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RULE NO. 424(b)(5)
REGISTRATION NO. 33-
PRICING SUPPLEMENT
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(TO PROSPECTUS SUPPLEMENT AND PROSPECTUS, EACH DATED JULY 7, 1997)
$21,235,000
MERRILL LYNCH & CO., INC.
MEDIUM-TERM NOTES, SERIES B
3.125% CALLABLE STOCK LINKED NOTES DUE JANUARY 22, 2005
(LINKED TO THE PERFORMANCE OF CHUBB COMMON STOCK)
Principal Amount: $21,235,000
Interest Rate: 3.125%
Interest Payment Dates: May 15 and November 15 of each year, and at Maturity
Stated Maturity Date: January 22, 2005
Redemption: The Notes may be redeemed at the option of the
Company, in whole or in part, upon notice given by
the Company not more than 10 nor less than 5 days
prior to any Redemption Date.
Initial Redemption Date: January 22, 2000
Redemption Price: 100% of the Principal Amount thereof, plus accrued
and unpaid interest thereon and the Supplemental
Redemption Amount, if any.
Other Provisions:
The 3.125% Callable Stock Linked Notes due January 22, 2005 are Fixed Rate
Notes as described in the attached Prospectus Supplement dated July 7, 1997 with
other provisions as described herein.
At the Stated Maturity, or upon earlier redemption, investors will receive the
principal amount of their Notes plus a Supplemental Redemption Amount. The
Supplemental Redemption Amount will be based on the percentage increase, if any,
in the price of the common stock, par value $1.00 per share, of Chubb
Corporation (or any Successor Company) (the "Chubb Common Stock") above a
Benchmark Stock Value of $97.15, which is 125% of the Starting Stock Value of
$77.72. The Supplemental Redemption Amount may be zero, but will not be less
than zero.
BEFORE YOU DECIDE TO INVEST IN THE SECURITIES, CAREFULLY READ THIS PROSPECTUS
SUPPLEMENT AND PROSPECTUS, ESPECIALLY THE RISK FACTORS BEGINNING ON PAGE S-3.
We expect that the Notes will be ready for delivery in book-entry form only
through the facilities of DTC on or about January 28, 1998.
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MERRILL LYNCH & CO.
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The date of this Prospectus Supplement is January 22, 1998.
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HEDGING
The Company has entered into hedging arrangements related to the Chubb Common
Stock with an affiliate of the Company, in connection with the Company's
obligations under the Notes. In connection therewith, such affiliate has
purchased shares of Chubb Common Stock in secondary market transactions at or
before the time of the pricing of the Notes.
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RISK FACTORS
Your investment in the Notes will involve certain risks. For example, there is
the risk that you might not earn a return on your investment in excess of the
return you realize because of the fixed interest rate, and the risk that you
will be unable to sell your Notes prior to their maturity. You should carefully
consider the following discussion of risks before deciding whether an investment
in the Notes is suitable for you.
THE SUPPLEMENTAL REDEMPTION AMOUNT.
The Benchmark Stock Value exceeds the Starting Stock Value by 25%. You should
be aware that if the Ending Stock Value does not exceed the Starting Stock Value
by more than 25% at maturity, the Supplemental Redemption Amount will be zero.
This will be true even if the value of the Chubb Common Stock was higher than
the Benchmark Stock Value at some time during the life of the Notes but later
falls below the Benchmark Stock Value. If the Supplemental Redemption Amount is
zero, we will pay you only the principal amount of your Notes.
YOUR YIELD MAY BE LOWER THAN THE YIELD ON A STANDARD DEBT SECURITY OF COMPARABLE
MATURITY.
The amount we pay you at maturity may, in addition to the payments of the
fixed interest, be less than the return you could earn on other investments.
Your yield may be less than the yield you would earn if you bought a standard
senior callable debt security of the Company with the same maturity date. Your
investment may not reflect the full opportunity cost to you when you consider
the effect of factors that affect the time value of money.
YOUR RETURN WILL NOT REFLECT THE PAYMENT OF DIVIDENDS.
The calculation of the Starting Stock Value, Benchmark Stock Value and Ending
Stock Value does not take into consideration the value of dividends paid on the
Chubb Common Stock. Therefore, the return you earn on the Notes, if any, will
not be the same as the return that you would earn if you actually owned the
Chubb Common Stock and received the dividends paid on that stock.
UNCERTAIN TRADING MARKET.
We will apply to have the Notes listed on the NYSE. There is no precedent to
indicate how the Notes will trade in the secondary market. You cannot assume
that a trading market will develop for the Notes. If such a trading market does
develop, there can be no assurance that there will be liquidity in the trading
market. The development of a trading market for the Notes will depend on the
financial performance of the Company, and other factors such as the
appreciation, if any, of the price of the Chubb Common Stock.
If the trading market for the Notes is limited, there may be a limited number
of buyers when you decide to sell your Notes if you do not wish to hold your
investment until maturity. This may affect the price you receive.
FACTORS AFFECTING TRADING VALUE OF THE NOTES.
We believe that the market value of the Notes will be affected by the price of
the Chubb Common Stock and by a number of other factors. Some of these factors
are interrelated in complex ways; as a result, the effect of any one factor may
be offset or magnified by the effect of another factor. The following paragraphs
describe the expected impact on the market value of the Notes given a change in
a specific factor, assuming all other conditions remain constant.
. CHUBB COMMON STOCK VALUE. We expect that the market value of the Notes
will depend substantially on the amount by which the price of the Chubb
Common Stock exceeds the Benchmark Stock Value. If you choose to sell your
Notes when the price of the Chubb Common Stock exceeds the Benchmark Stock
Value, you may receive substantially less than the amount that would be
payable at maturity based on the then current Chubb Common Stock price
because of the expectation that the price of the Chubb Common Stock will
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continue to fluctuate until the Ending Stock Value is determined. If you
choose to sell your Notes when the price of the Chubb Common Stock is
below the Benchmark Stock Value, you may receive less than the $1,000
principal amount per Note. In general, rising dividend rates (i.e.,
dividends per share) on the Chubb Common Stock may increase the price of
the Chubb Common Stock while falling dividend rates may decrease the price
of the Chubb Common Stock. Political, economic and other developments may
also affect the price of the Chubb Common Stock and the value of the
Notes.
. INTEREST RATES. We expect that the trading value of the Notes will be
affected by changes in interest rates. In general, if U.S. interest rates
increase, we expect that the trading value of the Notes will decrease. If
U.S. interest rates decrease, we expect the trading value of the Notes
will increase. However, interest rates may also affect the economy and,
in turn, the price of the Chubb Common Stock. Rising interest rates may
lower the price of the Chubb Common Stock and the Notes. Falling interest
rates may increase the value of the Chubb Common Stock and the value of
the Notes.
. VOLATILITY OF THE CHUBB COMMON STOCK. Volatility is the term used to
describe the size and frequency of market fluctuations. If the volatility
of the price of Chubb Common Stock increases, we expect that the trading
value of the Notes will increase. If the volatility of the price of Chubb
Common Stock decreases, we expect that the trading value of the Notes will
decrease.
. TIME REMAINING TO MATURITY. The Notes may trade at a value above that
which would be expected based on the level of interest rates and the price
of the Chubb Common Stock. This difference will reflect a "time premium"
due to expectations concerning the price of the Chubb Common Stock during
the period prior to maturity of the Notes. However, as the time remaining
to maturity of the Notes decreases, we expect that this time premium will
decrease, lowering the trading value of the Notes.
. DIVIDEND YIELD. If the dividend yield on the Chubb Common Stock
increases, we expect that the value of the Notes will decrease.
Conversely, if the dividend yield on the Chubb Common Stock decreases, we
expect that the value of the Notes will increase.
. COMPANY CREDIT RATINGS. Real or anticipated changes in the Company's
credit ratings may affect the market value of the Notes.
It is important for you to understand that the impact of one of the factors
specified above, such as an increase in interest rates, may offset some or all
of any increase in the trading value of the Notes attributable to another
factor, such as an increase in the Chubb Common Stock price.
In general, assuming all relevant factors are held constant, we expect that
the effect on the trading value of the Notes of a given change in most of the
factors listed above will be less if it occurs later in the term of the Notes
than if it occurs earlier in the term of the Notes except that we expect that
the effect on the trading value of the Notes of a given increase in the value of
the Chubb Common Stock will be greater if it occurs later in the term of the
Notes than if it occurs earlier in the term of the Notes.
NO STOCKHOLDER'S RIGHTS
Beneficial owners of the Notes will not be entitled to any rights with respect
to the Chubb Common Stock (including, without limitation, voting rights and
rights to receive any dividends or other distributions in respect thereof).
NO AFFILIATION BETWEEN THE COMPANY AND CHUBB CORPORATION
The Company has no affiliation with Chubb Corporation, and Chubb Corporation
has no obligations with respect to the Notes or amounts to be paid to beneficial
owners thereof, including any obligation to take the needs of the Company or of
beneficial owners of the Notes into consideration for any reason. Chubb
Corporation will not receive any of the proceeds of the offering of the Notes
made hereby and is not responsible for, and has not participated in, the
determination or calculation of the amount receivable by beneficial owners of
the Notes at maturity or upon earlier redemption. Chubb
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Corporation is not involved with the administration or trading of the Notes and
has no obligations with respect to the amount receivable by beneficial owners of
the Notes or upon earlier redemption.
STATE LAW LIMITS ON INTEREST PAID.
New York State laws govern the 1983 Indenture, as hereinafter defined. New
York has certain usury laws that limit the amount of interest that can be
charged and paid on loans, which includes debt securities like the Notes. 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 debt securities in which $2,500,000
or more has been invested.
While we believe that New York law would be given effect by a state or Federal
court sitting outside of New York, many other states also have laws that
regulate the amount of interest that may be charged to and paid by a borrower.
We will promise, for the benefit of the Notes holders, to the extent permitted
by law, not to voluntarily claim the benefits of any laws concerning usurious
rates of interest.
PURCHASES AND SALES BY MERRILL LYNCH.
The Company, MLPF&S and other affiliates of the Company may from time to time
buy or sell the Chubb Common Stock for their own accounts for business reasons
or in connection with hedging the Company's obligations under the Notes. These
transactions could affect the price of such stocks and the value of the Chubb
Common Stock.
POTENTIAL CONFLICTS.
MLPF&S is a subsidiary of the Company, the issuer of the Notes. MLPF&S will
also act as Calculation Agent for the Notes. Under certain circumstances,
MLPF&S's role as a subsidiary of the Company and its responsibilities as
Calculation Agent for the Notes could give rise to conflicts of interests. You
should be aware that because the Calculation Agent is controlled by the Company,
potential conflicts of interest could arise.
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DESCRIPTION OF NOTES
GENERAL
At maturity or upon earlier redemption a beneficial owner of a Note will
receive the principal amount of such Note plus the Supplemental Redemption
Amount. See "Payment at Maturity" below.
The Notes may be redeemed at the option of the Company on or after January 22,
2000, in whole or in part in increments of $1,000, at a redemption price of 100%
of the principal amount thereof to be redeemed, plus accrued interest thereon to
but excluding the redemption date, plus a Supplemental Redemption Amount,
calculated as provided below, except that the Ending Stock Value shall equal the
Volume Weighted Average Price (as defined below) on the NYSE of Chubb Common
Stock on the Trading Day on which a Market Disruption Event does not occur,
immediately following the date the Company sends notice (the "Notice Day") to
the Holders of the Notes of the Company's intention to redeem the Notes;
provided however, that if no such day occurs prior to the second scheduled
Trading Day preceding the Redemption Date, the Ending Stock Value shall equal
the Volume Weighted Average Price on the second scheduled Trading Day
immediately preceding the Redemption Date regardless of the occurrence of a
Market Disruption Event. If no Volume Weighted Average Price is available on
such date, the Calculation Agent will determine the Ending Stock Value using
then current market bid prices available for Chubb Common Stock and applying any
applicable dilution adjustments described below. The "Volume Weighted Average
Price" for any day shall be the volume weighted average price for the Chubb
Common Stock as reported on the relevant screen on Bloomberg for the period from
9:30 a.m. to 4:00 p.m. on the relevant date. If such value is not reported, the
Volume Weighted Average Price shall be determined by the Calculation Agent by
calculating, for each trade in Chubb Common Stock on such exchange from 9:30
a.m. to 4:00 p.m. on the relevant date, the product of the price per share paid
multiplied by the number of shares for such trade, and by adding all such
products and dividing such sum by the total number of shares traded on such
date.
Upon the occurrence of an Event of Default with respect to the Notes,
beneficial owners of the Notes may accelerate the maturity of the Notes, as
described under "Description of Notes" Events of Default and Acceleration" in
this Prospectus Supplement and "Description of Debt Notes" General Events of
Default" in the accompanying Prospectus.
The Notes are to be issued in denominations of $1,000.
PAYMENT AT MATURITY
General
At maturity, a beneficial owner of a Note will be entitled to receive the
principal amount thereof plus a Supplemental Redemption Amount, if any, all as
provided below. If the Ending Stock Value does not exceed the Benchmark Stock
Value, a beneficial owner of a Note will be entitled to receive only the
principal amount thereof.
Determination of the Supplemental Redemption Amount
The Supplemental Redemption Amount for a Note will be determined by the
Calculation Agent and will equal:
Principal Amount of such Note x Ending Stock Value - Benchmark Stock Value
------------------------------------------
Benchmark Stock Value
provided, however, that in no event will the Supplemental Redemption Amount be
less than zero.
The Starting Stock Value equals $77.72, which is the Volume Weighted Average
Price of Chubb Common Stock on the NYSE on January 21, 1998. The Benchmark
Stock Value equals $97.15, which is 125% of the Starting Stock Value. The
Ending Stock Value will be determined by the Calculation Agent and will equal
the Volume Weighted Average Price of the Chubb Common Stock on the NYSE on the
first Calculation Day in the Calculation Period. If no Calculation Days occur
during the Calculation Period, then the Ending Stock Value will equal the Volume
Weighted Average Price of the
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Chubb Common Stock on the NYSE determined on the last scheduled Calculation Day
in the Calculation Period, regardless of the occurrences of a Market Disruption
Event on such day. If no Volume Weighted Average Price is available on such
date, the Calculation Agent will determine the Ending Stock Value using then
current market bid prices available for Chubb Common Stock and applying any
applicable dilution adjustments described below. The "Calculation Period" means
the period from and including the fifth scheduled Calculation Day prior to the
maturity date to and including the second scheduled Calculation Day prior to the
maturity date. "Calculation Day" means any Trading Day during the Calculation
Period on which a Market Disruption Event has not occurred. "Trading Day" is a
day on which the Chubb Common Stock (A) is not suspended from trading on any
national or regional securities exchange or association or over-the-counter
market at the close of business and (B) has traded at least once on a national
or regional securities exchange or association or over-the-counter market that
is the primary market for the trading of the Chubb Common Stock. "Market
Disruption Event" means the occurrence or existence on any Business Day during
the one-half hour period that ends when the Volume Weighted Average Price is
determined, of any suspension of, or limitation imposed on, trading in the Chubb
Common Stock on the NYSE (or other market or exchange, if applicable).
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday that
is not a day on which banking institutions in The City of New York are
authorized or obligated by law to close and that is a trading day on the NYSE.
All determinations made by the Calculation Agent shall be at the sole discretion
of the Calculation Agent and, absent a determination by the Calculation Agent of
a manifest error, shall be conclusive for all purposes and binding on the
Company and beneficial owners of the Notes.
DILUTION ADJUSTMENTS
The Volume Average Weighted Price used to determine the Ending Stock Value,
including upon early redemption, are subject to adjustment if the Chubb Common
Stock shall: (i) pay a stock dividend or make a distribution with respect to the
Chubb Common Stock in shares of such stock; (ii) subdivide or split the
outstanding shares of the Chubb Common Stock into a greater number of shares;
(iii) combine the outstanding shares of the Chubb Common Stock into a smaller
number of shares; (iv) issue by reclassification of shares of the Chubb Common
Stock any shares of common stock of Chubb Corporation; (v) issue rights or
warrants to all holders of the Chubb Common Stock entitling them to subscribe
for or purchase shares of the Chubb Common Stock at a price per share less than
the then current market price of the Chubb Common Stock (other than rights to
purchase the Chubb Common Stock pursuant to a plan for the reinvestment of
dividends or interest); or (vi) pay a dividend or make a distribution to all
holders of the Chubb Common Stock of evidences of its indebtedness or other
assets (excluding any stock dividends or distributions referred to in clause (i)
above or any cash dividends other than any Extraordinary Cash Dividend (as
defined below)) or issue to all holders of the Chubb Common Stock rights or
warrants to subscribe for or purchase any of its securities (other than those
referred to in clause (v) above) (any of the foregoing are referred to as the
"Distributed Assets"). The effect of the foregoing is that there will not be any
adjustments to the Ending Stock Value for the issuance by the issuer of the
Chubb Common Stock options, warrants, stock purchase rights or securities in
connection with the issuer of the Chubb Common Stock employee benefit plans.
An "Extraordinary Cash Dividend" means, with respect to any consecutive 12-
month period, all cash dividends on the Chubb Common Stock during such period to
the extent such dividends exceed on a per share basis 10% of the average closing
price of the Chubb Common Stock on the NYSE over such period (less any such
dividends for which a prior adjustment was previously made). All adjustments
will be calculated to the nearest 1/10,000th of a share of the Chubb Common
Stock (or if there is not a nearest 1/10,000th of a share to the next lower
1/10,000th of a share). No adjustment shall be required unless such adjustment
would require an increase or decrease of at least one percent in the Volume
Weighted Average Price; provided, however, that any adjustments which by reason
of the foregoing are not required to be made shall be carried forward and taken
into account in any subsequent adjustment.
In the event of (A) any consolidation or merger of Chubb Corporation, or any
surviving entity or subsequent surviving entity of Chubb Corporation (a
"Successor Company"), with or into another entity (other than a merger or
consolidation in which Chubb Corporation is the continuing corporation and in
which the Chubb Common Stock outstanding immediately prior to the merger or
consolidation is not exchanged for cash, securities or other property of Chubb
Corporation or another corporation), (B) any sale, transfer, lease or conveyance
to another corporation of the property of Chubb Corporation or any Successor
Company as an entirety or substantially as an entirety, (C) any statutory
exchange of securities of Chubb Corporation or any Successor Company with
another corporation (other than in connection with a merger or acquisition) or
(D) any liquidation, dissolution, winding up or bankruptcy of Chubb Corporation
or any Successor Company (any such event described in clause (A), (B), (C) or
(D), a "Reorganization Event"), the value of the Chubb Common Stock will be
adjusted to preserve the intended economic benefit of the Notes.
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The foregoing adjustments shall be made by MLPF&S, as Calculation Agent, and
all such adjustments shall be final.
No adjustments will be made for certain other events, such as offerings of
Chubb Common Stock by Chubb Corporation for cash or in connection with
acquisitions.
The Company will, within ten Business Days following the occurrence of an
event that requires an adjustment (or if the Company is not aware of such
occurrence, as soon as practicable after becoming so aware), provide written
notice to the Trustee and to the holders of the Notes of the occurrence of such
event and a statement in reasonable detail setting forth the adjusted Volume
Weighted Average Price used in determining the Ending Stock Value.
EVENTS OF DEFAULT AND ACCELERATION
In case an Event of Default with respect to any Notes shall have occurred and
be continuing, the amount payable to a beneficial owner of a Note upon any
acceleration permitted by the Notes, with respect to each $1,000 principal
amount thereof, will be equal to the Principal Amount plus accrued but unpaid
interest thereon to but excluding the date of early repayment, if applicable,
and the Supplemental Redemption Amount, if any, calculated as though the date of
early repayment were the stated maturity date of the Notes. See "Description of
Notes "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 Note may be limited, under Section 502(b)(2) of Title 11 of the
United States Code, to the principal amount of the Note plus an additional
amount of contingent interest calculated as though the date of the commencement
of the proceeding were the maturity date of the Notes.
In case of default in payment on any Interest Payment Date or at the maturity
date of the Notes (whether at their stated maturity or upon redemption or
acceleration), from and after the maturity date the Notes shall bear interest,
payable upon demand of the beneficial owners thereof, at the rate of 6.12% 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 Notes to the date payment of such amount has been made or duly provided
for. During such time, the stated Interest Rate shall not accrue.
THE CHUBB COMMON STOCK
CHUBB CORPORATION
Chubb Corporation, together with its subsidiaries and divisions, is a holding
company operating in the property and casualty insurance and real estate
development industries.
Chubb Corporation is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended. Accordingly, Chubb Corporation
files reports, proxy and other information statements and other information with
the Securities and Exchange Commission (the "Commission"). Information provided
to or filed with the Commission by Chubb Corporation is available at the offices
of the Commission specified under "Available Information" in the accompanying
Prospectus. The Company makes no representation or warranty as to the accuracy
or completeness of such reports.
THE COMPANY IS NOT AFFILIATED WITH CHUBB CORPORATION, AND CHUBB CORPORATION
HAS NO OBLIGATIONS WITH RESPECT TO THE NOTES. THIS PROSPECTUS SUPPLEMENT
RELATES ONLY TO THE NOTES OFFERED HEREBY AND DOES NOT RELATE TO THE CHUBB COMMON
STOCK OR OTHER NOTES OF CHUBB CORPORATION. THE INFORMATION CONTAINED IN THIS
PROSPECTUS SUPPLEMENT REGARDING CHUBB CORPORATION HAS BEEN DERIVED FROM THE
PUBLICLY AVAILABLE DOCUMENTS DESCRIBED IN THE PRECEDING PARAGRAPH. THE COMPANY
HAS NOT PARTICIPATED IN THE PREPARATION OF SUCH DOCUMENTS OR MADE ANY DUE
DILIGENCE INQUIRIES WITH RESPECT TO CHUBB CORPORATION IN CONNECTION WITH THE
OFFERING OF THE NOTES. THE COMPANY MAKES NO REPRESENTATION THAT SUCH PUBLICLY
AVAILABLE DOCUMENTS OR ANY OTHER PUBLICLY AVAILABLE INFORMATION REGARDING CHUBB
CORPORATION ARE ACCURATE OR COMPLETE. FURTHERMORE, THERE CAN BE NO ASSURANCE
THAT ALL EVENTS OCCURRING PRIOR TO THE DATE HEREOF (INCLUDING EVENTS THAT WOULD
AFFECT THE ACCURACY OR COMPLETENESS OF THE PUBLICLY AVAILABLE DOCUMENTS
DESCRIBED IN THE PRECEDING PARAGRAPH) THAT WOULD AFFECT
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THE TRADING PRICE OF THE CHUBB COMMON STOCK (AND THEREFORE THE TRADING PRICE OF
THE NOTES) HAVE BEEN PUBLICLY DISCLOSED. SUBSEQUENT DISCLOSURE OF ANY SUCH
EVENTS OR THE DISCLOSURE OF OR FAILURE TO DISCLOSE MATERIAL FUTURE EVENTS
CONCERNING CHUBB CORPORATION COULD AFFECT THE SUPPLEMENTAL REDEMPTION AMOUNT TO
BE RECEIVED AT MATURITY AND THEREFORE THE TRADING VALUE OF THE NOTES.
HISTORICAL DATA ON THE CHUBB COMMON STOCK
The Chubb Common Stock is listed on the NYSE under the symbol "CB". The
following table sets forth, for the periods indicated, the high and low sales
prices of the Chubb Common Stock, as reported on the NYSE Composite Tape, for
each quarter since January 1, 1993. These historical data on the Chubb Common
Stock are not necessarily indicative of the future performance of the Chubb
Common Stock or what the value of the Notes may be. Any historical upward or
downward trend in the level of the Chubb Common Stock during any period set
forth below is not any indication that the Chubb Common Stock is more or less
likely to increase or decrease at any time during the term of the Notes.
PERIOD LOW HIGH
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1993
First Quarter............................. $42.1875 $47.8750
Second Quarter............................ $40.3750 $47.8125
Third Quarter............................. $42.0625 $46.3750
Fourth Quarter............................ $38.3125 $41.8750
1994
First Quarter............................. $35.9375 $41.5625
Second Quarter............................ $36.0625 $41.3125
Third Quarter............................. $34.7500 $39.2500
Fourth Quarter............................ $34.4375 $49.2500
1995
First Quarter............................. $38.2500 $40.5000
Second Quarter............................ $38.7500 $42.5625
Third Quarter............................. $39.1250 $48.4375
Fourth Quarter............................ $44.9375 $50.2500
1996
First Quarter............................. $46.9375 $52.1250
Second Quarter............................ $44.1250 $49.8750
Third Quarter............................. $41.3750 $50.0000
Fourth Quarter............................ $45.5000 $55.5000
1997
First Quarter............................. $53.0000 $62.2500
Second Quarter............................ $51.2500 $67.6250
Third Quarter............................. $65.5625 $71.7500
Fourth Quarter............................ $65.8750 $78.1250
1998
First Quarter (through January 21, 1998).. $71.0000 $78.2500
On January 21, 1998, the last reported sale price of the Chubb Common Stock on
the NYSE was $78 per share.
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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 Notes. 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 Notes held as
capital assets and does not purport to deal with persons in special tax
situations, such as financial institutions, insurance companies, regulated
investment companies, dealers in securities or currencies, tax-exempt entities,
persons holding Notes in a tax-deferred or tax-advantaged account, or persons
holding Notes as a hedge against currency risks, as a position in a "straddle"
or as part of a "hedging" or "conversion" transaction 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 Notes, as determined for United States Federal income tax
purposes, equals the principal amount thereof. Persons considering the purchase
of the Notes should consult their own tax advisors concerning the application of
the United States Federal income tax laws to their particular situations as well
as any consequences of the purchase, ownership and disposition of the Notes
arising under the laws of any other taxing jurisdiction.
As used herein, the term "U.S. Holder" means a beneficial owner of a Note that
is for United States Federal income tax purposes (a) a citizen or resident of
the United States, (b) a corporation, partnership or other entity created or
organized in or under the laws of the United States or of any political
subdivision thereof (other than a partnership that is not treated as a United
States person under any applicable Treasury regulations), (c) an estate the
income of which is subject to United States Federal income taxation regardless
of its source, (d) a trust, if a court within the United States is able to
exercise primary supervision over the administration of the trust and one or
more United States fiduciaries have the authority to control all substantial
decisions of the trust, or (e) any other person whose income or gain in respect
of a Note is effectively connected with the conduct of a United States trade or
business. Notwithstanding the preceding sentence, to the extent provided in
Treasury regulations, certain trusts in existence on August 20, 1996, and
treated as United States persons prior to such date that elect to continue to be
treated as United States persons also will be a U.S. Holder. As used herein, the
term "non-U.S. Holder" means a beneficial owner of a Note 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 Notes or securities with terms substantially
the same as the Notes. However, although the matter is not free from doubt,
under current law, each Note should be treated as a debt instrument of the
Company for United States Federal income tax purposes. The Company currently
intends to treat each Note 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 Notes.
Prospective investors in the Notes should be aware, however, that the IRS is not
bound by the Company's characterization of the Notes as indebtedness and the IRS
could possibly take a different position as to the proper characterization of
the Notes for United States Federal income tax purposes. The following
discussion of the principal United States Federal income tax consequences of the
purchase, ownership and disposition of the Notes is based upon the assumption
that each Note will be treated as a debt instrument of the Company for United
States Federal income tax purposes. If the Notes 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 Notes 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 Note could differ from the timing and character of income, gain or
loss recognized in respect of a Note had the Notes in fact been treated as debt
instruments of the Company for United States Federal income tax purposes.
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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 Notes, which apply to debt
instruments issued on or after August 13, 1996 and, accordingly, will apply to
the Notes. In general, the Final Regulations cause the timing and character of
income, gain or loss reported on a contingent payment debt instrument to
substantially differ from the timing and character of income, gain or loss
reported on a contingent payment debt instrument under general principles of
prior 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
Notes, the Company has determined that the projected payment schedule for the
Notes will consist of payment during the term of the Notes of the stated
semiannual interest payments at the rate of 3.125% per annum (the "Interest
Payments") and payment on the maturity date of the principal amount thereof and
a projected Supplemental Redemption Amount equal to $256.22 per Note (the
"Projected Supplemental Redemption Amount"). This represents an estimated yield
on the Notes equal to 6.12% per annum (compounded semiannually). Accordingly,
during the term of the Notes, a U.S. Holder of a Note will be required to
include in income as ordinary interest an amount equal to the sum of the daily
portions of interest on the Note 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 Note. The amount of interest that will be
deemed to accrue in any accrual period (i.e., generally each six-month period
during which the Notes are outstanding) will equal the product of this estimated
yield (properly adjusted for the length of the accrual period) and the Note'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 Note's adjusted
issue price will equal the Note's issue price (i.e., $1,000), increased by the
interest previously accrued on the Note and reduced by the Interest Payments
made on the Note. At maturity of a Note, in the event that the actual
Supplemental Redemption Amount, if any, exceeds $256.22 per Note (i.e., the
Projected Supplemental Redemption Amount), a U.S. Holder will be required to
include the excess of the actual Supplemental Redemption Amount over $256.22 per
Note (i.e., the Projected Supplemental Redemption Amount) in income as ordinary
interest on the maturity date. Alternatively, in the event that the actual
Supplemental Redemption Amount, if any, is less than $256.22 per Note (i.e., the
Projected Supplemental Redemption Amount), the amount by which the Projected
Supplemental Redemption Amount (i.e., $256.22 per Note) exceeds the actual
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
Note for the taxable year in which the maturity date occurs to the extent of the
amount of such includible interest. Further, 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
Projected Supplemental Redemption Amount (i.e., $256.22 per Note) in excess of
the actual Supplemental Redemption Amount that is not treated as an interest
offset pursuant to the foregoing rules. A U.S. Holder will not be taxed on the
receipt of the Interest Payments. U.S. Holders purchasing a Note at a price
that differs from the adjusted issue price of the Note 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.
Upon the sale, exchange or redemption of a Note 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, exchange or redemption and the U.S. Holder's adjusted tax basis
in the Note as of the date of disposition or redemption. A U.S. Holder's
adjusted tax basis in a Note generally will equal such U.S. Holder's initial
investment in the Note increased by any interest previously included in income
with respect to the Note by the U.S. Holder, and decreased by any Interest
Payments received by the U.S. Holder. Any such taxable gain will be treated as
ordinary income. Any such taxable loss will be treated as ordinary loss to the
extent of the U.S. Holder's total interest inclusions on the Note. Any remaining
loss generally will be treated as long-term, mid-term or short-term capital loss
(depending upon the U.S. Holder's holding period for the Note). 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.
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Prospective investors in the Notes should consult their own tax advisors
concerning the application of the Final Regulations to their investment in the
Notes. Investors in the Notes may also obtain the projected payment schedule, as
determined by the Company for purposes of the application of the Final
Regulations to the Notes, by submitting a written request for such information
to Merrill Lynch & Co., Inc., Attn: Darryl W. Colletti, Corporate Secretary's
Office, 100 Church Street, 12th Floor, New York, New York 10080-6512.
The projected payment schedule (including both the Projected Supplemental
Redemption Amount and the estimated yield on the Notes) has been determined
solely for United States Federal income tax purposes (i.e., for purposes of
applying the Final Regulations to the Notes), and is neither a prediction nor a
guarantee 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 Note during each accrual period over a term of
seven years for the Notes based upon the projected payment schedule for the
Notes (including both the Projected Supplemental Redemption Amount and the
estimated yield equal to 6.12% per annum (compounded semiannually)) as
determined by the Company for purposes of the application of the Final
Regulations to the Notes.
TOTAL INTEREST
DEEMED TO HAVE
INTEREST ACCRUED ON
DEEMED TO NOTES AS OF END
ACCRUE DURING OF ACCRUAL
ACCRUAL PERIOD ACCRUAL PERIOD PERIOD
- ---------------------------------------- (PER NOTE) (PER NOTE)
--------------- ----------------
January 28, 1998 through July 22, 1998.. $29.75 $ 29.75
July 23, 1998 through January 22, 1999.. $31.05 $ 60.80
January 23, 1999 through July 22, 1999.. $31.52 $ 92.32
July 23, 1999 through January 22, 2000.. $32.00 $124.32
January 23, 2000 through July 22, 2000.. $32.50 $156.82
July 23, 2000 through January 22, 2001.. $33.02 $189.84
January 23, 2001 through July 22, 2001.. $33.55 $223.39
July 23, 2001 through January 22, 2002.. $34.10 $257.49
January 23, 2002 through July 22, 2002.. $34.67 $292.16
July 23, 2002 through January 22, 2003.. $35.25 $327.41
January 23, 2003 through July 22, 2003.. $35.85 $363.26
July 23, 2003 through January 22, 2004.. $36.47 $399.73
January 23, 2004 through July 22, 2004.. $37.11 $436.84
July 23, 2004 through January 22, 2005.. $37.76 $474.60
- --------------
Projected Supplemental Redemption Amount = $256.22 per Note.
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 Note, 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 (a) is signed by the beneficial owner
of the Note under penalties of perjury, (b) certifies that such owner is not a
U.S. Holder and (c) 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 Note is held
through a securities clearing organization or certain other financial
institutions, the organization or institution may provide
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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 Note 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 Note would have been effectively connected with the conduct by such
individual of a trade or business in the United States.
BACKUP WITHHOLDING
Backup withholding of United States Federal income tax at a rate of 31% may
apply to payments made in respect of the Notes 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 Notes 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 Note to (or through) a broker, the broker must
withhold 31% of the entire purchase price, unless either (a) the broker
determines that the seller is a corporation or other exempt recipient or (b) 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 (a) the broker determines that the seller is an
exempt recipient or (b) 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.
NEW WITHHOLDING REGULATIONS
On October 6, 1997, the Treasury Department issued new regulations (the "New
Regulations") which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New Regulations
attempt to unify certification requirements and modify reliance standards. The
New Regulations will generally be effective for payments made after December 31,
1998, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
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