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RULE NO. 424(b)(3)
REGISTRATION NO. 333-44173
PRICING SUPPLEMENT
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(To Prospectus Supplement dated March 12, 1998 and Prospectus dated January 29,
1998)
$10,000,000
MERRILL LYNCH & CO., INC.
MEDIUM-TERM NOTES, SERIES B
STOCK LINKED NOTES DUE NOVEMBER 28, 2003
(LINKED TO THE PERFORMANCE OF TELEBRAS RECEIPT)
Principal Amount: $10,000,000
Price to Public 100% of Principal Amount
Stated Maturity Date: November 28, 2003
Redemption Price: 100% of the Principal Amount thereof and the Supplemental
Redemption Amount, if any.
Other Provisions:
The Stock Linked Notes due November 28, 2003 (the "Notes") are Fixed Rate
Notes as described in the attached Prospectus Supplement dated March 12, 1998
with other provisions as described herein.
On the Stated Maturity Date, 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 an
American Depositary Receipt (the "Telebras Receipt") that trades on the New York
Stock Exchange ("NYSE") representing the common stock of Telecomunicacoes
Brasileiras S.A.-Telebras (or any Successor Company (as defined herein))
("Telebras") and the value of securities, cash or property received by the
holders of the Telebras Receipt over the term of the Notes above the Starting
Value of $111.4375, which is the Closing Price (as defined herein) of the
Telebras Receipt as of May 21, 1998. The Supplemental Redemption Amount may be
zero, but will not be less than zero nor greater than $1,000 per $1,000
principal amount of Notes. There will be no payments prior to the Stated
Maturity Date.
BEFORE YOU DECIDE TO INVEST IN THE SECURITIES, CAREFULLY READ THIS PRICING
SUPPLEMENT, THE 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 May 29, 1998.
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MERRILL LYNCH & CO.
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The date of this Pricing Supplement is May 27, 1998.
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HEDGING
Merrill Lynch & Co., Inc. (the "Company") has entered into hedging
arrangements related to the Telebras Receipt with an affiliate of the Company,
in connection with the Company's obligations under the Notes. In connection
therewith, such affiliate has purchased units of the Telebras Receipt 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 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.
You should be aware that if the Ending Value does not exceed the Starting
Value at maturity, the Supplemental Redemption Amount will be zero. This will
be true even if the value of the Telebras Receipt was higher than the Starting
Value at some time during the life of the Notes but later falls below the
Starting Value. If the Supplemental Redemption Amount is zero, we will pay you
only the principal amount of your Notes. You should also be aware that the
Ending Value used to calculate the Supplemental Redemption Amount will be
limited to the Cap Value, which equals 200% of the Starting Value. As a result,
the Supplement Redemption Amount will not exceed $1,000 per $1,000 principal
amount of 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 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 non-callable debt security of the Company with the
same stated 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.
Your return on the Notes will not reflect the same yield as you might realize
if you purchased the Telebras Receipt at the time of the issuance of the Notes
and held the Telebras Receipt, or any cash, securities and/or other property you
received from ownership of the Telebras Receipt, for the term of the Notes. The
calculation of the Starting Value and Ending Value does not take into
consideration the value of dividends paid on the Telebras Receipt or any
Reference Securities (as defined herein). 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 Telebras Receipt and received any dividends paid on the
common stock of Telebras or any other Reference Securities. In addition, if the
proposed reorganization of Telebras occurs, or if any other similar event occurs
with respect to a Reference Security, the Ending Value will reflect the effect
of any such event only if the adjustments described in "Description of
Notes Dilution and Reorganization Adjustments" account for such event.
UNCERTAIN TRADING MARKET.
We will apply to have the Notes listed on the American Stock Exchange
("AMEX"). 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
Reference Property.
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 Reference Property 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.
. REFERENCE PROPERTY VALUE. We expect that the market value of the Notes will
depend on the amount by which the value of the Reference Property differs
from the Starting Value. If you choose to sell your Notes when the
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value of the Reference Property exceeds the Starting Value, you may receive
substantially less than the amount that would be payable at the Stated
Maturity Date based on that Reference Property value because of the
expectation that the price of the Reference Property will continue to
fluctuate until the Ending Value is determined. If you choose to sell your
Notes when the value of the Reference Property is below, or not sufficiently
above, the Starting Value, you may receive less than the principal amount
per Note. As a general matter, a rising dividend rate (i.e., dividends per
share) on a Reference Security may increase the price of the Reference
Security while a falling dividend rate may decrease the price of the
Reference Security. Political, economic and other developments may also
affect the price of a Reference Security and the price of the Notes.
. INTEREST RATES. We expect that the trading value of the Notes will be
affected by changes in interest rates. As a general matter during the
earlier years of the Notes, if U.S. interest rates increase, we expect that
the trading value of the Notes will decrease and if U.S. interest rates
decrease, we expect the trading value of the Notes will increase. However,
interest rates in Brazil and the U.S. may also affect the economies of
Brazil and the U.S. and, in turn, the prices of the Reference Securities.
Rising interest rates may lower the prices of the Reference Securities and
the Notes. Falling interest rates may increase the prices of the Reference
Securities and the value of the Notes.
. VOLATILITY OF THE REFERENCE SECURITIES. Volatility is the term used to
describe the size and frequency of market fluctuations. If the volatility of
the Reference Securities increases, we expect that the trading value of the
Notes will increase. If the volatility of the Reference Securities
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
Reference Property. This difference will reflect a "time premium" due to
expectations concerning the price of the Telebras Receipt 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 Reference Security increases,
we expect that the value of the Notes will decrease. Conversely, if the
dividend yield on the Telebras Receipt 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 Reference Property value.
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 Reference Property will be greater if it occurs later in the term of the
Notes than if it occurs earlier in the term of the Notes.
AMERICAN DEPOSITARY RECEIPTS
The Telebras Receipt is an American Depositary Receipt ("ADR") representing
1,000 shares of common stock of Telebras. If Telebras is reorganized, the
Reference Property will be adjusted as described below to reflect certain
distributions of cash, securities and/or other property. Certain of the
Reference Securities distributed in any such reorganization may be ADRs. An ADR
is a negotiable receipt which is issued by a depositary, generally a bank,
representing shares, such as the common stock of Telebras, of a non-U.S. issuer
(the "Non-U.S. Issuer") that have been deposited and are held, on behalf of the
holders of the ADRs, at a custodian bank in the Non-U.S. Issuer's home country.
While the market for shares underlying an ADR generally will be in the country
in which the Non-U.S. Issuer is organized and trading in such market generally
will be based on that country's currency, ADRs will trade in U.S. dollars.
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Although ADRs are distinct securities from the shares of stock underlying such
ADRs, the trading characteristics and valuations of ADRs will usually, but not
necessarily, mirror the characteristics and valuations of such shares
represented by the ADRs. Inasmuch as holders of ADRs may surrender the ADR in
order to take delivery of and trade the shares underlying such ADR (a
characteristic that allows investors in ADRs to take advantage of price
differentials between different markets), a market for the shares of stock
underlying an ADR that is not liquid generally will result in an illiquid market
for the ADR representing such underlying shares.
The depositary bank that issues an ADR generally charges a fee, based on the
price of the ADR, upon issuance and cancellation of the ADR. This fee would be
in addition to the brokerage commissions paid upon the acquisition or surrender
of the security. In addition, the depositary bank incurs expenses in connection
with the conversion of dividends or other cash distributions paid in local
currency into U.S. dollars and such expenses are deducted from the amount of the
dividend or distribution paid to holders, resulting in a lower payout per share
of stock underlying an ADR represented by the ADR than would be the case if such
share were held directly. Certain tax considerations, including tax rate
differentials, arising from application of the tax laws of one nation to the
nationals of another and from certain practices in the ADR market may also exist
with respect to an ADR. In varying degrees, any or all of these factors may
affect the value of the ADR compared with the value of the shares of stock
underlying an ADR in the local market.
FOREIGN CURRENCY EXCHANGE RATE AND FOREIGN MARKET CONSIDERATIONS
The Notes are U.S. dollar-denominated securities issued by the Company, a
United States corporation. Investments in the Notes do not give the beneficial
owners any right to receive a Reference Security or any Reference Property or
any other ownership right or interest in a Reference Security or any Reference
Property or the shares of common stock represented by the Telebras Receipt,
although the return on the investment in the Notes is based on the Ending Value
of the Reference Property. The price of the common stock of Telebras underlying
the Telebras Receipt is quoted in Brazilian currency. To the extent there are
other Reference Securities, the prices of such other Reference Securities may
also be quoted in currency other than U.S. dollars. The U.S. dollar price of a
Reference Security that is an ADR will depend on the price of the shares
underlying such ADR and the exchange rate between the non-U.S. dollar currency
and the U.S. dollar. Even if the price of the shares underlying an ADR is
unchanged, changes in the rates of exchange between the U.S. dollar and the non-
U.S. dollar currency will affect the U.S. dollar price of such ADR.
Furthermore, even if the price in non-U.S. dollar currency of the shares
underlying an ADR increases, the U.S. dollar price of the ADR may decrease as a
result of changes in the rates of exchange between the U.S. dollar and non-U.S.
dollar currency.
Rates of exchange between the U.S. dollar and a non-U.S. dollar currency are
determined by forces of supply and demand in the foreign exchange markets.
These forces are, in turn, affected by international balance of payments and
other economic and financial conditions, government intervention, speculation
and other factors. Fluctuations in foreign exchange rates, future U.S. and non-
U.S. political and economic developments and the possible imposition of exchange
controls or other foreign governmental laws or restrictions applicable to such
investments may affect the U.S. dollar value of an ADR. Moreover, individual
foreign economies, such as Brazil's, may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resources, self-sufficiency and balance of
payments position. There is the possibility of expropriation of assets,
confiscatory taxation, political or social instability or diplomatic
developments which could affect the value of investments in countries, such as
Brazil. There may be less publicly available information about a non-U.S.
company, such as Telebras, than about a U.S. company, and non-U.S. companies are
not typically subject to accounting, auditing and financial reporting standards
and requirements comparable to those to which U.S. entities are subject. Non-
U.S. investments may be subject to foreign withholding taxes which could affect
the value of investment. In addition, investment laws in certain non-U.S.
countries such as Brazil may limit or restrict ownership of certain securities
by foreign nationals by restricting or eliminating voting or other rights or
limiting the amount of securities that may be so owned, and such limitations or
restrictions may affect the prices of such securities.
Brazil's financial markets, while growing in volume, have substantially less
volume than U.S. markets. The securities of many non-U.S. companies trading in
foreign markets are generally less liquid and their prices more volatile in such
markets than securities of comparable U.S. companies trading in the domestic
financial markets. Foreign markets have different trading practices that may
affect the prices of securities. Non-U.S. markets have different clearance and
settlement procedures than those in the U.S., and in certain countries, such as
Brazil, there have been instances when such procedures have been insufficient to
accommodate the volume of securities transactions, making it difficult to
conduct such transactions. There is generally less government supervision and
regulation of exchanges, brokers and issuers in
PS-5
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Brazil than in the U.S. In addition, the terms and conditions of depositary
facilities may result in less liquidity or lower market values for the ADRs than
for the securities underlying the ADRs.
The price of the common stock of Telebras and the price of the securities of
any spin-offs from Telebras, will depend on the financial condition and results
of operations of Telebras and such spin-offs. The financial condition and
results of operations of such entities will be affected by general economic,
political, financial and social conditions in Brazil, and in particular, by
prospects for future economic growth and its impact on demand for
telecommunications services in Brazil. Brazil has in the past experienced
economic and political instability and there can be no assurance that current
government programs to stabilize the economy will succeed.
NO STOCKHOLDER'S RIGHTS
Beneficial owners of the Notes will not be entitled to any rights with respect
to any Reference Securities (including, without limitation, voting rights and
rights to receive any dividends or other distributions in respect thereof).
NO AFFILIATION BETWEEN THE COMPANY AND TELEBRAS
The Company has no affiliation with Telebras, and Telebras 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. Telebras 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. In
addition, Telebras 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.
STATE LAW LIMITS ON INTEREST PAID.
New York State laws govern the 1993 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, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") and
other affiliates of the Company may from time to time buy or sell the Reference
Securities, including shares of Telebras 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 the Reference
Securities.
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.
PS-6
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DESCRIPTION OF NOTES
GENERAL
At maturity a beneficial owner of a Note will receive the principal amount of
such Note plus the Supplemental Redemption Amount, if any. See "Payment at
Maturity" below.
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 Pricing 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 Value does not exceed the Starting 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 Value - Starting Value
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Starting Value
provided, however, that in no event will the Supplemental Redemption Amount be
less than zero, and provided, further, that if the Calculation Agent determines
that the Ending Value is greater than the Cap Value, the Supplemental Redemption
Amount for a Note will equal:
Principal Amount of such Note x Cap Value - Starting Value
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Starting Value
The Starting Value equals $111.4375, which was the Closing Price (as defined
herein) of a Telebras Receipt on May 21, 1998. The Cap Value equals $222.8750,
which is equal to 200% of the Starting Value. The Ending Value will be
determined by the Calculation Agent and will equal the Reorganization Event
Value (as defined herein) with respect to a Reorganization Event (as defined
herein), if any, plus the value of the Reference Property determined as follows:
(A) for any portion of the Reference Property consisting of cash, the U.S.
Dollar Equivalent (as defined herein) of such cash plus interest on such amount
accruing from the date of the payment of such cash to holders of the relevant
Reference Property for which such cash was paid until the stated maturity date
at a fixed interest rate determined on the date of such payment equal to the
interest rate that would be paid on a fixed rate senior non-callable debt
security of the Company with a term equal to the remaining term for the Notes as
determined by the Calculation Agent; (B) for any portion of the Reference
Property consisting of property other than cash or Reference Securities, the
U.S. Dollar Equivalent of the market value of such property on the date that
such property was delivered to holders of the relevant Reference Property for
which such property was distributed plus interest on such U.S. dollar amount
accruing from the date of such delivery until the stated maturity date at a
fixed interest rate determined as described in (A) above; and (C) for any
portion of the Reference Property consisting of Reference Securities, the
Closing Price of each such Reference Security determined on the third scheduled
Trading Day prior to the Stated Maturity Date. If a Market Disruption Event
occurs on the third scheduled Trading Day prior to the Stated Maturity Date with
respect to a Reference Security, then the Closing Price for such Reference
Security shall be determined on the second scheduled Trading Day prior to the
Stated Maturity Date, regardless of the occurrence of a Market Disruption Event
on such day.
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"Reference Property" initially shall mean one unit of the Telebras Receipt,
and shall be subject to adjustment from time to time to reflect the addition,
substitution or distribution of cash, securities and/or other property resulting
from the application of the adjustment provisions described below under
"Description of Notes Dilution and Reorganization Adjustments".
"Starting Value" equals $111.4375, which was the closing price of the Telebras
Receipt at the close of trading on the NYSE on May 21, 1998.
"Cap Value" equals $222.8750, which is equal to 200% of the Starting Value.
"U.S. Dollar Equivalent" means, with respect to cash not denominated in U.S.
dollars, such cash amount multiplied by the Spot Rate (defined below) for the
currency in which such cash is denominated at approximately the date of payment
or date of valuation of such cash.
"Trading Day" means a day on which the AMEX, the NYSE and the NASDAQ National
Market System ("NASDAQ NMS") are open for trading.
"Market Disruption Event" means, with respect to a Reference Security, the
occurrence or existence on any Business Day during the one-half hour period that
ends when the Closing Price is determined, of any suspension of, or limitation
imposed on, trading in such Reference Security on the NYSE (or other market or
exchange, if applicable).
"Closing Price" with respect to a Reference Security means, for a Calculation
Day the following:
(a) If such Reference Security is listed on a national securities
exchange in the United States, is a NASDAQ NMS security or is included in
the OTC Bulletin Board Service ("OTC Bulletin Board") operated by the
National Association of Securities Dealers, Inc. (the "NASD"), Closing
Price means (i) the last reported sale price, regular way, on such day on
the principal United States securities exchange registered under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), on which
such Reference Security is listed or admitted to trading, or (ii) if not
listed or admitted to trading on any such securities exchange or if such
last reported sale price is not obtainable, the last reported sale price on
the over-the-counter market as reported on the NASDAQ NMS or OTC Bulletin
Board on such day, or (iii) if the last reported sale price is not
available pursuant to (i) and (ii) above, the mean of the last reported bid
and offer price on the over-the-counter market as reported on the NASDAQ
NMS or OTC Bulletin Board on such day as determined by the Calculation
Agent. The term "NASDAQ NMS security" shall include a security included in
any successor to such system and the term "OTC Bulletin Board" shall
include any successor service thereto.
(b) If such Reference Security is not listed on a national securities
exchange in the United States or is not a NASDAQ NMS security or included
in the OTC Bulletin Board operated by the NASD, Closing Price means the
last reported sale price on such day on the securities exchange on which
such Reference Security is listed or admitted to trading with the greatest
volume of trading for the calendar month preceding such day as determined
by the Calculation Agent, provided that if such last reported sale price is
for a transaction which occurred more than four hours prior to the close of
such exchange, then the Closing Price shall mean the average (mean) of the
last available bid and offer price on such exchange. If such Reference
Security is not listed or admitted to trading on any such securities
exchange or if such last reported sale price or bid and offer are not
obtainable, the Closing Price shall mean the last reported sale price for a
transaction which occurred more than four hours prior to when trading in
such over-the-counter market typically ends, then the Closing Price shall
mean the average (mean) of the last available bid and offer prices in such
market of the three dealers which have the highest volume of transactions
in such Reference Security in the immediately preceding calendar month as
determined by the Calculation Agent based on information that is reasonably
available to it. If such prices are quoted in a currency other than in U.S.
dollars, such prices will be translated into U.S. dollars for purposes of
calculating the Average Market Price using the Spot Rate on the same
calendar day as the date of any such price. The "Spot Rate" on any date
will be determined by the Calculation Agent and will equal the spot rate of
such currency per U.S. $1.00 on such date at approximately 3:00 p.m., New
York City time, as reported by a recognized reporting service for such spot
rate, provided that if the Calculation Agent shall determine that such
reported rate is not indicative of actual rates of exchange that may be
obtained in the currency exchange rate market, then the Spot Rate shall
equal the spot rate of such currency per U.S. $1.00 on such date at
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approximately 3:00 p.m., New York City time at which the Calculation Agent
is able to convert such currency into U.S. dollars.
"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
and the AMEX.
All determinations made by the Calculation Agent shall be at the sole
discretion of the Calculation Agent and, absent a determination by the
Calculation Agent of a manifest error, shall be conclusive for all purposes and
binding on the Company and beneficial owners of the Notes.
DILUTION AND REORGANIZATION ADJUSTMENTS
The Reference Property is subject to adjustment if an issuer of any Reference
Security (or the custodian in the case of Reference Security that is an ADR)
shall: (i) pay a stock dividend or make a distribution with respect to such
Reference Security in Reference Securities; (ii) subdivide or split the
outstanding units of such Reference Security into a greater number of units;
(iii) combine the outstanding units of such Reference Security into a smaller
number of units; (iv) issue by reclassification of units of such Reference
Security any units of another security of such issuer; (v) issue rights or
warrants to all holders of such Reference Security entitling them to subscribe
for or purchase shares, in the aggregate, for more than 5% of the number of such
Reference Securities outstanding prior to the issuance of such rights or
warrants at a price per share less than the then current market price of such
Reference Security (other than rights to purchase such Reference Security
pursuant to a plan for the reinvestment of dividends or interest); or (vi) pay a
dividend or make a distribution to all holders of such Reference Security 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
such Reference Security 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 assets are referred to as the "Distributed Assets" and any of the
foregoing events are referred to as the "Dilution Events"). Notwithstanding
provision (vi) in the foregoing sentence, if a Reference Security is an ADR and
the holder of such ADR would receive cash or other property other than
securities in the circumstances described in (vi) above, but the holder of the
securities underlying such ADR could receive securities as a result of a
Dilution Event (the "Distributed Securities") and the Calculation Agent or its
affiliates would be eligible to receive the Distributed Securities, then the
Company can elect for purposes of provision (vi) to include the Distributed
Securities in the Reference Property instead of the cash or property distributed
to holders of the ADR in an amount equal to the amount of the Distributed
Securities that would have been received had the Reference Property consisted of
the securities underlying the ADRs instead of the ADRs. For purposes of
provision (vi), if the holder of a Reference Security can elect to receive
securities in lieu of cash or property other than securities, then for purposes
of provision (vi) the holders of the Reference Security shall be deemed to
receive only the securities.
In the case of the Dilution Events referred to in clauses (i), (ii), (iii) and
(iv) above, the Reference Property shall be adjusted to include the number of
units of such Reference Security and/or security of such issuer which a holder
of units of such Reference Security would have owned or been entitled to receive
immediately following any such event had such holder held, immediately prior to
such event, the number of units of such Reference Security constituting part of
the Reference Property immediately prior to such event. Each such adjustment
shall become effective immediately after the effective date for such
subdivision, split, combination or reclassification, as the case may be. Each
such adjustment shall be made successively.
In the case of the Dilution Event referred to in clause (v) above where the
rights or warrants are for more than 5% of the number of shares outstanding
prior to the issuance of such rights or warrants, the Reference Property shall
be adjusted by multiplying the number of Reference Securities constituting
Reference Property immediately prior to the date of issuance of the rights or
warrants referred to in clause (v) above by a fraction, (1) the numerator of
which shall be the number of Reference Securities outstanding on the date
immediately prior to such issuance, plus the number of additional Reference
Securities offered for subscription or purchase pursuant to such rights or
warrants, and (2) the denominator of which shall be the number of Reference
Securities outstanding on the date immediately prior to such issuance, plus the
number of additional Reference Securities which the aggregate offering price of
the total number of Reference Securities so offered for subscription or purchase
pursuant to such rights or warrants would purchase at the current market price
(determined as the average Closing Price per Reference Security for the 20
Trading Days immediately prior to the date of such rights or warrants are
issued, subject to certain adjustments), which shall be determined by
multiplying such total
PS-9
<PAGE>
number of Reference Securities by the exercise price of such rights or warrants
and dividing the product so obtained by such current market price. To the extent
that Reference Securities are not delivered after the expiration of such rights
or warrants, or if such rights or warrants are not issued, the Reference
Property shall be readjusted to the Reference Property which would then be in
effect had such adjustments for the issuance of such rights or warrants been
made upon the basis of delivery of only the number of Reference Securities
actually delivered.
In the case of the Dilution Event referred to in clause (vi) above, the
Reference Property shall be adjusted to include, from and after such dividend,
distribution or issuance, (x) in respect of that portion, if any, of the
Distributed Assets consisting of cash, the amount of such Distributed Assets
consisting of cash received for each unit of such Reference Security multiplied
by the number of units of such Reference Security constituting part of the
Reference Property on the date of such dividend, distribution or issuance,
immediately prior to such dividend, distribution or issuance, plus (y) in
respect of that portion, if any, of the Distributed Assets which are other than
cash, the number or amount of each type of Distributed Assets other than cash
received with respect to each unit of such Reference Security multiplied by the
number of units of such Reference Security constituting part of the Reference
Property on the date of such dividend, distribution or issuance, immediately
prior to such dividend, distribution or issuance.
For example, where a reorganization of Telebras results in the distribution to
holders of the Telebras Receipt of ADRs representing shares of common stock in
various companies formed to operate various spin-off businesses of Telebras,
then the Reference Property shall include such ADRs in amounts specified
pursuant to provision (vi) above. If in any such reorganization of Telebras,
holders of Telebras Receipts receive cash or property while holders of the
shares of common stock underlying the Telebras Receipts receive Distributed
Securities and the Calculation Agent or an affiliate can receive and hold such
Distributed Securities, then the Calculation Agent can elect to have the
Reference Property include such Distributed Securities instead of such cash or
property.
An "Extraordinary Cash Dividend" means, with respect to any consecutive 12-
month period, the amount, if any, by which the aggregate amount of all cash
dividends or any other distribution made by the issuer of a Reference Security
or made pursuant to an arrangement effecting a distribution of distributable
profits or reserves, whether in cash or in specie, on any Reference Security
occurring in such 12-month period (or, if such Reference Security was not
outstanding at the commencement of such 12-month period or was not then a part
of the Reference Property, occurring in such shorter period during which such
Reference Security was outstanding and was part of the Reference Property)
exceeds on a per share basis 10% of the average of the Closing Prices per share
of such Reference Security over such 12-month period (or such shorter period
during which such Reference Security was outstanding and was part of the
Reference Property); provided that, for purposes of the foregoing definition,
the amount of cash dividends paid on a per share basis will be appropriately
adjusted to reflect the occurrence during such period of any stock dividend or
distribution of shares of capital stock of the issuer of such Reference Security
or any subdivision, split, combination or reclassification of shares of such
Reference Security.
All adjustments will be calculated to the nearest 1/10,000th of a share of the
Reference Security (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
Closing 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.
If any of the Distributed Assets are cash, property or Reference Securities
that will be distributed only to holders of the relevant Reference Property who
or which can certify as to a certain nationality or formation under the laws of
a certain jurisdiction, as the case may be, and a corporation formed in the
United States or an affiliate of such corporation formed elsewhere cannot
receive such distribution, the Reference Property will reflect only those
Distributed Assets available for distribution to such United States corporation
or its affiliates.
In the event of (A) any consolidation or merger of an issuer of a Reference
Security, or any surviving entity or subsequent surviving entity of such issuer
(a "Successor Company"), with or into another entity (other than a merger or
consolidation in which such issuer is the continuing corporation and in which
the Reference Security outstanding immediately prior to the merger or
consolidation is not exchanged for cash, securities or other property of such
issuer or another corporation), (B) any sale, transfer, lease or conveyance to
another corporation of the property of an issuer of a Reference Security or any
Successor Company as an entirety or substantially as an entirety, (C) any
statutory exchange of securities of an issuer of a Reference Security or any
Successor Company with another corporation (other than in
PS-10
<PAGE>
connection with a merger or acquisition) or (D) any liquidation, dissolution,
winding up or bankruptcy of an issuer of a Reference Security or any Successor
Company (any such event described in clause (A), (B), (C) or (D), a
"Reorganization Event"), the Ending Value shall be calculated by including the
Reorganization Event Value. The "Reorganization Event Value" shall be determined
by the Calculation Agent and shall equal (i) the Transaction Value related to
the relevant Reorganization Event, plus (ii) interest on such Transaction Value
accruing from the date of the payment or delivery of the consideration, if any,
received in connection with such Reorganization Event until the stated maturity
date at a fixed interest rate determined on the date of such payment or delivery
equal to the interest rate that would be paid on a fixed rate senior non-
callable debt security of the Company with a term equal to the remaining term of
the Notes. The "Transaction Value" means (i) for any cash received in any such
Reorganization Event, the U.S. Dollar Equivalent of cash received per unit of
Reference Security, (ii) for any property other than cash or securities received
in any such Reorganization Event, an amount equal to the U.S. Dollar Equivalent
of the market value of such property per unit of Reference Security on the date
that such property is received by holders of such Reference Security as
determined by the Calculation Agent, and (iii) for any securities received in
any such Reorganization Event, an amount equal to the Closing Price per unit of
such securities on the date such securities are received by holders of such
Reference Security multiplied by the number of such securities received for each
unit of such Reference Security (subject to adjustment on a basis consistent
with the adjustment provisions described above).
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
Deposit Reference Shares by Telebras 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, which shall provide notice to the holders of the Notes of
the occurrence of such event and, if applicable, a statement in reasonable
detail setting forth the adjusted Closing Price to be used in determining the
Ending 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 will be equal to the Principal Amount 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 Pricing 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 of the Notes (whether at their stated maturity
or upon acceleration), from and after the maturity date the Notes shall bear
interest, payable upon demand of the beneficial owners thereof, at the rate of
6.00% 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.
PS-11
<PAGE>
THE TELEBRAS RECEIPT
TELECOMUNICACOES BRASILEIRAS S.A.-TELEBRAS
Telecomunicacoes Brasileiras S.A.-Telebras is the primary supplier of public
telecommunications services in Brazil. Telebras owns and operates all of the
inter-state and international telephone transmission facilities in Brazil, is
the primary provider of intra-state service and provides telephone-related
services such as data transmission, cellular mobile telephone service, and
sound, image, videotext and telex transmission.
Telebras is currently controlled by the federal government of Brazil, which
has announced its intention to privatize Telebras. In connection with such
privatization, the federal government of Brazil has indicated that it intends to
reorganize Telebras by creating 12 separate corporations as a result of spin-
offs from Telebras of various businesses of Telebras which may result in the
distribution to holders of Telebras Receipt of cash, securities and/or other
property, including common stock and/or warrants or rights to purchase common
stock in the new corporations. An investor in the Notes should carefully review
the adjustments to be made in the case of certain reorganization events
contained in "Description of Notes--Dilution and Reorganization Adjustments".
Telebras is subject to the informational requirements of the Exchange Act.
Accordingly, Telebras files reports, proxy and other information statements and
other information with the SEC. Information provided to or filed with the SEC
by Telebras is available at the offices of the SEC specified under "Available
Information" in the accompanying Prospectus. The Company makes no
representation or warranty as to the accuracy or completeness of such reports.
There can be no assurance that Telebras will continue to be subject to the
reporting requirements of the Exchange Act and distribute reports and other
information required thereby to its shareholders. In the event that Telebras
ceases to be subject to such reporting requirements or otherwise fails to
distribute such information during the term of the Notes, pricing information
for the Notes may be more difficult to obtain and the value and liquidity of the
Notes may be adversely affected.
THE COMPANY IS NOT AFFILIATED WITH TELEBRAS, AND TELEBRAS HAS NO OBLIGATIONS
WITH RESPECT TO THE NOTES. THIS PRICING SUPPLEMENT RELATES ONLY TO THE NOTES
OFFERED HEREBY AND DOES NOT RELATE TO THE TELEBRAS RECEIPT OR OTHER NOTES OF
TELEBRAS. THE INFORMATION CONTAINED IN THIS PRICING SUPPLEMENT REGARDING
TELEBRAS 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 TELEBRAS 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 TELEBRAS 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 THE TRADING
PRICE OF THE TELEBRAS RECEIPT (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 TELEBRAS
COULD AFFECT THE SUPPLEMENTAL REDEMPTION AMOUNT TO BE RECEIVED AT MATURITY AND
THEREFORE THE TRADING VALUE OF THE NOTES.
From time to time, in the ordinary course of business, affiliates of the
Company have engaged in certain investment banking activities on behalf of the
Telebras as well as served as counterparty in certain other transactions.
PS-12
<PAGE>
HISTORICAL DATA ON THE TELEBRAS RECEIPT
The Telebras Receipt is traded on the NYSE under the symbol "TBR". The
following table sets forth for the periods indicated, the split-adjusted high
and low closing sales prices per share of the Telebras Receipt, as reported on
the NYSE, for each quarter, since January 1, 1994 and dividends paid in U.S.
dollars. These historical data on the Telebras Receipt are not necessarily
indicative of the future performance of the Telebras Receipt or what the value
of the Notes may be. Any historical upward or downward trend in the level of
the Telebras Receipt during any period set forth below is not an indication that
the Telebras Receipt is more or less likely to increase or decrease at any time
during the term of the Notes.
<TABLE>
<CAPTION>
PERIOD LOW HIGH DIVIDENDS PAID
- ------------------------------------------------ ----------------- ------------------ ------------------------
Split-Adjusted/(1)/
1994
<S> <C> <C> <C>
First Quarter.................................. $ 33.30 $ 52.75
Second Quarter................................. $ 27.98 $ 44.02
Third Quarter.................................. $ 37.50 $ 62.82 $0.09
Fourth Quarter................................. $ 41.79 $ 62.82
1995
First Quarter.................................. $ 19.75 $ 44.75
Second Quarter................................. $ 26.04 $ 39.66
Third Quarter.................................. $ 32.96 $ 48.56 $0.32
Fourth Quarter................................. $ 37.00 $ 49.38
1996
First Quarter.................................. $ 47.00 $ 57.50
Second Quarter................................. $ 48.63 $ 72.50
Third Quarter.................................. $ 68.50 $ 84.00 $1.61
Fourth Quarter................................. $ 70.00 $ 81.50
1997
First Quarter.................................. $ 74.63 $109.25
Second Quarter................................. $102.00 $159.75
Third Quarter.................................. $116.38 $169.25 $1.81
Fourth Quarter................................. $ 83.06 $147.69
1998
First Quarter.................................. $ 93.50 $135.00
Second Quarter (through May 26, 1998).......... $103.00 $130.44
</TABLE>
______________
(1) The sales prices presented above have been adjusted for stock splits that
have occurred through May 26, 1998.
On May 26, 1998, the closing price of the Telebras Receipt on the NYSE was
$103.00 per share.
PS-13
<PAGE>
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion replaces in its entirety the discussion appearing in
the Prospectus Supplement under the caption "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 persons 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.
PS-14
<PAGE>
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 on the maturity date of the principal amount
thereof and a projected Supplemental Redemption Amount equal to $384.3460 per
$1,000 principal amount of Notes (the "Projected Supplemental Redemption
Amount"). This represents an estimated yield on the Notes equal to 6.00% 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
principal amount (i.e., $1,000), increased by the interest previously accrued on
the Note. At maturity of a Note, in the event that the actual Supplemental
Redemption Amount, if any, exceeds $384.3460 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 $384.3460 per Note
(i.e., the Projected Supplemental Redemption Amount) in income as ordinary
interest on the stated maturity date. Alternatively, in the event that the
actual Supplemental Redemption Amount, if any, is less than $384.3460 per Note
(i.e., the Projected Supplemental Redemption Amount), the amount by which the
Projected Supplemental Redemption Amount (i.e., $384.3460 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 stated 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., $384.3460 per
Note) in excess of the actual Supplemental Redemption Amount that is not treated
as an interest offset pursuant to the foregoing rules. 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 or exchange of a Note prior to the stated 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 Note as of the
date of disposition. 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. 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 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.
All 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
PS-15
<PAGE>
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 as determined by the Company for purposes of applying the Final
Regulations to the Notes:
<TABLE>
<CAPTION>
TOTAL INTEREST
DEEMED TO HAVE
INTEREST ACCRUED ON
DEEMED TO NOTES AS OF END
ACCRUE DURING OF ACCRUAL
ACCRUAL PERIOD PERIOD
ACCRUAL PERIOD (PER NOTE) (PER NOTE)
- ----------------------------------------------------- ------------------- -------------------------
<S> <C> <C>
May 29, 1998 through November 28, 1998 $30.0834 $ 30.0834
November 29, 1998 through May 28, 1999 $30.9025 $ 60.9859
May 29, 1999 through November 28, 1999 $31.8296 $ 92.8155
November 29, 1999 through May 28, 2000 $32.7845 $125.6000
May 29, 2000 through November 28, 2000 $33.7680 $159.3680
November 29, 2000 through May 28, 2001 $34.7810 $194.1490
May 29, 2001 through November 28, 2001 $35.8245 $229.9735
November 29, 2001 through May 28, 2002 $36.8992 $266.8727
May 29, 2002 through November 28, 2002 $38.0062 $304.8789
November 29, 2002 through May 28, 2003 $39.1463 $344.0252
May 29, 2003 through November 28, 2003 $40.3208 $384.3460
</TABLE>
- --------------
Projected Supplemental Redemption Amount = $384.3460 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 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
PS-16
<PAGE>
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 that 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, 1999, subject to certain transition rules. Prospective
investors are urged to consult their own tax advisors regarding the New
Regulations.
USE OF PROCEEDS
The net proceeds from the sale of the Notes will be used as described under
"Use of Proceeds" in the attached Prospectus and to hedge market risks of the
Company associated with its obligation to pay the Principal Amount and the
Supplemental Redemption Amount, if any, as the case may be.
PS-17
