<PAGE>
RULE NO. 424(b)(5)
REGISTRATION NO. 33-65135
PROSPECTUS SUPPLEMENT
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(TO PROSPECTUS DATED AUGUST 30, 1996)
[LOGO]
1,500,000 UNITS
MERRILL LYNCH & CO., INC.
HEALTHCARE/BIOTECHNOLOGY PORTFOLIO MARKET INDEX TARGET-TERM SECURITIESSM DUE
OCTOBER 31, 2001
"MITTS(R)"
An aggregate principal amount of $15,000,000 of Healthcare/Biotechnology
Portfolio Market Index Target-Term SecuritiesSM due October 31, 2001 (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 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 October 31, 2001. 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 value of a portfolio (the "Portfolio") of specified stocks of companies
involved in various segments of the healthcare industry and the biotechnology
industry over the Benchmark Portfolio Value. The Supplemental Redemption
Amount will in no event be less than zero. 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, if any, 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 Benchmark Portfolio Value
to the Ending Portfolio Value. The Benchmark Portfolio Value equals 115 and
was determined as described herein. The Benchmark Portfolio Value exceeds the
closing value of the Portfolio on the date of this Prospectus Supplement by
15%. The Ending Portfolio Value, as more particularly described herein, will
be the average (arithmetic mean) of the closing values of the Portfolio on
certain days, or, if certain events occur, the closing value of the Portfolio
on a single day prior to the maturity of the Securities.
FOR INFORMATION AS TO THE CALCULATION OF THE SUPPLEMENTAL REDEMPTION AMOUNT,
IF ANY, WHICH WILL BE PAID AT MATURITY, THE CALCULATION AND THE COMPOSITION OF
THE PORTFOLIO, AND CERTAIN TAX CONSEQUENCES TO BENEFICIAL OWNERS OF THE
SECURITIES, SEE "DESCRIPTION OF SECURITIES", "THE PORTFOLIO", AND "CERTAIN
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS", RESPECTIVELY, IN THIS
PROSPECTUS SUPPLEMENT. FOR OTHER INFORMATION THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS, SEE "RISK FACTORS" BEGINNING ON PAGE S-6 OF THIS
PROSPECTUS SUPPLEMENT.
Ownership of the Securities will be maintained in book-entry form by or
through the Depository. Beneficial owners of the Securities will not have the
right to receive physical certificates evidencing their ownership except under
the limited circumstances described herein.
The Securities have been approved for listing on the American Stock Exchange
(the "AMEX") under the symbol "MLH", subject to official notice of issuance.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR
THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT THE COMPANY(1)
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<S> <C> <C> <C>
Per Unit............................... $10 $.20 $9.80
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Total.................................. $15,000,000 $300,000 $14,700,000
</TABLE>
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(1) Before deduction of expenses payable by the Company.
---------------
The Securities are offered by the Underwriter, subject to prior sale, when,
as, and if issued by the Company and accepted by the Underwriter and subject
to certain other conditions. The Underwriter reserves the right to reject
orders in whole or in part. It is expected that delivery of the Securities
will be made in New York, New York on or about October 30, 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.
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MERRILL LYNCH & CO.
---------------
The date of this Prospectus Supplement is October 24, 1996.
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"MITTS" is a registered service mark and "Market Index Target-Term Securities"
is a service mark owned by Merrill Lynch & Co., Inc.
<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.......... 1,500,000 Units of Healthcare/Biotechnology
Portfolio Market Index Target-Term Securities
due October 31, 2001. The Securities are to
be issued as a series of Senior Debt
Securities under the 1983 Indenture described
herein.
Listing..................... The Securities have been approved for listing
on the AMEX under the symbol "MLH", subject
to official notice of issuance.
Denominations............... A Unit consisting of $10 principal amount of
Securities and integral multiples thereof.
Maturity.................... October 31, 2001.
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 Portfolio Value - Benchmark
Principal Portfolio Value
Amount X ----------------------------------
Benchmark Portfolio Value
provided, however, that in no event will the
Supplemental Redemption Amount be less than
zero. The Benchmark Portfolio Value equals
115 and was determined as described herein.
The closing value of the Portfolio on the
date the Securities were priced by the
Company for initial sale to the public (the
"Pricing Date") equaled 100 and the Benchmark
Portfolio Value exceeded such closing value
by 15%. The Ending Portfolio Value will equal
the average (arithmetic mean) of the closing
value of the Portfolio 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
Portfolio Value will equal the closing value
of the Portfolio on a single day.
Starting Portfolio Value.... Based on the individual prices of the
Portfolio Securities on the Pricing Date, the
Multiplier (as defined below) for each
Portfolio Security was initially set so that,
on the Pricing Date, the Portfolio Securities
were equally dollar-weighted in the Portfolio
and the Portfolio Value equaled 100 (the
"Starting Portfolio Value").
Portfolio Securities........ The stocks indicated under the caption
"Description of Securities--Portfolio
Securities" below will be used to calculate
the value of the Portfolio. Beneficial owners
of the Securities will not have any right to
receive Portfolio Securities. The Portfolio
Securities represent interests in equity
securities issued by 25 corporations involved
in various segments of the healthcare
industry and the biotechnology
S-3
<PAGE>
industry (the "Portfolio Securities"), and
have significantly different market
capitalizations (i.e., the number of shares
outstanding of a security multiplied by the
current price of such security). The original
Multipliers were determined so that each
Portfolio Security represented an equal
percentage of the Starting Portfolio Value on
the Pricing Date. See "The Portfolio" in this
Prospectus Supplement. The inclusion of a
Portfolio Security in the Portfolio is not a
recommendation to buy or sell such Portfolio
Security, and neither the Company nor any of
its affiliates make any representation to any
purchaser of Securities as to the performance
of the Portfolio or any Portfolio Security.
Symbol for Portfolio "MXH"
Value......................
Portfolio Value............. The American Stock Exchange, or any successor
thereto (the "AMEX"), generally will
calculate and disseminate the value of the
Portfolio based on the most recently reported
prices of the Portfolio Securities (as
reported by the primary exchange or trading
system on which such Portfolio Securities are
listed or traded (the "Exchanges")), at
approximately 15-second intervals during the
AMEX's business hours and at the end of each
Portfolio Business Day via the Consolidated
Tape Association's Network B. The Portfolio
Value, at any time, will equal the sum of the
products of such prices and the applicable
Multipliers for the Portfolio Securities. The
Ending Portfolio Value, however, will be
calculated by the Calculation Agent based on
averaging the Portfolio Values reported by
the AMEX at the end of certain Portfolio
Business Days (as defined below). See
"Description of Securities--Payment at
Maturity" in this Prospectus Supplement.
Risk Factors................ The Securities are subject to certain special
considerations. On the Pricing Date, the
Benchmark Portfolio Value exceeded the
Starting Portfolio Value by 15%. Investors
should be aware that if the Ending Portfolio
Value does not exceed the Starting Portfolio
Value by more than 15%, beneficial owners of
the Securities will receive only the
principal amount thereof. A beneficial owner
of the Securities may receive no Supplemental
Redemption Amount at maturity, or a
Supplemental Redemption Amount that 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, if any, may not reflect
the full opportunity costs implied by
inflation or other factors relating to the
time value of money.
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
S-4
<PAGE>
of other factors. The trading value of the
Securities is expected to depend
substantially on the extent of the
appreciation, if any, of the Portfolio Value
over the Benchmark Portfolio Value. See "The
Portfolio--Historical Information" in this
Prospectus Supplement for historical values
of the Portfolio Securities. If, however,
Securities are sold prior to the maturity
date at a time when the Portfolio Value
exceeds the Benchmark Portfolio 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
Portfolio Value over the Benchmark Portfolio
Value were to prevail until maturity of the
Securities because of the possible
fluctuation of the Portfolio Value between
the time of such sale and the time that the
Ending Portfolio 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 Portfolio is
below, equal to or not sufficiently above the
Benchmark Portfolio Value. A discount could
also result from rising interest rates.
Beneficial owners of the Securities will
receive a payment at maturity which will be
based on the value of the Portfolio, but will
not have any right to receive any of the
Portfolio Securities. The Portfolio does not
reflect the payment of dividends on the
stocks underlying it and, therefore, the
yield based on the Portfolio 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. See
"Risk Factors" in this Prospectus Supplement.
The value of the Portfolio and the
Supplemental Redemption Amount, if any, may
be adversely affected by political, economic
and other developments that affect the stocks
underlying the Portfolio. Since the stocks
underlying the Portfolio are of companies
involved in various segments of the
healthcare industry and the biotechnology
industry, factors affecting these industries
may affect the value of the Portfolio and
therefore the trading value of the
Securities.
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,
including the effect of certain recent tax
law changes. See "Certain United States
Federal Income Tax Considerations" in this
Prospectus Supplement.
S-5
<PAGE>
RISK FACTORS
PAYMENT AT MATURITY
"Benchmark Portfolio Value will Exceed Value of Starting Portfolio Value on
the Pricing Date." On the Pricing Date, the Benchmark Portfolio Value exceeded
the Starting Portfolio Value by 15%. Investors should be aware that if, at
maturity, the Ending Portfolio Value does not exceed the Starting Portfolio
Value by more than 15%, beneficial owners of the Securities will receive only
the principal amount thereof.
"Yield may be Below Market Interest Rates on the Pricing Date." A beneficial
owner of the Securities may receive no Supplemental Redemption Amount at
maturity, or a Supplemental Redemption Amount that 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 Supplemental Redemption Amount, if any, 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 Dividends." The Portfolio does not
reflect the payment of dividends on the stocks underlying it and therefore the
yield based on the Portfolio 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.
"State Law Limit on Interest Paid." Because the 1983 Indenture provides that
the Securities will be governed by and construed in accordance with the laws
of New York, certain usury laws of New York State may apply. Under present New
York law, the maximum rate of interest is 25% per annum on a simple interest
basis. This limit may not apply to Securities in which $2,500,000 or more has
been invested. While the Company believes that New York law would be given
effect by a state or Federal court sitting outside of New York, state laws
frequently regulate the amount of interest that may be charged to and paid by
a borrower (including, in some cases, corporate borrowers). It is suggested
that prospective investors consult their personal advisors with respect to the
applicability of such laws. The Company will covenant for the benefit of the
Holders of the Securities, to the extent permitted by law, not to claim
voluntarily the benefits of any laws concerning usurious rates of interest
against a Holder of the Securities.
TRADING
The Securities have been approved for listing on the AMEX under the symbol
"MLH", subject to official notice of issuance. There is little precedent to
indicate how the Securities will trade in the secondary market or whether such
market will be liquid. It is expected that the secondary market for the
Securities will be affected by the creditworthiness of the Company and by a
number of other factors. The tax treatment of the Securities as described in
"Certain United States Federal Income Tax Considerations" in this Prospectus
Supplement may make the Securities a less appealing investment for investors
who would otherwise hold the Securities in taxable accounts.
The trading value of the Securities is expected to depend substantially on
the extent of the appreciation, if any, of the Portfolio Value over the
Benchmark Portfolio Value. See "The Portfolio--Historical Information" in this
Prospectus Supplement for historical values of the Portfolio. If, however,
Securities are sold prior to the maturity date at a time when the Portfolio
Value exceeds the Benchmark Portfolio 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 Portfolio Value over the Benchmark Portfolio Value
were to prevail until maturity of the Securities because of the possible
fluctuation of the Portfolio between the time of such sale and the time that
the Ending Portfolio 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 Portfolio is below, equal to, or not sufficiently above the
Benchmark Portfolio Value. A discount could also result from rising interest
rates.
S-6
<PAGE>
In addition to the value of the Portfolio, 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 Portfolio 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 Portfolio. Rising interest rates may lower the value of the
Portfolio and, thus, may decrease the trading value of the Securities. Falling
interest rates may increase the value of the Portfolio and, thus, may increase
the trading value of the Securities.
"Volatility of the Portfolio." If the volatility of the Portfolio Value
increases, the trading value of the Securities is expected to increase. If the
volatility of the Portfolio Value 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 Portfolio. This
difference will reflect a "time premium" due to expectations concerning the
value of the Portfolio 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
Portfolio is below, equal to, or not sufficiently above the Benchmark
Portfolio Value.
"Dividend Rates in the United States." If dividend rates on the stocks
comprising the Portfolio increase, the trading value of the Securities is
expected to decrease. Conversely, if dividend rates on the stocks comprising
the Portfolio decrease, the value of the Securities is expected to increase.
However, in general, rising U.S. corporate dividend rates may increase the
value of the Portfolio and, in turn, increase the trading value of the
Securities. Conversely, falling U.S. corporate dividend rates may decrease the
value of the Portfolio and, in turn, decrease the trading value of the
Securities.
The impact of the factors specified above, excluding the value of the
Portfolio, 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 Portfolio. 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 Portfolio 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, Portfolio volatility and/or dividend
rates of stocks comprising the Portfolio 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 Portfolio in excess of the Benchmark Portfolio 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 PORTFOLIO
The value of the Portfolio and the Supplemental Redemption Amount, if any,
may be adversely affected by political, economic and other developments that
affect the stocks underlying the Portfolio. Since the stocks underlying the
Portfolio are of companies involved in various segments of the healthcare
industry and the biotechnology industry, factors affecting these industries
may affect the value of the Portfolio and therefore the trading value of the
Securities. See "The Portfolio--Healthcare and Biotechnology Industries".
S-7
<PAGE>
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.
Investors should also consider the tax consequences of investing in the
Securities, including the effect of certain recent tax law changes. 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 stocks underlying the Portfolio for their proprietary accounts
and for other accounts under their management, which may influence the value
of such stocks and therefore the value of the Securities. MLPF&S and its
affiliates will also be the counterparties to the hedge of the Company's
obligations under the Securities. See "Use of Proceeds" herein. Accordingly,
under certain circumstances, conflicts of interest may arise between MLPF&S's
responsibilities as Calculation Agent with respect to the Securities and its
obligations under its hedge and its status as a subsidiary of the Company.
Under certain circumstances, the duties of MLPF&S as Calculation Agent in
determining the existence of Market Disruption Events could conflict with the
interests of MLPF&S as an affiliate of the issuer of the Securities, Merrill
Lynch & Co., Inc., and with the interests of the holders of the Securities.
S-8
<PAGE>
RECENT DEVELOPMENTS
The following summary of consolidated financial information was derived
from, and is qualified in its entirety by reference to, the financial
statements and other information and data contained in the Company's Annual
Report on Form 10-K for the year ended December 29, 1995, the Quarterly Report
on Form 10-Q for the period ended June 28, 1996 (the "Quarterly Report") and
the Current Report on Form 8-K dated October 15, 1996 (the "Current Report").
The Current Report (which includes unaudited preliminary results of operations
for the quarter ended September 27, 1996) will be superseded in its entirety
by the Company's Quarterly Report on Form 10-Q for the quarterly period ended
September 27, 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.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
SEPTEMBER 29, SEPTEMBER 27,
INCOME STATEMENT INFORMATION 1995 1996
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(IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C>
Revenues.......................................... $ 16,220 $ 18,410
Net revenues(1)................................... $ 7,652 $ 9,735
Earnings before income taxes...................... $ 1,329 $ 1,891
Net earnings...................................... $ 810 $ 1,174
Ratio of earnings to fixed charges(2)............. 1.2 --
<CAPTION>
AT DECEMBER 29, AT JUNE 28,
BALANCE SHEET INFORMATION(3) 1995 1996
- ---------------------------- --------------- -------------
(IN MILLIONS)
<S> <C> <C>
Total assets...................................... $176,857 $205,175
Long-term borrowings.............................. $ 17,340 $ 22,640
Stockholders' equity.............................. $ 6,141 $ 6,514
</TABLE>
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(1) Net Revenues are revenues net of interest expense.
(2) The ratio of earnings to fixed charges for the nine months ended September
27, 1996 is not available as of the date of this Prospectus Supplement.
For the six months ended June 28, 1996, the ratio of earnings to fixed
charges 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 for the quarter ended September 27, 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 June 28, 1996, $2,696 million of bank loans
and $18,393 million of commercial paper were outstanding. In addition,
certain of the Company's subsidiaries lend securities and enter into
repurchase agreements to obtain financing. At June 28, 1996, cash deposits
for securities loaned and securities sold under agreements to repurchase
amounted to $3,591 million and $62,865 million, respectively. From June
29, 1996 to October 21, 1996, long-term borrowings, net of repayments and
repurchases, increased by approximately $1,746 million.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 27, 1996
Global financial markets were affected by a slowdown during the 1996 third
quarter after a strong first half. A brief midsummer U.S. stock market
correction combined with increased uncertainty over the direction of U.S.
interest rates led to lower trading and underwriting volumes, particularly in
equities, compared to the first six months of 1996. As a result, industrywide
revenues from such activities declined from first-half highs. Nevertheless,
issuer and investor demand was stronger than in the year-ago period.
S-9
<PAGE>
Net earnings for the first nine months of 1996 were a record $1,174 million,
up 45% from the $810 million reported in the comparable 1995 period. Third
quarter net earnings of $331 million were down 24% from record second quarter
1996 net earnings of $433 million. Earnings per common share were $5.91
primary and $5.89 fully diluted, compared with $3.95 primary and $3.90 fully
diluted in the first nine months of 1995. Total revenues for the first nine
months of 1996 were a record $18,410 million, up 14% from $16,220 in the
comparable 1995 period. Net revenues (revenues after interest expense) totaled
$9,735 million up 27% from the year-ago period.
Commission revenues rose 24% during the first nine months of 1996 to $2,819
million from $2,279 million in the comparable 1995 period. Commissions
revenues from listed securities increased due to higher trading volumes on
most major U.S. and international exchanges. Mutual fund commissions advanced
to a record level due to strong sales of U.S. and offshore funds and increased
distribution fees.
Interest and dividend revenues for the first nine months of 1996 increased
to $9,407 million, up 1% from $9,329 million in the first nine months of 1995.
Interest expense, which includes dividend expense, was $8,675 million up 1%
from $8,568 million in the year-ago period. Net interest and dividend profit
was $732 million, down 4% from $761 million in 1995 as a result of reduced
levels of net interest-earning assets.
Principal transactions revenues increased 39% from the first nine months of
1995 to $2,709 million, as increased client activity led to higher revenues in
most product categories. Equities and equity derivatives trading revenues, in
the aggregate, were up 35% to $874 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 76% to $771 million primarily
due to higher revenues from mortgage-backed products, non-U.S. governments and
agencies securities, and money market instruments. Mortgage-backed securities
trading revenues advanced due primarily to improved liquidity and increased
customer demand compared with the year-ago period. Trading revenues for non-
U.S. governments and agencies securities benefited from higher demand for
emerging market securities. Trading revenues from money market instruments
rose due to increased floating-rate note activity in European markets.
Interest rate and currency swap trading revenues increased 19% to $698 million
due to higher revenues from both U.S. and non-U.S. dollar-denominated
transactions. Municipal securities revenues increased 22% to $257 million,
largely due to increased investor demand for tax-advantaged products. Foreign
exchange and commodities trading revenues, in the aggregate, rose 67% from the
first nine months of 1995 to $109 million. Strong customer activity
attributable to increased volatility in exchange rates contributed to higher
foreign exchange trading revenues.
Investment banking revenues were $1,428 million, up 52% from $938 million in
the first nine months of 1995. Underwriting fees were higher in virtually all
products, particularly equity securities, due to increased transaction volume.
Strategic services revenues benefited from improved market share for mergers
and acquisitions activity.
Asset management and portfolio service fees were $1,661 million for the
first nine months of 1996, up 19% from $1,397 million in the year-ago period,
as a result of strong inflows of client assets and net asset appreciation.
Other revenues were $386 million, up 19% from $325 million in the first nine
months of 1995 primarily due to gains on sales from Real Estate Mortgage
Investment Conduit ("REMIC") transactions and partnership investments.
Non-interest expenses were $7,844 million, up 24% from $6,323 million in the
year-ago period. Compensation and benefits expense, which represented
approximately 64% of non-interest expenses, increased 27% during the first
nine months of 1996 due primarily to higher incentive and production-related
compensation as well as a 7% increase in the number of full-time employees,
due in part to acquisitions. Compensation and benefits expense was 51.8% of
net revenues for the first nine months of 1996, compared with 51.9% in the
1995 period.
Non-interest expenses excluding compensation and benefits, rose 19% to
$2,800 million. A significant component of this increase relates to strategic
investments in technology such as the Trusted Global Advisor ("TGA")
initiative, a new technology platform that will enable Financial Consultants
to provide enhanced
S-10
<PAGE>
services to clients. These technology-related expenses primarily affected
communications and equipment rental, depreciation and amortization, and
professional fees which, in the aggregate, increased 21% from the comparable
1995 period to $1,131 million.
Occupancy costs increased 4% from the first nine months of 1995 due to
international growth, including the addition of Smith New Court facilities.
Advertising and market development expenses increased 28% from the first nine
months of 1995 due to increased international travel and higher promotion-
related recognition costs. Brokerage, clearing, and exchange fees increased
17% as a result of higher trading volume, particularly in international
markets. Other expenses increased 22% from the first nine months of 1995,
primarily due to provisions related to various business activities and nine
months of goodwill amortization primarily related to Smith New Court.
Income tax expense totaled $717 million for the first nine months of 1996.
The effective tax rate in the 1996 period was 37.9%, compared with 39.0% a
year ago. The decrease in the effective tax rate was primarily attributable to
expanded international business activities.
CERTAIN BALANCE SHEET INFORMATION AS OF JUNE 28, 1996
The Company believes that its equity base is adequate relative to the level
and composition of its assets and the mix of its business.
In the normal course of business, the Company underwrites, trades, and holds
non-investment grade securities in connection with its investment banking,
market making, and derivative structuring activities. These activities are
subject to risks related to the creditworthiness of the issuers and the
liquidity of the market for such securities, in addition to the usual risks
associated with investing in, financing, underwriting, and trading in
investment grade instruments.
Information concerning the Company's positions in highly leveraged and non-
investment grade securities and investments in highly leveraged transactions
at September 27, 1996 is not available as of the date of this Prospectus
Supplement. At June 28, 1996, the fair value of long and short non-investment
grade trading inventories amounted to $8,452 million and $1,282 million,
respectively, and in the aggregate (i.e. the sum of long and short trading
inventories) represented 9.0% of aggregate consolidated trading inventories.
At June 28, 1996, the carrying value of extensions of credit provided to
corporations entering into leveraged transactions aggregated $293 million
(excluding unutilized revolving lines of credit and other lending commitments
of $117 million), consisting primarily of senior term and subordinated
financings to 37 medium-sized corporations. At June 28, 1996, the Company had
no bridge loans outstanding. A $90 million bridge loan outstanding on March
29, 1996 was repaid during the 1996 second quarter, and a $100 million bridge
loan commitment made after March 29, 1996 was canceled before June 28, 1996.
Subsequent to June 28, 1996, the Company entered into a bridge loan commitment
for $135 million to a non-investment grade counterparty. The Company intends
to syndicate the loan, if extended, and may retain a residual portion. Direct
equity investments made in conjunction with the Company's investment and
merchant banking activities aggregated $161 million at June 28, 1996,
representing investments in 62 enterprises. At June 28, 1996, the Company held
interests in partnerships, totaling $79 million (recorded on the cost basis),
that invest in highly leveraged transactions and non-investment grade
securities. At June 28, 1996, the Company also committed to invest an
additional $80 million in partnerships that invest in leveraged transactions.
The Company's insurance subsidiaries hold non-investment grade securities.
Non-investment grade securities were 5.0% of total insurance investments at
June 28, 1996. Non-investment grade securities of insurance subsidiaries are
classified as available-for-sale and are carried at fair value.
At June 28, 1996, the largest non-investment grade concentration consisted
of various sovereign and corporate issues of a South American sovereign
totaling $861 million, which primarily represented hedges of other financial
instruments. No one industry sector accounted for more than 27% of total non-
investment trade positions. At June 28, 1996, the Company held an aggregate
carrying value of $140 million in debt and equity securities of issuers in
various stages of bankruptcy proceedings or in default, of which 70% resulted
from the Company's market making activities in such securities.
S-11
<PAGE>
DESCRIPTION OF SECURITIES
GENERAL
The Securities are to be issued as a series of Senior Debt Securities under
the Senior Indenture, referred to as the "1983 Indenture", which is more fully
described in the accompanying Prospectus. The Securities will mature on
October 31, 2001.
While at maturity a beneficial owner of a Security will receive the
principal amount of such Security plus the Supplemental Redemption Amount, if
any, 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, if any,
all as provided below. If the Ending Portfolio Value does not exceed the
Benchmark Portfolio Value a beneficial owner of a Security will be entitled to
receive only the principal amount thereof.
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:
Principal Amount X Ending Portfolio Value--Benchmark Portfolio Value
-------------------------------------------------
Benchmark Portfolio Value
provided, however, that in no event will the Supplemental Redemption Amount be
less than zero. The Benchmark Portfolio Value equals 115. The Benchmark
Portfolio Value was determined on the Pricing Date by multiplying the Starting
Portfolio Value by a factor equal to 115%. Based on the individual prices of
the Portfolio Securities on the Pricing Date, the Multiplier for each
Portfolio Security was initially set by the AMEX so that, on the Pricing Date,
the Portfolio Securities were equally dollar-weighted in the Portfolio and the
Portfolio Value equaled 100. The Ending Portfolio 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
Portfolio determined on each of the first five Calculation Days during the
Calculation Period. If there are fewer than five Calculation Days, then the
Ending Portfolio Value will equal the average (arithmetic mean) of the closing
values of the Portfolio on such Calculation Days, and if there is only one
Calculation Day, then the Ending Portfolio Value will equal the closing value
of the Portfolio on such Calculation Day. If no Calculation Days occur during
the Calculation Period because of Market Disruption Events, then the Ending
Portfolio Value will equal the closing value of the Portfolio determined on
the last scheduled Portfolio 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
Portfolio Business Day prior to the maturity date to and including the second
scheduled Portfolio Business Day prior to the maturity date. "Calculation Day"
means any Portfolio Business Day during the Calculation Period on which a
Market Disruption Event has not occurred. For purposes of determining the
Ending Portfolio Value, a "Portfolio Business Day" is a day on which the AMEX
is open for trading and trading generally occurs in the over-the-counter
market for equity securities and the Portfolio or any Successor Portfolio is
calculated and published. All determinations made by the
S-12
<PAGE>
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.
The following table illustrates, for a range of hypothetical Ending
Portfolio Values, (i) the total amount payable at maturity for each $10
principal amount of Securities, based on the Benchmark Portfolio Value, which
equals 115% of the Starting Portfolio Value; (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 Portfolio (which
includes an assumed aggregate dividend yield of 0.23% per annum, as more fully
described below).
<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
PORTFOLIO VALUE PORTFOLIO VALUE MATURITY(1) SECURITIES(2) THE PORTFOLIO(2)(3)
------------------- ----------------- ----------- ------------------ -------------------
<S> <C> <C> <C> <C>
50 -50% $ 10.00 0.00% -13.09%
60 -40% $ 10.00 0.00% -9.66%
70 -30% $ 10.00 0.00% -6.71%
80 -20% $ 10.00 0.00% -4.11%
90 -10% $ 10.00 0.00% -1.79%
100(4) 0% $ 10.00 0.00% 0.23%
110 10% $ 10.00 0.00% 2.23%
120 20% $ 10.43 0.85% 4.00%
130 30% $ 11.30 2.47% 5.64%
140 40% $ 12.17 3.97% 7.17%
150 50% $ 13.04 5.39% 8.60%
160 60% $ 13.91 6.72% 9.96%
170 70% $ 14.78 7.97% 11.23%
180 80% $ 15.65 9.16% 12.45%
190 90% $ 16.52 10.30% 13.60%
200 100% $ 17.39 11.38% 14.70%
210 110% $ 18.26 12.41% 15.75%
220 120% $ 19.13 13.40% 16.76%
230 130% $ 20.00 14.35% 17.77%
240 140% $ 20.87 15.27% 18.66%
250 150% $ 21.74 16.15% 19.56%
</TABLE>
- --------
(1) The total amount payable at maturity is based on the Benchmark Portfolio
Value, which equals 115% of the Starting Portfolio Value.
(2) The annualized rates of return specified in the preceding table are
calculated on a semiannual bond equivalent basis.
(3) This rate of return assumes (i) an investment of a fixed amount in the
stocks underlying the Portfolio with the allocation of such amount
reflecting the relative weights of such stocks in the Portfolio; (ii) a
percentage change in the aggregate price of such stocks that equals the
percentage change in the Portfolio from the Starting Portfolio Value to
the relevant hypothetical Ending Portfolio Value; (iii) a constant
dividend yield of 0.23% per annum, paid quarterly from the date of initial
delivery of Securities, applied to the value of the Portfolio at the end
of each such quarter assuming such value increases or decreases linearly
from the Starting Portfolio Value to the applicable hypothetical Ending
Portfolio Value; (iv) no transaction fees or expenses; (v) a five year
maturity of the Securities from the date of issuance; and (vi) a final
Portfolio value equal to the Ending Portfolio Value. The aggregate
dividend yield of the stocks underlying the Portfolio as of October 24,
1996 was approximately 0.23% per annum.
(4) The Starting Portfolio Value was set at 100 based on the closing prices on
the Pricing Date.
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
Portfolio Value determined by the Calculation Agent as provided herein.
Historical data regarding the Portfolio is included in this Prospectus
Supplement under "The Portfolio--Historical Information".
S-13
<PAGE>
ADJUSTMENTS TO THE PORTFOLIO; MARKET DISRUPTION EVENTS
If at any time the method of calculating the Portfolio Value is changed in
any material respect, or if the Portfolio is in any other way modified so that
such Portfolio Value does not, in the opinion of the Calculation Agent, fairly
represent the Portfolio Value 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 Portfolio 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 Portfolio Value as if such changes or modifications had not
been made, and calculate such closing value with reference to the Portfolio
Value, as adjusted. Accordingly, if the method of calculating the Portfolio
Value is modified so that the Portfolio Value 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 Portfolio Value), then the Calculation Agent shall adjust such Portfolio
Value in order to arrive at a Portfolio Value 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 three or more of the Portfolio Securities 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 the trading of option contracts related to three
or more of the Portfolio Securities 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 PORTFOLIO
If the AMEX discontinues publication of the Portfolio Value 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 Portfolio
Value (any such index being referred to hereinafter as a "Successor Portfolio
Value"), then, upon the Calculation Agent's notification of such determination
to the Trustee and the Company, the Calculation Agent will substitute the
Successor Portfolio Value as calculated by the AMEX or such other entity for
the Portfolio Value and calculate the Ending Portfolio Value as described
above under "Payment at Maturity". Upon any selection by the Calculation Agent
of a Successor Portfolio Value, the Company shall cause notice thereof to be
given to Holders of the Securities.
If the AMEX discontinues publication of the Portfolio Value and a Successor
Portfolio Value 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
Portfolio Value 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 Portfolio Value prior to any such discontinuance.
If a Successor Portfolio Value is selected or the Calculation Agent calculates
a value as a substitute for the Portfolio Value as described below, such
Successor Portfolio Value or value shall be substituted for the Portfolio
Value for all purposes, including for purposes of determining whether a Market
Disruption Event exists.
S-14
<PAGE>
If the AMEX discontinues publication of the Portfolio Value prior to the
period during which the Supplemental Redemption Amount is to be determined and
the Calculation Agent determines that no Successor Portfolio Value is
available at such time, then on each Business Day until the earlier to occur
of (i) the determination of the Ending Portfolio Value and (ii) a
determination by the Calculation Agent that a Successor Portfolio Value 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 Wall Street Journal (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 Portfolio Value 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. See "Description of Securities--Payment at Maturity" in this
Prospectus Supplement. If a bankruptcy proceeding is commenced in respect of
the Company, the claim of the beneficial owner of a Security may be limited,
under Section 502(b)(2) of Title 11 of the United States Code, to the
principal amount of the Security plus an additional amount of contingent
interest calculated as though the date of the commencement of the proceeding
were the maturity date of the Securities.
In case of default in payment at the maturity date of the Securities
(whether at their stated maturity or upon acceleration), from and after the
maturity date the Securities shall bear interest, payable upon demand of the
beneficial owners thereof, at the rate of 7.7% 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 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").
S-15
<PAGE>
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 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.
S-16
<PAGE>
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.
THE PORTFOLIO
GENERAL
While the Portfolio consists of stocks of certain companies involved in
various segments of the healthcare industry and the biotechnology industry,
the Portfolio is not intended to provide an indication of the pattern of price
movements of common stocks of healthcare and biotechnology corporations
generally. All of the Portfolio Securities are registered under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Companies with
securities registered under the Exchange Act are required to file periodically
certain financial and other information specified by the Securities and
Exchange Commission (the "Commission"). Information provided to or filed with
the Commission is available at the offices of the Commission and at the Web
site specified under "Available Information" in the attached Prospectus.
Neither the Company nor MLPF&S makes any representation or warranty as to the
accuracy or completeness of such reports. THE INCLUSION OF A PORTFOLIO
SECURITY IN THE PORTFOLIO IS NOT A RECOMMENDATION TO BUY OR SELL SUCH
PORTFOLIO SECURITY AND NEITHER THE COMPANY NOR ANY OF ITS AFFILIATES MAKE ANY
REPRESENTATION TO ANY PURCHASER OF SECURITIES AS TO THE PERFORMANCE OF THE
PORTFOLIO.
The Company or its affiliates may presently or from time to time engage in
business with one or more of the issuers of the Portfolio Securities,
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 a Security
should undertake an independent investigation of the issuers of the Portfolio
Securities as in its judgment is appropriate to make an informed decision with
respect to an investment in the Securities.
"Healthcare and Biotechnology Industries"
The healthcare industry is subject to various federal, state and local laws
and regulations which are frequently subject to change in many ways that can
affect the price of the stocks of companies involved in such industry.
A number of legislative bills and proposals to regulate, control or alter
substantially the methods of financing and delivering healthcare, including
proposals covering cost controls, imposition of charitable care requirements,
national health insurance, incentives for competition in the provision of
healthcare insurance premiums, catastrophic illness coverage under Medicare, a
voucher system for Medicare, and the promotion of prepaid healthcare plans,
are currently under discussion, and certain of such bills have been introduced
in Congress. There are wide variations among these bills and proposals, and
the effect of these bills and proposals on the healthcare industry cannot be
determined at this time. Because of the many possible financial effects that
could result from an enactment of any of these bills and proposals, it is not
possible at this time to predict with assurance the effect on the prices of
Portfolio Securities and therefore the Securities if any of these bills or
proposals were enacted.
The biotechnology industry segment is subject to many of the same factors
that affect the healthcare industry. In addition, the products produced by
biotechnology companies often entail costly research and development and can
be subject to extensive regulatory review prior to approval for sale.
S-17
<PAGE>
COMPUTATION OF THE PORTFOLIO VALUE
The AMEX will generally calculate and disseminate the value of the Portfolio
based on the most recently reported prices of the Portfolio Securities (as
reported by the Exchanges), at approximately 15-second intervals during the
AMEX's business hours and at the end of each Portfolio Business Day via the
Consolidated Tape Association's Network B. The Portfolio Value, at any time,
will equal the sum of the products of such prices and the applicable
Multipliers for the Portfolio Securities. The Ending Portfolio Value, however,
is calculated by the Calculation Agent based on averaging the Portfolio Values
reported by the AMEX at the end of certain Portfolio Business Days. See
"Description of Securities--Payment at Maturity". The securities listed below
are the Portfolio Securities and will be used to calculate the value of the
Portfolio. Holders of the MITTS will not have any right to receive the
Portfolio Securities. The following table sets forth the issuers of the
Portfolio Securities, the exchanges, the percentage of each Portfolio Security
in the Starting Portfolio Value and the initial Multipliers:
<TABLE>
<CAPTION>
APPROXIMATE
MARKET
CAPITALIZATION % OF STARTING
ISSUER OF THE INDUSTRY AS OF PORTFOLIO INITIAL
PORTFOLIO SECURITY EXCHANGES SEGMENT OCTOBER 23, 1996 VALUE MULTIPLIER
------------------ --------- ------------------------------- ---------------- ------------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Amgen Inc............... Nasdaq Biotechnology 16,312.14 4% 0.0640000
Apria Healthcare Group
Inc. .................. NYSE Health--Specialty 874.73 4% 0.2269504
Baxter International
Inc.................... NYSE Hospital Supplies 11,718.40 4% 0.0981595
Beverly Enterprises..... NYSE Health--Long Term Care 1,166.27 4% 0.3368421
Biogen, Inc. ........... Nasdaq Biotechnology 2,870.02 4% 0.0487805
Chiron Corporation...... Nasdaq Biotechnology 3,270.62 4% 0.2077922
Columbia/HCA Healthcare
Corporation............ NYSE Hospital Management 24,148.37 4% 0.1126761
Emcare Holdings Inc. ... Nasdaq Health--Specialty 215.90 4% 0.1502347
Genzyme Corporation..... Nasdaq Biotechnology 1,629.46 4% 0.1649485
Genesis Health Ventures,
Inc.................... NYSE Health--Long Term Care 730.63 4% 0.1675393
Health Management
Associates, Inc........ NYSE Hospital Management 2,495.82 4% 0.1729730
Healthsource, Inc. ..... NYSE Health Maintenance Organization 741.34 4% 0.3440860
Healthsouth
Corporation............ NYSE Health--Specialty 5,909.69 4% 0.1038961
Humana Inc.............. NYSE Health Maintenance Organization 3,086.40 4% 0.2105263
Johnson & Johnson....... NYSE Hospital Supplies 66,327.34 4% 0.0822622
Medpartners/Mullikin,
Inc.................... NYSE Health Maintenance Organization 1,205.26 4% 0.1720430
Neuromedical Systems,
Inc.................... Nasdaq Health--Specialty 516.75 4% 0.2162162
Olsten Corporation...... NYSE Health--Specialty 1,283.15 4% 0.1739130
Oxford Health Plans,
Inc.................... Nasdaq Health Maintenance Organization 3,441.59 4% 0.0871935
Phycor, Inc. ........... Nasdaq Health Maintenance Organization 1,759.06 4% 0.1216730
Quorum Health Group,
Inc. .................. Nasdaq Hospital Management 1,291.42 4% 0.1428571
Renal Treatment Centers,
Inc. .................. NYSE Health--Specialty 683.50 4% 0.1361702
Tenet Healthcare
Corporation............ NYSE Hospital Management 4,476.70 4% 0.1893491
Total Renal Care
Holdings, Inc. ........ NYSE Health--Specialty 1,119.74 4% 0.0932945
United Healthcare
Corporation............ NYSE Health Maintenance Organization 6,657.24 4% 0.1126761
</TABLE>
The initial Multiplier relating to each Portfolio Security indicates the
number of shares of such Portfolio Security, given the market price of such
Portfolio Security, required to be included in the calculation of the Starting
Portfolio Value so that each Portfolio Security represents an equal percentage
of the Starting Portfolio Value. The price of each Portfolio Security used to
calculate the initial Multiplier relating to each such Portfolio Security was
the closing price of such Portfolio Security on the Pricing Date. The
respective Multipliers will remain constant for the term of the Securities
unless adjusted for certain corporate events, as described below.
ADJUSTMENTS TO THE MULTIPLIER AND PORTFOLIO
The Multiplier with respect to any Portfolio Security and the Portfolio will
be adjusted as follows:
1. If a Portfolio Security is subject to a stock split or reverse stock
split, then once such split has become effective, the Multiplier relating
to such Portfolio Security will be adjusted to equal the product of
S-18
<PAGE>
the number of shares issued with respect to one such share of such
Portfolio Security and the prior multiplier.
2. If a Portfolio Security is subject to a stock dividend (issuance of
additional shares of the Portfolio Security) that is given equally to all
holders of shares of the issuer of such Portfolio Security, then once the
dividend has become effective and such Portfolio Security is trading ex-
dividend, the Multiplier will be adjusted so that the new Multiplier shall
equal the former Multiplier plus the product of the number of shares of
such Portfolio Security issued with respect to one such share of such
Portfolio Security and the prior multiplier.
3. There will be no adjustments to the Multipliers to reflect cash
dividends or distributions paid with respect of a Portfolio Security other
than for Extraordinary Dividends as described below. A cash dividend with
respect to a Portfolio Security will be deemed to be an "Extraordinary
Dividend" if such dividend exceeds the immediately preceding non-
Extraordinary Dividend for such Portfolio Security by an amount equal to at
least 10% of the market price on the Portfolio Business Day preceding the
record day for the payment of such Extraordinary Dividend (the "ex-dividend
date"). If an Extraordinary Dividend occurs with respect to a Portfolio
Security, the Multiplier with respect to such Portfolio Security will be
adjusted on the ex-dividend date with respect to such Extraordinary
Dividend so that the new Multiplier will equal the product of (i) the then
current Multiplier, and (ii) a fraction, the numerator of which is the sum
of the Extraordinary Dividend Amount and the market price on the Trading
Day preceding the ex-dividend date, and the denominator of which is the
market price on the Trading Day preceding the ex-dividend date. The
"Extraordinary Dividend Amount" with respect to an Extraordinary Dividend
for a Portfolio Security will equal such Extraordinary Dividend minus the
amount of the immediately preceding non-Extraordinary Dividend for such
Portfolio Security.
4. If the issuer of a Portfolio Security is being liquidated or is
subject to a proceeding under any applicable bankruptcy, insolvency or
other similar law, such Portfolio Security will continue to be included in
the Portfolio so long as a market price for such Portfolio Security is
available. If a market price is no longer available for a Portfolio
Security for whatever reason, including the liquidation of the issuer of
such Portfolio Security or the subjection of the issuer of such Portfolio
Security to a proceeding under any applicable bankruptcy, insolvency or
other similar law, then the value of such Portfolio Security will equal
zero in connection with calculating the Portfolio Value and the Ending
Portfolio Value for so long as no market price is available, and no attempt
will be made to find a replacement stock or increase the value of the
Portfolio to compensate for the deletion of such Portfolio Security.
5. If the issuer of a Portfolio Security has been subject to a merger or
consolidation and is not the surviving entity or is nationalized, then a
value for such Portfolio Security will be determined at the time such
issuer is merged or consolidated or nationalized and will equal the last
available market price for such Portfolio Security and that value will be
constant for the remaining term of the Securities. At such time, no
adjustment will be made to the Multiplier of such Portfolio Security. The
Company may at its sole discretion increase such last available market
price to reflect payments or dividends of cash, securities or other
consideration to holders of such Portfolio Security in connection with such
a merger or consolidation which may not be reflected in such last available
market price.
6. If the issuer of a Portfolio Security issues to all of its
shareholders equity securities that are publicly traded of an issuer other
than the issuer of the Portfolio Security, then such new equity securities
will be added to the Portfolio as a new Portfolio Security. The Multiplier
for such new Portfolio Security will equal the product of the original
Multiplier with respect to the Portfolio Security for which the new
Portfolio Security is being issued (the "Original Portfolio Security") and
the number of shares of the new Portfolio Security issued with respect to
one share of the Original Portfolio Security.
No adjustments of any Multiplier of a Portfolio Security will be required
unless such adjustment would require a change of at least 1% in the Multiplier
then in effect. The Multiplier resulting from any of the
S-19
<PAGE>
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 Multiplier of any Portfolio
Security or to the Portfolio will be made other than those specified above,
however, the AMEX may at its discretion make adjustments to maintain the
economic intent of the Portfolio.
HISTORICAL INFORMATION
The following table sets forth the high and low market price during 1991,
1992, 1993, 1994, 1995 and 1996 through October 24, 1996, and the market price
on October 24, 1996. All market prices are rounded to the nearest one-sixty-
fourth dollar. The historical prices of the Portfolio Securities should not be
taken as an indication of future performance, and no assurance can be given
that the prices of the Portfolio Securities will increase sufficiently to
cause the beneficial owners of the Securities to receive a Supplemental
Redemption Amount in excess of zero.
<TABLE>
<CAPTION>
PORTFOLIO SECURITIES HIGH LOW LAST
-------------------- ------ ------ ------
<S> <C> <C> <C>
Amgen Inc.
1991...................................................... 38.000 9.422
1992...................................................... 39.125 24.625
1993...................................................... 35.875 15.500
1994...................................................... 30.125 17.375
1995...................................................... 59.750 28.063
1996...................................................... 65.500 51.500 62.625
Apria Healthcare Group Inc.
1991...................................................... * *
1992...................................................... 17.141 6.781
1993...................................................... 19.828 12.141
1994...................................................... 20.531 10.531
1995...................................................... 34.500 16.844
1996...................................................... 35.250 17.125 17.625
Baxter International Inc.
1991...................................................... 40.875 25.625
1992...................................................... 40.500 30.500
1993...................................................... 32.750 24.375
1994...................................................... 28.875 21.625
1995...................................................... 44.750 26.750
1996...................................................... 46.250 37.203 40.750
Beverly Enterprises
1991...................................................... 12.375 6.875
1992...................................................... 13.125 7.125
1993...................................................... 14.750 9.250
1994...................................................... 16.125 11.750
1995...................................................... 16.125 9.000
1996...................................................... 12.625 9.500 11.875
Biogen, Inc.
1991...................................................... 49.000 24.250
1992...................................................... 49.750 18.250
1993...................................................... 47.750 24.250
1994...................................................... 55.750 27.250
1995...................................................... 66.500 32.000
1996...................................................... 83.500 51.625 82.000
</TABLE>
S-20
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO SECURITIES HIGH LOW LAST
-------------------- ------ ------ ------
<S> <C> <C> <C>
Chiron Corporation
1991...................................................... 19.375 9.500
1992...................................................... 18.313 8.813
1993...................................................... 21.375 10.281
1994...................................................... 23.781 12.969
1995...................................................... 28.000 12.125
1996...................................................... 29.547 17.500 19.250
Columbia/HCA Healthcare Corporation
1991...................................................... 12.000 6.672
1992...................................................... 14.328 9.828
1993...................................................... 22.422 11.328
1994...................................................... 29.750 22.250
1995...................................................... 35.922 23.750
1996...................................................... 39.000 32.172 35.500
Emcare Holdings Inc.
1991...................................................... * *
1992...................................................... * *
1993...................................................... * *
1994...................................................... 14.750 11.000
1995...................................................... 27.375 13.125
1996...................................................... 36.625 21.250 26.625
Genzyme Corporation
1991...................................................... 24.766 11.446
1992...................................................... 32.563 15.914
1993...................................................... 24.649 12.338
1994...................................................... 18.852 11.750
1995...................................................... 35.024 13.625
1996...................................................... 38.000 22.000 24.250
Genesis Health Ventures, Inc.
1991...................................................... 8.500 4.500
1992...................................................... 11.328 4.172
1993...................................................... 16.078 7.672
1994...................................................... 21.328 14.500
1995...................................................... 25.000 16.922
1996...................................................... 32.875 22.500 23.875
Health Management Associates, Inc.
1991...................................................... 5.266 2.141
1992...................................................... 5.656 3.703
1993...................................................... 8.672 3.109
1994...................................................... 11.859 8.000
1995...................................................... 18.000 10.438
1996...................................................... 25.000 17.250 23.125
Healthsource, Inc.
1991...................................................... 5.453 2.750
1992...................................................... 9.563 4.000
1993...................................................... 38.750 13.375
1994...................................................... 21.125 12.750
1995...................................................... 36.000 15.125
1996...................................................... 40.125 11.000 11.625
</TABLE>
S-21
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO SECURITIES HIGH LOW LAST
-------------------- ------ ------ ------
<S> <C> <C> <C>
Healthsouth Corporation
1991...................................................... 17.578 7.328
1992...................................................... 18.625 7.625
1993...................................................... 13.188 6.063
1994...................................................... 19.688 11.688
1995...................................................... 32.375 16.375
1996...................................................... 39.625 27.375 38.500
Humana Inc.
1991...................................................... 12.500 8.109
1992...................................................... 10.516 6.063
1993...................................................... 19.125 6.125
1994...................................................... 25.375 15.750
1995...................................................... 28.000 17.000
1996...................................................... 28.750 15.625 19.000
Johnson & Johnson
1991...................................................... 29.063 16.344
1992...................................................... 29.344 21.500
1993...................................................... 25.188 17.813
1994...................................................... 28.250 18.000
1995...................................................... 46.188 26.813
1996...................................................... 53.125 41.875 48.625
Medpartners/Mullikin, Inc.
1991...................................................... * *
1992...................................................... * *
1993...................................................... * *
1994...................................................... * *
1995...................................................... 34.500 14.750
1996...................................................... 36.000 16.625 23.250
Neuromedical Systems, Inc.
1991...................................................... * *
1992...................................................... * *
1993...................................................... * *
1994...................................................... * *
1995...................................................... 21.500 18.375
1996...................................................... 26.500 11.375 18.500
Olsten Corporation
1991...................................................... 11.109 4.781
1992...................................................... 17.891 10.438
1993...................................................... 21.328 14.672
1994...................................................... 25.922 18.750
1995...................................................... 28.172 18.828
1996...................................................... 33.000 22.250 23.000
Oxford Health Plans, Inc.
1991..................................................... 3.063 1.719
1992..................................................... 7.094 3.375
1993..................................................... 14.000 3.906
1994..................................................... 20.875 9.875
1995..................................................... 41.875 19.250
1996..................................................... 52.250 31.063 45.875
</TABLE>
S-22
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO SECURITIES HIGH LOW LAST
-------------------- ------ ------ ------
<S> <C> <C> <C>
Phycor, Inc.
1991...................................................... * *
1992...................................................... 5.109 2.438
1993...................................................... 9.188 4.000
1994...................................................... 12.438 7.484
1995...................................................... 34.000 10.891
1996...................................................... 40.750 26.172 32.875
Quorum Health Group, Inc.
1991...................................................... * *
1992...................................................... * *
1993...................................................... * *
1994...................................................... 22.750 16.250
1995...................................................... 23.875 17.250
1996...................................................... 28.000 22.625 28.000
Renal Treatment Centers, Inc.
1991...................................................... * *
1992...................................................... * *
1993...................................................... 11.000 5.500
1994...................................................... 12.875 5.750
1995...................................................... 23.500 10.375
1996...................................................... 34.000 20.063 29.375
Tenet Healthcare Corporation
1991...................................................... 51.625 12.625
1992...................................................... 18.125 9.625
1993...................................................... 14.500 6.500
1994...................................................... 19.500 12.500
1995...................................................... 20.750 13.375
1996...................................................... 22.875 18.375 21.125
Total Renal Care Holdings, Inc.
1991...................................................... * *
1992...................................................... * *
1993...................................................... * *
1994...................................................... * *
1995...................................................... 30.000 17.375
1996...................................................... 46.125 27.375 42.875
United Healthcare Corporation
1991...................................................... 19.563 5.000
1992...................................................... 29.188 17.125
1993...................................................... 39.375 20.000
1994...................................................... 55.375 37.250
1995...................................................... 65.625 34.125
1996...................................................... 67.375 31.000 35.500
</TABLE>
- --------
* No shares of the issuer were outstanding during the year
S-23
<PAGE>
HYPOTHETICAL HISTORICAL PORTFOLIO VALUES
The following table and graph set forth hypothetical Portfolio Values on the
last business day of each month from December 31, 1990 through September 30,
1996 (the "Historical Portfolio Values"). Except as described below, the
Historical Portfolio Values were calculated on the same basis as the Portfolio
Value will be calculated in the future. The Historical Portfolio Value of 100
corresponding to December 31, 1990 was set to provide an illustration of past
movements of the Historical Portfolio Value only. The Multiplier for each
Portfolio Security was initially set so that the Starting Portfolio Value
equaled 100 on the Pricing Date. The Historical Portfolio Value at any given
prior date was equal to the sum of the products of the then current market
prices for the relevant Portfolio Securities on the last business day of the
respective month and the applicable Multipliers. For months during which one
or more of the Portfolio Securities were not outstanding and publicly traded,
the Historical Portfolio Value was calculated based upon the values of the
remaining Portfolio Securities that were then publicly traded. The Multipliers
with respect to the remaining publicly traded Portfolio Securities were
adjusted to reflect the increased weighting of each such remaining Portfolio
Security. Only 13 of the 25 Portfolio Securities were outstanding during the
entire period illustrated below.
Historical Multipliers and the Portfolio were subject to the same
adjustments, as reported by securities pricing sources, as Multipliers will be
subject to described under "Description of Securities--Adjustments to the
Multiplier and Portfolio".
THE EXPERIENCE OF THE HISTORICAL PORTFOLIO VALUES SHOULD NOT BE TAKEN AS AN
INDICATION OF FUTURE PERFORMANCE OF THE PORTFOLIO VALUE AND NO ASSURANCE CAN
BE GIVEN THAT THE VALUE OF THE PORTFOLIO VALUE WILL NOT DECLINE AND THEREBY
RESULT IN REPAYMENT OF ONLY $10 FOR EACH $10 PRINCIPAL AMOUNT OF SECURITIES TO
BENEFICIAL OWNERS OF THE SECURITIES AT MATURITY OR OTHERWISE.
S-24
<PAGE>
<TABLE>
<CAPTION>
DATE HISTORICAL PORTFOLIO VALUE
---- --------------------------
<S> <C>
1990
December...................................... 100.000
1991
January....................................... 109.854
February (1).................................. 118.284
March......................................... 132.093
April (2)..................................... 127.162
May........................................... 132.499
June (3)...................................... 119.397
July.......................................... 130.635
August (4).................................... 133.196
September..................................... 134.633
October....................................... 137.691
November...................................... 123.893
December...................................... 146.715
1992
January (5)................................... 142.241
February (6).................................. 133.483
March......................................... 128.114
April......................................... 124.105
May........................................... 127.349
June.......................................... 121.077
July.......................................... 133.613
August........................................ 122.541
September..................................... 123.934
October....................................... 131.769
November...................................... 143.606
December...................................... 149.938
1993
January....................................... 142.919
February...................................... 122.025
March......................................... 118.199
April......................................... 122.351
May........................................... 131.695
June.......................................... 135.684
July (7)...................................... 132.661
August........................................ 130.851
September..................................... 139.391
October....................................... 146.692
November...................................... 149.603
December...................................... 164.950
1994
January....................................... 180.859
February...................................... 178.347
March......................................... 167.579
April......................................... 171.468
May (8)....................................... 177.093
June.......................................... 161.955
July.......................................... 171.998
</TABLE>
S-25
<PAGE>
<TABLE>
<CAPTION>
DATE HISTORICAL PORTFOLIO VALUE
---- --------------------------
<S> <C>
August........................................ 191.966
September..................................... 200.434
October....................................... 201.286
November...................................... 188.093
December (9).................................. 196.014
1995
January....................................... 199.642
February (10)................................. 202.488
March......................................... 216.728
April......................................... 203.469
May........................................... 197.263
June.......................................... 201.418
July.......................................... 220.261
August........................................ 229.133
September..................................... 248.532
October (11).................................. 246.244
November...................................... 274.622
December (12)................................. 287.025
1996
January....................................... 301.713
February...................................... 302.948
March......................................... 298.738
April......................................... 302.689
May........................................... 290.284
June.......................................... 273.076
July.......................................... 236.589
August........................................ 258.257
September..................................... 267.749
</TABLE>
- --------
(1) Health Management Associates, Inc. was included in the calculation of the
Historical Portfolio Value commencing this month.
(2) Healthsource, Inc. was included in the calculation of the Historical
Portfolio Value commencing this month.
(3) Genesis Health Ventures, Inc. was included in the calculation of the
Historical Portfolio Value commencing this month.
(4) Oxford Health Plans, Inc. was included in the calculation of the
Historical Portfolio Value commencing this month.
(5) Phycor, Inc. was included in the calculation of the Historical Portfolio
Value commencing this month.
(6) Apria Healthcare Group Inc. was included in the calculation of the
Historical Portfolio Value commencing this month.
(7) Renal Treatment Centers, Inc. was included in the calculation of the
Historical Portfolio Value commencing this month.
(8) Quorum Health Group, Inc. was included in the calculation of the
Historical Portfolio Value commencing this month.
(9) Emcare Holdings Inc. was included in the calculation of the Historical
Portfolio Value commencing this month.
(10) Medpartners/Mullikin, Inc. was included in the calculation of the
Historical Portfolio Value commencing this month.
(11) Total Renal Care Holdings, Inc. was included in the calculation of the
Historical Portfolio Value commencing this month.
(12) Neuromedical Systems, Inc. was included in the calculation of the
Historical Portfolio Value commencing this month.
S-26
<PAGE>
The following graph sets forth the hypothetical Historical Portfolio Values
on the last business day of each month from December 1990 through September
1996. Past movements of the Historical Portfolio Values are not necessarily
indicative of future movements of the Portfolio Value.
[The graph sets forth the hypothetical Historical Portfolio Values on the last
business day of each month from December 1990 through September 1996 with the
vertical axis specifying the hypothetical month-end closing levels of the
Portfolio in a range from 0 to 350 in increments of 50 and the horizontal axis
specifying the time period in increments of three months from December 1990 to
September 1996.]
The closing hypothetical Historical Portfolio Value on October 24, 1996 was
255.482.
S-27
<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, 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, 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
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, which
apply to debt instruments issued on or after August 13, 1996 and, accordingly,
will apply to the Securities. In general, the Final Regulations cause the
timing and character of income, gain or loss reported
S-28
<PAGE>
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. 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 is 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, solely for purposes of applying the Final Regulations 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 $3.8425 per Unit.
This represents an estimated yield on the Securities equal to 6.61% per annum
(compounded semiannually). Accordingly, during the term of the Securities, a
U.S. Holder of a Security will 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
holds such Security. The amount of interest that will be deemed to accrue in
any accrual period (i.e., generally each six month period during which the
Securities are outstanding) will 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 will 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 will 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 Supplemental Redemption Amount,
if any, exceeds $3.8425 per Unit, a U.S. Holder will be required to include
the excess of the Supplemental Redemption Amount over $3.8425 per Unit in
income as ordinary interest on the maturity date. Alternatively, in the event
that the Supplemental Redemption Amount, if any, is less than $3.8425 per
Unit, the excess of $3.8425 per Unit over the Supplemental Redemption Amount
will be treated first as an offset to any interest otherwise includible in
income by the U.S. Holder with respect to the Security for the taxable year in
which the maturity date occurs to the extent of the amount of such includible
interest. A U.S. Holder will 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
$3.8425 per Unit over the Supplemental Redemption 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 will 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 will 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 will be
treated as ordinary income. Any such taxable loss generally will be treated as
ordinary loss to the extent of the U.S. Holder's total interest inclusions on
the Security. Any remaining loss generally will be treated as long-term or
short-term capital loss (depending upon the U.S. Holder's holding period for
the Security). All amounts includible in income by a U.S. Holder as ordinary
interest pursuant to the Final Regulations will be treated as 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,
which is not expected to be the case, 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. In such event, if a U.S. Holder
purchases a Security for an amount equal to the principal amount thereof, the
amount of the difference between the principal amount of the Securities and
the issue price thereof generally should be allocated by the U.S. Holder to
daily
S-29
<PAGE>
portions of interest that are deemed to accrue on each such date as an offset
to such interest on each such date. In addition, on each such date, the U.S.
Holder's adjusted tax basis in the Security will be reduced by the amount
treated as an interest offset pursuant to the foregoing rule. Alternatively,
in the event that the issue price of the Securities, as determined for United
States Federal income tax purposes, equals the principal amount thereof and a
U.S. Holder purchases a Security for an amount that is less than the principal
amount thereof, the amount of the difference between the principal amount of
the Security and the amount paid by the U.S. Holder to purchase the Security
generally should be allocated by the U.S. Holder to daily portions of interest
that are deemed to accrue on each such date as additional ordinary interest
includible in income by the U.S. Holder on each such date. In such event, on
each such date, the U.S. Holder's adjusted tax basis in the Security will be
increased by the amount treated as additional ordinary interest income. In
addition, 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) will be subject to special rules providing for certain adjustments
to the foregoing rules 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 application of
the Final Regulations to their investment in the Securities. Investors in the
Securities may also obtain the projected payment schedule, as determined by
the Company for purposes of the application of the Final Regulations to the
Securities, by submitting a written request for such information to Merrill
Lynch & Co., Inc., Attn: Richard D. Kreuder, Office of the Corporate
Secretary, 100 Church Street, New York, New York 10080.
The projected payment schedule (including both the projected Supplemental
Redemption Amount and the estimated yield on the Securities) has been
determined solely for United States Federal income tax purposes (i.e., for
purposes of applying the Final Regulations to the Securities), and is not a
prediction of what the actual Supplemental Redemption Amount will be, or that
the actual Supplemental Redemption Amount will even exceed zero.
The following table sets forth the amount of interest that will be deemed to
have accrued with respect to each Unit of the Securities during each accrual
period over the term of the Securities based upon the projected payment
schedule for the Securities (including both the projected Supplemental
Redemption Amount and the estimated yield equal to 6.61% per annum (compounded
semiannually)) as determined by the Company for purposes of the application of
the Final Regulations to the Securities:
S-30
<PAGE>
<TABLE>
<CAPTION>
TOTAL INTEREST DEEMED
TO HAVE ACCRUED ON
INTEREST DEEMED TO SECURITIES AS OF END
ACCRUE DURING ACCRUAL OF ACCRUAL PERIOD
ACCRUAL PERIOD PERIOD (PER UNIT) (PER UNIT)
-------------- --------------------- ---------------------
<S> <C> <C>
October 30, 1996 through
April 30, 1997............... $0.3305 $0.3305
May 1, 1997 through
October 31, 1997............. $0.3414 $0.6719
November 1, 1997 through
April 30, 1998............... $0.3527 $1.0246
May 1, 1998 through
October 31, 1998............. $0.3644 $1.3890
November 1, 1998 through
April 30, 1999............... $0.3764 $1.7654
May 1, 1999 through
October 31, 1999............. $0.3888 $2.1542
November 1, 1999 through
April 30, 2000............... $0.4017 $2.5559
May 1, 2000 through
October 31, 2000............. $0.4150 $2.9709
November 1, 2000 through
April 30, 2001............... $0.4287 $3.3996
May 1, 2001 through
October 31, 2001............. $0.4429 $3.8425
</TABLE>
--------
Projected Supplemental Redemption Amount = $3.8425 per Unit
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.
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.
S-31
<PAGE>
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.
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 $15,000,000 aggregate
principal amount of Securities. The Underwriting Agreement provides that the
obligations of the Underwriter are subject to certain conditions precedent and
that the Underwriter will be obligated to purchase all of the Securities if
any are purchased.
The Underwriter has advised the Company that it proposes initially to offer
all or part of the Securities directly to the public at the offering price set
forth on the cover page of this Prospectus Supplement. After the initial
public offering, the public offering price 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-32
<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.
---------------
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 Portfolio.............................................................. S-17
Certain United States Federal Income Tax Considerations.................... S-28
Use of Proceeds............................................................ S-32
Underwriting............................................................... S-32
Validity of Securities..................................................... S-32
PROSPECTUS
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.................................................................... 19
</TABLE>
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[LOGO]
1,500,000 UNITS
MERRILL LYNCH & CO., INC.
HEALTHCARE/BIOTECHNOLOGY
PORTFOLIO MARKET INDEX
TARGET-TERM SECURITIES SM
DUE OCTOBER 31, 2001
"MITTS(R)"
----------------------
PROSPECTUS SUPPLEMENT
----------------------
MERRILL LYNCH & CO.
OCTOBER 24, 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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