all Outstanding
Debt Securities of that series, except in a case of failure to pay principal of
or premium, if any, or interest or Additional Amounts, if any, on any Debt
Security of that series for which payment had not been subsequently made or in
respect of a covenant or provision which cannot be modified or amended without
the consent of the Holder of each Outstanding Debt Security of such series
affected.
The Holders of a majority in principal amount of the Outstanding Debt
Securities of a series may direct the time, method and place of conducting any
proceeding for any remedy available to the applicable Trustee or exercising any
trust or power conferred on such Trustee with respect to Debt Securities of
such series, provided that such direction shall not be in conflict with any
rule of law or the applicable Indenture. Subject to the provisions of each
Indenture relating to the duties of the appropriate Trustee, before proceeding
to exercise any right or power under an Indenture at the direction of such
Holders, the applicable Trustee shall be entitled to receive from such Holders
reasonable security or indemnity against the costs, expenses and liabilities
which might be incurred by it in complying with any such direction.
The Company will be required to furnish to each Trustee annually a statement
as to the fulfillment by the Company of all of its obligations under the
applicable Indenture.
SPECIAL TERMS RELATING TO THE SENIOR DEBT SECURITIES
"LIMITATIONS UPON LIENS"
The Senior Indentures provide that the Company may not, and may not permit
any Subsidiary to, create, assume, incur or permit to exist any indebtedness
for borrowed money secured by a pledge, lien or other encumbrance (except for
certain liens specifically permitted by the Senior Indentures) on the Voting
Stock owned directly or indirectly by the Company of any Subsidiary (other than
a Subsidiary which, at the time of incurrence of such secured indebtedness, has
a net worth of less than $3,000,000) without making effective provision whereby
the Outstanding Senior Debt Securities will be secured equally and ratably with
such secured indebtedness.
"LIMITATIONS ON DISPOSITION OF VOTING STOCK OF, AND MERGER AND SALE OF ASSETS
BY, MLPF&S"
The Senior Indentures provide that the Company may not sell, transfer or
otherwise dispose of any Voting Stock of MLPF&S or permit MLPF&S to issue, sell
or otherwise dispose of any of its Voting Stock, unless, after giving effect to
any such transaction, MLPF&S remains a Controlled Subsidiary (defined in the
Senior Indentures to mean a corporation more than 80% of the outstanding shares
of Voting Stock of which
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are owned directly or indirectly by the Company). In addition, the Senior
Indentures provide that the Company may not permit MLPF&S to (i) merge or
consolidate, unless the surviving company is a Controlled Subsidiary, or (ii)
convey or transfer its properties and assets substantially as an entirety,
except to one or more Controlled Subsidiaries.
SPECIAL TERMS RELATING TO THE SUBORDINATED DEBT SECURITIES
Upon any distribution of assets of the Company resulting from any
dissolution, winding up, liquidation or reorganization, payments on
Subordinated Debt Securities are to be subordinated to the extent provided in
the Subordinated Indenture in right of payment to the prior payment in full of
all Senior Indebtedness, but the obligation of the Company to make payments on
the Subordinated Debt Securities will not otherwise be affected. No payment on
Subordinated Debt Securities may be made at any time when there is a default in
the payment of any principal, premium, interest, Additional Amounts, if any, or
sinking fund of or on any Senior Indebtedness. Holders of Subordinated Debt
Securities will be subrogated to the rights of holders of Senior Indebtedness
to the extent of payments made on Senior Indebtedness upon any distribution of
assets in any such proceedings out of the distributive shares of Subordinated
Debt Securities. By reason of such subordination, in the event of a
distribution of assets upon insolvency, certain creditors of the Company may
recover more, ratably, than Holders of Subordinated Debt Securities.
Senior Indebtedness is defined in the Subordinated Indenture as the principal
of, premium, if any, and unpaid interest on (a) indebtedness of the Company
(including indebtedness of others guaranteed by the Company), other than the
Subordinated Debt Securities, whether outstanding on the date of execution of
the Subordinated Indenture or thereafter created, incurred, assumed or
guaranteed, (i) for money owing to banks, (ii) for money borrowed from sources
other than banks or (iii) in connection with the acquisition by the Company or
a subsidiary of assets of any kind except in the ordinary course of business,
unless in the instrument creating or evidencing the same or pursuant to which
the same is outstanding it is provided that such indebtedness is not superior
in right of payment to the Subordinated Debt Securities, and (b) renewals,
extensions, modifications and refundings of any such indebtedness. As of March
29, 1996, a total of approximately $39.2 billion of the Company's indebtedness
would have been Senior Indebtedness as so defined.
DESCRIPTION OF DEBT WARRANTS
The Company may issue, together with Debt Securities, Currency Warrants or
Index Warrants or separately, Debt Warrants for the purchase of Debt
Securities. The Debt Warrants are to be issued under debt warrant agreements
(each a "Debt Warrant Agreement") to be entered into between the Company and a
bank or trust company, as debt warrant agent (the "Debt Warrant Agent"), all as
shall be set forth in the Prospectus Supplement relating to Debt Warrants being
offered thereby. A copy of the form of Debt Warrant Agreement, including the
form of warrant certificates representing the Debt Warrants (the "Debt Warrant
Certificates"), reflecting the alternative provisions to be included in the
Debt Warrant Agreements that will be entered into with respect to particular
offerings of Debt Warrants, is filed as an exhibit to the Registration
Statement. The following summaries of certain provisions of the Debt Warrant
Agreement and the Debt Warrant Certificates do not purport to be complete and
are subject to, and are qualified in their entirety by reference to, all the
provisions of the Debt Warrant Agreement and the Debt Warrant Certificates,
respectively, including the definitions therein of certain terms.
GENERAL
The applicable Prospectus Supplement will describe the terms of Debt Warrants
offered thereby, the Debt Warrant Agreement relating to such Debt Warrants and
the Debt Warrant Certificates representing such Debt Warrants, including the
following: (1) the designation, aggregate principal amount, price at which such
principal amount may be purchased upon exercise and terms of the Debt
Securities purchasable upon
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exercise of such Debt Warrants, including whether such Debt Securities are
Senior Debt Securities or Subordinated Debt Securities, and the procedures and
conditions relating to the exercise of such Debt Warrants; (2) the designation
and terms of any related Debt Securities with which such Debt Warrants are
issued, including whether such Debt Securities are Senior Debt Securities or
Subordinated Debt Securities, the number of such Debt Warrants issued with each
such Debt Security, and the Indenture under which the Debt Securities will be
issued; (3) the date, if any, on and after which such Debt Warrants and the
related Debt Securities will be separately transferable; (4) the date on which
the right to exercise such Debt Warrants shall commence and the date on which
such right shall expire (the "Expiration Date"); (5) if the Debt Securities
purchasable upon exercise of such Debt Warrants are original issue discount
Debt Securities, a discussion of Federal income tax considerations applicable
thereto; and (6) whether the Debt Warrants represented by the Debt Warrant
Certificates will be issued in registered or bearer form, and, if registered,
where they may be transferred and registered.
Debt Warrant Certificates will be exchangeable for new Debt Warrant
Certificates of different denominations and Debt Warrants may be exercised at
the corporate trust office of the Debt Warrant Agent or any other office
indicated in the Prospectus Supplement. Prior to the exercise of their Debt
Warrants, holders of Debt Warrants will not have any of the rights of Holders
of the Debt Securities purchasable upon such exercise and will not be entitled
to payments of principal of, and any premium, Additional Amounts, if any, or
interest on, the Debt Securities purchasable upon such exercise.
EXERCISE OF DEBT WARRANTS
Each Debt Warrant will entitle the Holder to purchase for cash such principal
amount of Debt Securities at such exercise price as shall in each case be set
forth in, or be determinable as set forth in, the Prospectus Supplement
relating to the Debt Warrants offered thereby. Debt Warrants may be exercised
at any time up to the close of business on the Expiration Date set forth in the
Prospectus Supplement relating to the Debt Warrants offered thereby. After the
close of business on the Expiration Date, unexercised Debt Warrants will become
void.
Debt Warrants may be exercised as set forth in the Prospectus Supplement
relating to the Debt Warrants offered thereby. Upon receipt of payment and the
Debt Warrant Certificate properly completed and duly executed at the corporate
trust office of the Debt Warrant Agent or any other office indicated in the
Prospectus Supplement, the Company will, as soon as practicable, forward the
Debt Securities purchasable upon such exercise. If less than all of the Debt
Warrants represented by such Debt Warrant Certificate are exercised, a new Debt
Warrant Certificate will be issued for the remaining amount of Debt Warrants.
DESCRIPTION OF CURRENCY WARRANTS
The Company may issue, together with Debt Securities, Debt Warrants or Index
Warrants or separately, Currency Warrants either in the form of Currency Put
Warrants entitling the Holders thereof to receive from the Company the cash
settlement value in U.S. dollars of the right to sell a specified amount of a
specified foreign currency or currency units for a specified amount of U.S.
dollars, or in the form of Currency Call Warrants entitling the Holders thereof
to receive from the Company the cash settlement value in U.S. dollars of the
right to purchase a specified amount of a specified foreign currency or units
of two or more currencies for a specified amount of U.S. dollars. The Currency
Warrants are to be issued under a currency put warrant agreement or a currency
call warrant agreement, as applicable (each a "Currency Warrant Agreement"), to
be entered into between the Company and a bank or trust company, as currency
warrant agent (the "Currency Warrant Agent"), all as shall be set forth in the
applicable Prospectus Supplement. Copies of the forms of Currency Put Warrant
Agreement and Currency Call Warrant Agreement, including the forms of warrant
certificates representing the Currency Put Warrants and Currency Call Warrants
(the "Currency Warrant Certificates"), reflecting the provisions to be included
in the Currency Warrant Agreements that will be entered into with respect to
particular offerings of Currency Warrants, are filed as exhibits to the
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Registration Statement. The following summaries of certain provisions of the
Currency Warrant Agreements and the Currency Warrant Certificates do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all the provisions of the Currency Warrant Agreements and the
Currency Warrant Certificates, respectively, including the definitions therein
of certain terms.
GENERAL
The applicable Prospectus Supplement will describe the terms of Currency
Warrants offered thereby, the Currency Warrant Agreement relating to such
Currency Warrants and the Currency Warrant Certificates representing such
Currency Warrants, including the following: (1) whether such Currency Warrants
shall be Currency Put Warrants, Currency Call Warrants, or both; (2) the
formula for determining the cash settlement value of each Currency Warrant; (3)
the procedures and conditions relating to the exercise of such Currency
Warrants; (4) the circumstances which will cause the Currency Warrants to be
deemed to be automatically exercised; (5) any minimum number of Currency
Warrants which must be exercised at any one time, other than upon automatic
exercise; and (6) the date on which the right to exercise such Currency
Warrants shall commence and the date on which such right shall expire (the
"Expiration Date"), provided that the commencement date and the Expiration Date
may be the same date.
BOOK-ENTRY PROCEDURES AND SETTLEMENT
Except as may otherwise be provided in an applicable Prospectus Supplement,
the Currency Warrants will be issued in the form of global Currency Warrant
Certificates, registered in the name of a depository or its nominee. Beneficial
owners will not be entitled to receive definitive certificates representing
Currency Warrants. Ownership of a Currency Warrant will be recorded on or
through the records of the brokerage firm or other entity that maintains a
beneficial owner's account. In turn, the total number of Currency Warrants held
by an individual brokerage firm for its clients will be maintained on the
records of the depository in the name of such brokerage firm or its agent.
Transfer of ownership of any Currency Warrant will be effected only through the
selling beneficial owner's brokerage firm.
EXERCISE OF CURRENCY WARRANTS
Each Currency Warrant will entitle the Holder to the cash settlement value of
such Currency Warrant on the applicable Exercise Date, in each case as such
terms will be defined in the applicable Prospectus Supplement. If a Currency
Warrant has more than one exercise date and is not exercised prior to 1:30
P.M., New York City time, on the fifth New York Business Day preceding the
Expiration Date, Currency Warrants will be deemed automatically exercised.
LISTING
Each issue of Currency Warrants will be listed on a national securities
exchange, subject only to official notice of issuance, as a condition of sale
of any such Currency Warrants. In the event that the Currency Warrants are
delisted from, or permanently suspended from trading on, such exchange, the
Expiration Date for such Currency Warrants will be the date such delisting or
trading suspension becomes effective and Currency Warrants not previously
exercised will be deemed automatically exercised on the business day
immediately preceding such Expiration Date. The applicable Currency Warrant
Agreement will contain a covenant of the Company not to seek delisting of the
Currency Warrants, or suspension of their trading, on such exchange.
DESCRIPTION OF INDEX WARRANTS
The Company may issue from time to time Index Warrants consisting of put
warrants (the "Index Put Warrants") or call warrants (the "Index Call
Warrants"). The Index Warrants will entitle the holders to receive from the
Company a payment or delivery, subject to applicable law, determined by
reference to decreases (in the case of Index Put Warrants) or to increases (in
the case of Index Call Warrants) in the level
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of an index or portfolio based on one or more equity or debt securities
(including the price or yield of such securities), any statistical measure of
economic or financial performance (including any consumer price, currency or
mortgage index) or the price or value of any commodity or any combination
thereof (the "Index"). Unless otherwise specified in the accompanying
Prospectus Supplement, payments, if any, upon exercise (or deemed exercise) of
the Index Warrants will be made in U.S. dollars. The Index Warrants will be
offered on terms to be determined at the time of sale.
GENERAL
The applicable Prospectus Supplement will describe the Index Warrant
Agreement or Index Warrant Trust Indenture (each as defined below), as the case
may be, relating to the Index Warrants being offered thereby and the terms of
such Index Warrants, including, without limitation: (i) whether the Index
Warrants to be issued will be Index Put Warrants, Index Call Warrants or both;
(ii) the aggregate number and initial public offering price or purchase price;
(iii) the Index for such Index Warrants; (iv) whether the Index Warrants will
be deemed exercised as of a specified date or whether the Index Warrants may be
exercised during a period and the date on which the right to exercise such
Index Warrants commences and the date on which such right expires; (v) the
manner in which such Index Warrants may be exercised and any restrictions on,
or other special provisions relating to, the exercise of such Index Warrants;
(vi) the minimum number, if any, of such Index Warrants exercisable at any one
time; (vii) the maximum number, if any, of such Index Warrants that may,
subject to the Company's election, be exercised by all Index Warrantholders (or
by any person or entity) on any day; (viii) any provisions permitting an Index
Warrantholder to condition an exercise notice on the absence of certain
specified changes in the level of the applicable Index after the exercise date,
any provisions permitting the Company to suspend exercise of such Index
Warrants based on market conditions or other circumstances and any other
special provision relating to the exercise of such Index Warrants; (ix) any
provisions for the automatic exercise of such Index Warrants other than at
expiration; (x) any provisions permitting the Company to cancel such Index
Warrants upon the occurrence of certain events; (xi) any additional
circumstances which would constitute an Event of Default with respect to such
Index Warrants; (xii) the method of determining (a) the payment or delivery, if
any, to be made in connection with the exercise or deemed exercise of such
Index Warrants (the "Settlement Value"), (b) the minimum payment or delivery,
if any, to be made upon expiration of such Index Warrants (the "Minimum
Expiration Value"), (c) the payment or delivery to be made upon the exercise of
any right which the Company may have to cancel such Index Warrants and (d) the
value of the Index; (xiii) in the case of Index Warrants relating to an Index
for which the trading prices of underlying securities, commodities or rates are
expressed in a foreign currency, the method of converting amounts in the
relevant foreign currency or currencies into U.S. dollars (or such other
currency or composite currency in which the Index Warrants are payable); (xiv)
the method of providing for a substitute index or otherwise determining the
payment or delivery, if any, to be made in connection with the exercise of such
Index Warrants if the Index changes or ceases to be made available by its
publisher; (xv) the time or times at which payment or delivery, if any, will be
made in respect of such Index Warrants following exercise or deemed exercise;
(xvi) the self-regulatory organization on which such Index Warrants will be
traded, if any; (xvii) any provisions for issuing such Index Warrants in other
than book-entry form; (xviii) if such Index Warrants are not issued in book-
entry form, the place or places at which payment or delivery on cancellation,
if any, and the Minimum Expiration Value, if any, of such Index Warrants is to
be made by the Company; (xix) certain U.S. federal income tax consequences
relating to such Index Warrants; and (xx) other specific provisions.
Except as otherwise provided in the applicable Prospectus Supplement, each
issue of Index Warrants will contain the terms set forth below.
The Index Warrants which are issued without a Minimum Expiration Value will
be issued under one or more index warrant agreements (each, an "Index Warrant
Agreement") to be entered into between the Company and a bank or trust company,
as warrant agent (the "Index Warrant Agent"), all as described in the
Prospectus Supplement relating to such Index Warrants. The Index Warrant Agent
will act solely as the
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<PAGE>
agent of the Company under the applicable Index Warrant Agreement and will not
assume any obligation or relationship of agency or trust for or with any Index
Warrantholders. A single bank or trust company may act as Index Warrant Agent
for more than one issue of Index Warrants.
The Index Warrants which are issued with a Minimum Expiration Value will be
issued under one or more index warrant trust indentures (each an "Index Warrant
Trust Indenture") to be entered into between the Company and a corporation (or
other person permitted to so act by the Trust Indenture Act of 1939, as amended
from time to time (the "Trust Indenture Act")), to act as trustee (the "Index
Warrant Trustee"), all as described in the Prospectus Supplement relative to
such Index Warrants. Any Index Warrant Trust Indenture will be qualified under
the Trust Indenture Act. To the extent allowed by the Trust Indenture Act, a
single qualified corporation may act as Index Warrant Trustee for more than one
issue of Index Warrants.
Forms of Index Warrant Agreement and Index Warrant Trust Indenture and the
respective global index warrant certificates related thereto are filed as
exhibits to the Registration Statement. The summaries herein of certain
provisions of the Index Warrant Agreement, the Index Warrant Trust Indenture
and global index warrant certificates do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, all the
provisions of the Index Warrant Agreement, the Index Warrant Trust Indenture
and global index warrant certificates, respectively.
The Company will have the right to "reopen" a previous issue of Index
Warrants and to issue additional Index Warrants of such issue without the
consent of any Index Warrantholder.
The Index Warrants involve a high degree of risk, including the risk that the
Index Warrants will expire worthless except for the Minimum Expiration Value,
if any, of such Index Warrants. Investors should therefore be prepared to
sustain a total loss of the purchase price of the Index Warrants (except for
the Minimum Expiration Value, if applicable). Investors who consider purchasing
Index Warrants should be experienced with respect to options and option
transactions and reach an investment decision only after carefully considering
the suitability of the Index Warrants in light of their particular
circumstances and the information set forth below as well as additional
information contained in the Prospectus Supplement relating to such Index
Warrants.
Unless otherwise provided in the Prospectus Supplement, each Index Warrant
will entitle Index Warrantholders to receive from the Company upon exercise the
Settlement Value of such Index Warrant. Certain Index Warrants issued pursuant
to an Index Warrant Trust Indenture will, if specified in the Prospectus
Supplement, entitle the Index Warrantholder to receive from the Company, under
certain circumstances specified in the Prospectus Supplement, a payment or
delivery equal to the greater of the applicable Settlement Value and a Minimum
Expiration Value of such Index Warrants. In addition, certain Index Warrants
will, if specified in the Prospectus Supplement, entitle Index Warrantholders
to receive from the Company a certain payment or delivery upon cancellation of
the Index Warrants by the Company, upon the occurrence of specified events. In
addition, if so specified in the Prospectus Supplement, following the
occurrence of an extraordinary event, the Settlement Value of an Index Warrant
may, at the option of the Company, be determined on a different basis,
including in connection with automatic exercise at expiration.
Unless otherwise specified in the related Prospectus Supplement, the Index
Warrants will be deemed to be automatically exercised upon expiration or such
earlier date that may be specified. Upon such automatic exercise, Index
warrantholders will be entitled to receive a payment or delivery equal to the
Settlement Value of the Index Warrants, except that holders of Index Warrants
having a Minimum Expiration Value will be entitled to receive a payment or
delivery equal to the greater of such Settlement Value and the applicable
Minimum Expiration Value. The Minimum Expiration Value may be either a
predetermined payment or delivery or a payment or delivery that varies during
the term of the Index Warrants in accordance with a schedule or formula. Any
Minimum Expiration Value applicable to an issue of Index Warrants, as well as
any additional circumstances resulting in the automatic exercise of such Index
Warrants, will be specified in the related Prospectus Supplement.
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<PAGE>
If so specified in the Prospectus Supplement, the Index Warrants may be
canceled by the Company, or the exercise or valuation of, or payment or
delivery for, such Index Warrants may be delayed or postponed upon the
occurrence of an extraordinary event. Any extraordinary events relating to an
issue of Index Warrants will be set forth in the related Prospectus Supplement.
Upon cancellation, the related Index warrantholders will be entitled to receive
only the applicable payment or delivery on cancellation specified in such
Prospectus Supplement. The payment or delivery on cancellation may be either a
predetermined payment or delivery or a payment or delivery that varies during
the term of the Index Warrants in accordance with a schedule or formula.
If the Company defaults with respect to any of its obligations under Index
Warrants which are issued with a Minimum Expiration Value pursuant to an Index
Warrant Trust Indenture, such default may be waived by the Index warrantholders
of a majority in interest of all outstanding Index Warrants, except a default
in the payment or delivery of the Settlement Value, Minimum Expiration Value or
cancellation payment or delivery (if applicable) on such Index Warrants or in
respect of a covenant or provision of the applicable Index Warrant Trust
Indenture which cannot be modified or amended without the consent of the Index
warrantholder of each outstanding Index Warrant affected.
The Index Warrants are unsecured contractual obligations of the Company and
will rank pari passu with the Company's other unsecured contractual obligations
and with the Company's unsecured and unsubordinated debt. Since the Company is
a holding company, the right of the Company, and hence the right of creditors
of the Company (including the Holders of the Debt Securities), to participate
in any distribution of the assets of any subsidiary upon its liquidation or
reorganization or otherwise is necessarily subject to the prior claims of
creditors of the subsidiary, except to the extent that claims of the Company
itself as a creditor of the subsidiary may be recognized. In addition,
dividends, loans and advances from certain subsidiaries, including MLPF&S, to
the Company are restricted by net capital requirements under the Exchange Act
and under rules of certain exchanges and other regulatory bodies.
Certain special United States federal income tax considerations may be
applicable to instruments such as the Index Warrants. The related Prospectus
Supplement will describe such tax considerations. The summary of United States
Federal income tax considerations contained in the Prospectus Supplement will
be presented for informational purposes only, however, and will not be intended
as legal or tax advice to prospective purchasers. Prospective purchasers of
Index Warrants are urged to consult their own tax advisors prior to any
acquisition of Index Warrants.
BOOK-ENTRY PROCEDURES AND SETTLEMENT
Except as may otherwise be provided in an applicable Prospectus Supplement,
Index Warrants will be issued in book-entry form and represented by global
Index Warrants, registered in the name of a depository or its nominee. Except
as may otherwise be provided in an applicable Prospectus Supplement, Index
Warrantholders will not be entitled to receive definitive certificates
representing Index Warrants, unless the depository is unwilling or unable to
continue as depository or the Company decides to have the Index Warrants
represented by definitive certificates. A beneficial owner's interest in an
Index Warrant represented by a global Index Warrant will be recorded on or
through the records of the brokerage firm or other entity that maintains such
beneficial owner's account. In turn, the total number of Index Warrants held by
an individual brokerage firm or other entity for its clients will be maintained
on the records of the depository in the name of such brokerage firm or other
entity or its agent.
LISTING
Unless otherwise indicated in the Prospectus Supplement, the Index Warrants
will be traded pursuant to the rules of a self-regulatory organization as
specified in the Prospectus Supplement. It is expected that such self-
regulatory organization will cease trading an issue of Index Warrants at the
close of business on the related expiration date of such Index Warrants.
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MODIFICATION
Any Index Warrant Agreement or Index Warrant Trust Indenture and the terms of
the related Index Warrants may be amended by the Company and the Index Warrant
Agent or Index Warrant Trustee, as the case may be (which amendment shall take
the form of a supplemental index warrant agreement or supplemental index
warrant trust indenture (collectively referred to as "Supplemental
Agreements")), without the consent of the holders of any Index Warrants, for
the purpose of (i) curing any ambiguity, or of curing, correcting or
supplementing any defective or inconsistent provision contained therein, or of
making any other provisions with respect to matters or questions arising under
the Index Warrant Agreement or Index Warrant Trust Indenture, as the case may
be, which shall not be inconsistent with the provisions thereof or of the Index
Warrants, (ii) evidencing the succession of another corporation to the Company
and the assumption by any such successor of the covenants of the Company
contained in the Index Warrant Agreement or the Index Warrant Trust Indenture,
as the case may be, and the Index Warrants, (iii) appointing a successor
depository, (iv) evidencing and providing for the acceptance of appointment by
a successor Index Warrant Agent or Index Warrant Trustee with respect to the
Index Warrants, as the case may be, (v) adding to the covenants of the Company,
for the benefit of the Index Warrantholders or surrendering any right or power
conferred upon the Company under the Index Warrant Agreement or Index Warrant
Trust Indenture, as the case may be, (vi) issuing Index Warrants in definitive
form, or (vii) amending the Index Warrant Agreement or Index Warrant Trust
Indenture, as the case may be, in any manner which the Company may deem to be
necessary or desirable and which will not materially and adversely affect the
interests of the Index warrantholders.
The Company and the Index Warrant Agent may also amend any Index Warrant
Agreement or Index Warrant Trust Indenture, as the case may be, and the terms
of the related Index Warrants (which amendment shall take the form of a
Supplemental Agreement) with the consent of the Index warrantholders holding
not less than 66 2/3% in number of the then outstanding unexercised Index
Warrants affected by such amendment, for the purpose of adding any provisions
to or changing in any manner or eliminating any of the provisions of the Index
Warrant Agreement or Index Warrant Trust Indenture, as the case may be, or of
modifying in any manner the rights of the Index warrantholders; provided that
no such amendment that (i) changes the determination of the Settlement Value or
the payment or delivery to be made on cancellation, if any, or Minimum
Expiration Value, if any, of the Index Warrants (or any aspects of such
determination) so as to reduce the payment or delivery to be made upon exercise
or deemed exercise, (ii) shortens the period of time during which the Index
Warrants may be exercised, or otherwise materially and adversely affects the
exercise rights of the Index warrantholders or (iii) reduces the number of
outstanding Index Warrants, the consent of whose holders is required for
amendment of the Index Warrant Agreement, the Index Warrant Trust Indenture or
the terms of the related Index Warrants, may be made without the consent of
each Index warrantholder affected thereby.
EVENTS OF DEFAULT
Certain events in bankruptcy, insolvency or reorganization of the Company
will constitute an Event of Default with respect to Index Warrants having a
Minimum Expiration Value which are issued under an Index Warrant Trust
Indenture. Upon the occurrence of an Event of Default, the holders of 25% of
unexercised Index Warrants may elect to receive a settlement payment or
delivery for such unexercised Index Warrants, which will immediately become due
to the Index warrantholders upon such election in an amount equal to the market
value of such Index Warrants (assuming the Company's ability to satisfy its
obligations under such Index Warrants as they would become due) as of the date
the Company is notified of the intended liquidation, as determined by a
nationally recognized securities broker-dealer unaffiliated with the Company
and mutually selected by the Company and the Index Warrant Trustee.
MERGER, CONSOLIDATION, SALE, LEASE OR OTHER DISPOSITIONS
The Company may consolidate or merge with or into any other corporation and
the Company may sell, lease or convey all or substantially all of its assets to
any corporation, provided that (i) the corporation
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<PAGE>
(if other than the Company) formed by or resulting from any such consolidation
or merger or which shall have received such assets shall be a corporation
organized and existing under the laws of the United States of America or a
State thereof and shall assume the Company's obligations in respect of the
payment or delivery of the Settlement Value (or any Minimum Expiration Value or
cancellation payment or delivery, if applicable) with respect to all the
unexercised Index Warrants and the performance and observance of all of the
covenants and conditions of the Index Warrant Agreement or Index Warrant Trust
Indenture, as the case may be, to be performed or observed by the Company, and
(ii) the Company or such successor corporation, as the case may be, shall not
immediately be in default under the Index Warrant Agreement or Index Warrant
Trust Indenture, as the case may be.
ENFORCEABILITY OF RIGHTS BY INDEX WARRANTHOLDERS
Any Index warrantholder may, without the consent of the related Index Warrant
Agent, enforce by appropriate legal action, in and for its own behalf, its
right to exercise, and receive payment or delivery for, its Index Warrants.
PLAN OF DISTRIBUTION
The Company may sell Securities (i) through MLPF&S as agent, (ii) to the
public through, or through underwriting syndicates managed by, one or more of
the firms named on the cover page of this Prospectus or (iii) directly to
purchasers. The Prospectus Supplement with respect to the Securities of a
particular series describes the terms of the offering of such Securities,
including the name of the agent or the name or names of any underwriters, the
public offering or purchase price, any discounts and commissions to be allowed
or paid to the agent or underwriters, all other items constituting underwriting
compensation, the discounts and commissions to be allowed or paid to dealers,
if any, and the exchanges, if any, on which the Securities will be listed. Only
the agents or underwriters so named in the Prospectus Supplement are agents or
underwriters in connection with the Securities offered thereby. Under certain
circumstances, the Company may repurchase Securities and reoffer them to the
public as set forth above. The Company may also arrange for repurchases and
resales of such Securities by dealers.
If so indicated in the Prospectus Supplement, the Company will authorize
underwriters to solicit offers by certain institutions to purchase Debt
Securities from the Company pursuant to delayed delivery contracts providing
for payment and delivery on the date stated in the Prospectus Supplement. Each
such contract will be for an amount not less than, and, unless the Company
otherwise agrees, the aggregate principal amount of Debt Securities sold
pursuant to such contracts shall not be more than, the respective amounts
stated in the Prospectus Supplement. Institutions with whom such contracts,
when authorized, may be made include commercial and savings banks, insurance
companies, pension funds, investment companies, educational and charitable
institutions, and other institutions, but shall in all cases be subject to the
approval of the Company. Delayed delivery contracts will not be subject to any
conditions except that the purchase by an institution of the Debt Securities
covered thereby shall not at the time of delivery be prohibited under the laws
of any jurisdiction in the United States to which such institution is subject.
The Company has agreed to indemnify the agent and the several underwriters
against certain civil liabilities, including liabilities under the Securities
Act of 1933, as amended (the "Act"), or contribute to payments the agent or the
underwriters may be required to make in respect thereof.
The distribution of Securities will conform to the requirements set forth in
the applicable sections of Schedule E to the By-Laws of the National
Association of Securities Dealers, Inc.
EXPERTS
The consolidated financial statements and related financial statement
schedules of the Company and its subsidiaries included or incorporated by
reference in the Company's 1995 Annual Report on Form 10-K,
18
<PAGE>
and incorporated by reference in this Prospectus, have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their reports incorporated by
reference herein. The information under the caption "Summary Financial
Information" for each of the five years in the period ended December 29, 1995
included in this Prospectus and the Selected Financial Data under the captions
"Operating Results", "Financial Position" and "Common Share Data" for each of
the five years in the period ended December 29, 1995 included in the 1995
Annual Report to Stockholders of the Company and incorporated by reference
herein, has been derived from consolidated financial statements audited by
Deloitte & Touche LLP, as set forth in their reports included as an exhibit to
the Registration Statement or incorporated by reference herein. Such
consolidated financial statements and related financial statement schedules,
such Summary Financial Information and Selected Financial Data appearing or
incorporated by reference in this Prospectus and the Registration Statement of
which this Prospectus is a part, have been included or incorporated herein by
reference in reliance upon such reports of Deloitte & Touche LLP given upon
their authority as experts in accounting and auditing.
With respect to unaudited interim financial information for the periods
included in the Quarterly Reports on Form 10-Q which are incorporated herein by
reference, Deloitte & Touche LLP have applied limited procedures in accordance
with professional standards for a review of such information. However, as
stated in their report included in such Quarterly Report on Form 10-Q and
incorporated by reference herein, they did not audit and they do not express an
opinion on such interim financial information. Accordingly, the degree of
reliance on their reports on such information should be restricted in light of
the limited nature of the review procedures applied. Deloitte & Touche LLP are
not subject to the liability provisions of Section 11 of the Act for any such
report on unaudited interim financial information because any such report is
not a "report" or a "part" of the registration statement prepared or certified
by an accountant within the meaning of Sections 7 and 11 of the Act.
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<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-30
Underwriting............................................................... S-30
Validity of Securities..................................................... S-30
</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]
2,500,000 UNITS
MERRILL LYNCH & CO., INC.
TOP TEN YIELD MARKET INDEX
TARGET-TERM SECURITIES SM
DUE AUGUST , 2006
"MITTS(R)"
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PROSPECTUS SUPPLEMENT
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MERRILL LYNCH & CO.
AUGUST , 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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