AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 20, 1995
REGISTRATION NO. 33-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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MERRILL LYNCH & CO., INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-2740599
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
WORLD FINANCIAL CENTER
NORTH TOWER
NEW YORK, NEW YORK 10281-1334
(212) 449-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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ROSEMARY T. BERKERY, ESQ.
ASSOCIATE GENERAL COUNSEL
MERRILL LYNCH & CO., INC.
WORLD FINANCIAL CENTER
NORTH TOWER
NEW YORK, NEW YORK 10281-1334
(212) 449-6990
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
NORMAN D. SLONAKER, ESQ.
BROWN & WOOD
ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]__________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]__________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1)(2) PRICE(1)(2) REGISTRATION FEE
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% STRYPES Due 1998(3).. 5,750,000 STRYPES(4) $47.125 $270,968,750 $93,438
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(1) Estimated pursuant to Rule 457 solely for the purpose of calculating the
registration fee.
(2) Exclusive of accrued interest, if any.
(3) The shares of Common Stock, par value $1.00 per share, of MGIC Investment
Corporation ("MGIC Investment") deliverable at maturity of such STRYPES
(including such indeterminate number of shares as may be deliverable as a
result of the anti-dilution provisions thereof) are registered pursuant to
a separate registration statement on Form S-3 filed concurrently herewith
by MGIC Investment.
(4) Includes 750,000 STRYPES that the Underwriter has the option to purchase
from Merrill Lynch & Co., Inc. to cover over-allotments, if any.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED , 1995
PROSPECTUS
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LOGO
5,000,000 STRYPES
MERRILL LYNCH & CO., INC.
% STRYPES SM DUE , 1998
PAYABLE WITH SHARES OF COMMON STOCK OF MGIC INVESTMENT CORPORATION
(OR CASH WITH AN EQUAL VALUE)
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The issue price of each Structured Yield Product Exchangeable for Stock SM,
% STRYPES SM Due , 1998 (each, a "STRYPES") of Merrill Lynch & Co., Inc.
(the "Company") being offered hereby is $ , which amount is equal to the last
sale price of the common stock, par value $1.00 per share (the "MGIC Common
Stock"), of MGIC Investment Corporation, a Wisconsin corporation ("MGIC
Investment"), on , 1995, as reported on the New York Stock Exchange
Composite Tape (the "Initial Price"). The STRYPES will mature on , 1998
(the "Maturity Date"). Interest on the STRYPES, at the rate of % of the issue
price per annum, is payable in cash quarterly in arrears on January 15, April
15, July 15 and October 15, beginning , 1995, and on the Maturity Date. The
STRYPES are not subject to redemption or any sinking fund prior to maturity.
The STRYPES will be unsecured obligations of the Company ranking pari passu
with all of its other unsecured and unsubordinated indebtedness.
On the Maturity Date, the Company will pay and discharge each STRYPES by
delivering to the holder thereof a number of shares of MGIC Common Stock (or,
at the Company's option, which may be exercised with respect to all, but not
less than all, shares of MGIC Common Stock deliverable on the Maturity Date,
cash with an equal value) based on the Payment Rate. The Payment Rate is equal
to, subject to certain adjustments, (a) if the Maturity Price is greater than
or equal to $ per share of MGIC Common Stock (the "Threshold Appreciation
Price"), shares of MGIC Common Stock per STRYPES, (b) if the Maturity Price
is less than the Threshold Appreciation Price but is greater than the Initial
Price, a fractional share of MGIC Common Stock per STRYPES so that the value
thereof (determined at the Maturity Price) equals the Initial Price and (c) if
the Maturity Price is less than or equal to the Initial Price, one share of
MGIC Common Stock per STRYPES. The "Maturity Price" means the average Closing
Price (as defined herein) per share of MGIC Common Stock on the 20 Trading Days
(as defined herein) immediately prior to the Maturity Date. ACCORDINGLY, THERE
CAN BE NO ASSURANCE THAT THE AMOUNT RECEIVABLE BY HOLDERS OF THE STRYPES ON THE
MATURITY DATE WILL BE EQUAL TO OR GREATER THAN THE ISSUE PRICE OF THE STRYPES.
See "Description of the STRYPES."
Reference is made to the accompanying prospectus of MGIC Investment covering
the shares of MGIC Common Stock which may be received by a holder of the
STRYPES at Maturity.
MGIC Investment is not affiliated with the Company, will not receive any of
the proceeds from the sale of the STRYPES and will have no obligations with
respect to the STRYPES.
SEE "RISK FACTORS" ON PAGE 6 OF THIS PROSPECTUS FOR CERTAIN CONSIDERATIONS
RELEVANT TO AN INVESTMENT IN THE STRYPES.
For a discussion of certain United States Federal income tax consequences for
holders of the STRYPES, see "Certain United States Federal Income Tax
Considerations."
The MGIC Common Stock is listed on the New York Stock Exchange ("NYSE") under
the trading symbol "MTG." Application will be made to list the STRYPES on the
NYSE.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(1)(3)
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Per STRYPES............................... $ $ $
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Total(4).................................. $ $ $
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(1) Plus accrued interest, if any, from , 1995 to the date of delivery.
(2) The Company, MGIC Investment and The Northwestern Mutual Life Insurance
Company have agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."
(3) Before deducting expenses payable by the Company estimated at $ .
(4) The Company has granted the Underwriter an option for 30 days to purchase
up to an additional 750,000 STRYPES at the initial public offering price
per STRYPES, less the underwriting discount, solely to cover over-
allotments. If such over-allotment option is exercised in full, the total
Price to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
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The STRYPES are offered by the Underwriter, subject to prior sale, when, as
and if issued to and accepted by the Underwriter and subject to certain other
conditions. The Underwriter reserves the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the STRYPES will be made in New York, New York, on or about ,
1995.
This Prospectus may be used by the Underwriter in connection with offers and
sales related to market-making transactions in the STRYPES. The Underwriter may
act as principal or agent in such transactions. Such sales will be made at
prices related to prevailing market prices at the time of sale.
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SM Service Mark of Merrill Lynch & Co., Inc.
MERRILL LYNCH & CO.
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The date of this Prospectus is , 1995.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE STRYPES AND
THE MGIC COMMON STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK
EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy and information statements and
other information filed by the Company can be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional
Offices of the Commission: Chicago Regional Office, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511 and New York Regional Office, Seven
World Trade Center, New York, New York 10048. Copies of such material can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. Reports, proxy and
information statements and other information concerning the Company may also
be inspected at the offices of the New York Stock Exchange, the American Stock
Exchange, the Chicago Stock Exchange and the Pacific Stock Exchange.
The Company has filed a Registration Statement on Form S-3 (the
"Registration Statement") with the Commission pursuant to the Securities Act
of 1933, as amended (the "Securities Act"), covering the STRYPES. This
Prospectus does not contain all the information set forth in the Registration
Statement and the exhibits thereto, to which reference is hereby made.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended December 30,
1994, Quarterly Report on Form 10-Q for the period ended March 31, 1995, and
Current Reports on Form 8-K dated January 12, 1995, January 23, 1995, February
8, 1995, February 9, 1995, March 3, 1995, March 9, 1995, April 18, 1995, May
2, 1995 and May 23, 1995 filed pursuant to Section 13 of the Exchange Act, are
hereby incorporated by reference into this Prospectus.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering of the STRYPES shall be deemed to be
incorporated by reference into this Prospectus and to be a part hereof from
the date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent
that a statement contained herein or in any other subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Prospectus.
THE COMPANY WILL PROVIDE WITHOUT CHARGE TO EACH PERSON TO WHOM THIS
PROSPECTUS IS DELIVERED, ON THE WRITTEN OR ORAL REQUEST OF SUCH PERSON, A COPY
(WITHOUT EXHIBITS OTHER THAN EXHIBITS SPECIFICALLY INCORPORATED BY REFERENCE)
OF ANY OR ALL DOCUMENTS INCORPORATED BY REFERENCE INTO THIS PROSPECTUS.
REQUESTS FOR SUCH COPIES SHOULD BE DIRECTED TO MR. GREGORY T. RUSSO,
SECRETARY, MERRILL LYNCH & CO., INC., 100 CHURCH STREET, 12TH FLOOR, NEW YORK,
NEW YORK 10080-6512; TELEPHONE NUMBER (212) 602-8435.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE COMMISSIONER
OF INSURANCE FOR THE STATE OF NORTH CAROLINA, NOR HAS THE COMMISSIONER OF
INSURANCE RULED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
2
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the information
incorporated by reference in this Prospectus and by the more detailed
information included elsewhere in this Prospectus. Unless otherwise indicated,
the information contained in this Prospectus assumes that the Underwriter's
over-allotment option is not exercised.
MERRILL LYNCH & CO., INC.
Merrill Lynch & Co., Inc. is a holding company that, through its subsidiaries
and affiliates, provides investment, financing, insurance, and related services
on a global basis. Its principal subsidiary, Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("MLPF&S"), one of the largest securities firms in the
world, is a leading broker in securities, options contracts, and commodity and
financial futures contracts; a leading dealer in options and in corporate and
municipal securities; a leading investment banking firm that provides advice
to, and raises capital for, its clients; and an underwriter of selected
insurance products. Other subsidiaries provide financial services on a global
basis similar to those of MLPF&S and are engaged in such other activities as
international banking, lending, and providing other investment and financing
services. Merrill Lynch International Incorporated, through subsidiaries and
affiliates, provides investment, financing, and related services outside the
United States and Canada. Merrill Lynch Government Securities Inc. is a primary
dealer in obligations issued or guaranteed by the U.S. Government and by
Federal agencies or instrumentalities. Merrill Lynch Capital Services, Inc.,
Merrill Lynch Derivative Products, Inc., and Merrill Lynch Capital Markets PLC
are the Company's primary derivative product dealers and enter into interest
rate and currency swaps and other derivative transactions as intermediaries and
as principals. Merrill Lynch Asset Management L.P., with its related
affiliates, is one of the largest mutual fund managers in the world and
provides investment advisory services. The Company's insurance underwriting
operations consist of the underwriting of life insurance and annuity products.
Banking, trust, and mortgage lending operations conducted through subsidiaries
of the Company include issuing certificates of deposit, offering money market
deposit accounts, making secured loans, and providing foreign exchange
facilities and other related services.
The principal executive office of the Company is located at World Financial
Center, North Tower, 250 Vesey Street, New York, New York 10281; its telephone
number is (212) 449-1000.
MGIC INVESTMENT CORPORATION
MGIC Investment Corporation is a holding company which, through its indirect
wholly owned subsidiary, Mortgage Guaranty Insurance Corporation, is a leading
provider of private mortgage insurance coverage in the United States to
mortgage bankers, savings institutions, commercial banks, mortgage brokers,
credit unions and other lenders. Private mortgage insurance covers residential
first mortgage loans and expands home ownership opportunities by enabling
people to purchase homes with less than 20% down payments. If the home owner
defaults, private mortgage insurance reduces and, in some instances, eliminates
the loss to the insured institution. Private mortgage insurance also
facilitates the sale of low down payment mortgage loans in the secondary
mortgage market, principally to the Federal National Mortgage Association and
the Federal Home Loan Mortgage Corporation. In addition to mortgage insurance,
MGIC Investment, through other subsidiaries, provides various underwriting and
contract services related to home mortgage lending.
Reference is made to the accompanying prospectus of MGIC Investment covering
the shares of MGIC Common Stock which may be received by a holder of STRYPES on
the Maturity Date. MGIC Investment is not affiliated with the Company, will not
receive any of the proceeds from the sale of the STRYPES and will have no
obligations with respect to the STRYPES. The prospectus of MGIC Investment is
being attached hereto and delivered to prospective purchasers of STRYPES
together with this Prospectus for convenience of reference only. The prospectus
of MGIC Investment does not constitute a part of this Prospectus, nor is it
incorporated by reference herein.
3
THE STRYPES
Offering.................. 5,000,000 STRYPES
Issue Price............... $ per STRYPES
Maturity Date............. , 1998
Interest Rate............. % of the issue price per annum, or $ per
STRYPES per quarter, payable in cash quarterly in
arrears
Interest Payment Dates.... January 15, April 15, July 15 and October 15, be-
ginning , 1995, and the Maturity Date.
Payment at Maturity....... On the Maturity Date, the Company will pay and dis-
charge each STRYPES by delivering to the holder
thereof a number of shares of MGIC Common Stock
(or, at the Company's option, which may be exer-
cised with respect to all, but not less than all,
shares of MGIC Common Stock deliverable on the Ma-
turity Date, cash with an equal value) based on
the Payment Rate. The Payment Rate is equal to,
subject to certain adjustments, (a) if the Matu-
rity Price is greater than or equal to $ per
share of MGIC Common Stock (the "Threshold Appre-
ciation Price"), shares of MGIC Common Stock
per STRYPES, (b) if the Maturity Price is less
than the Threshold Appreciation Price but is
greater than the Initial Price, a fractional share
of MGIC Common Stock per STRYPES so that the value
thereof (determined at the Maturity Price) equals
the Initial Price and (c) if the Maturity Price is
less than or equal to the Initial Price, one share
of MGIC Common Stock per STRYPES. The "Maturity
Price" means the average Closing Price per share
of MGIC Common Stock on the 20 Trading Days imme-
diately prior to the Maturity Date. ACCORDINGLY,
THERE CAN BE NO ASSURANCE THAT THE AMOUNT RECEIV-
ABLE BY HOLDERS OF THE STRYPES ON THE MATURITY
DATE WILL BE EQUAL TO OR GREATER THAN THE ISSUE
PRICE OF THE STRYPES. See "Description of the
STRYPES--General."
No Redemption, Sinking
Fund or Payment prior to
Maturity................. The STRYPES are not subject to redemption by the
Company prior to the Maturity Date and do not con-
tain any sinking fund or other mandatory redemp-
tion provisions. The STRYPES are not subject to
payment prior to the Maturity Date at the option
of the holder.
Ranking................... The STRYPES will be unsecured obligations of the
Company ranking pari passu with all of its other
unsecured and unsubordinated indebtedness.
Relationship to MGIC
Common Stock............. The STRYPES will bear interest at % of the issue
price per annum, a yield substantially in excess
of the % dividend yield of MGIC Common Stock
based on the last sale price of the MGIC Common
Stock on , 1995, as reported on the NYSE Com-
posite
4
Tape, and the current $ per share quarterly div-
idend payable on the MGIC Common Stock. However,
the opportunity for equity appreciation afforded
by an investment in the STRYPES is less than the
opportunity for equity appreciation afforded by a
direct investment in the MGIC Common Stock because
the amount receivable by a holder of a STRYPES on
the Maturity Date will only exceed the issue price
of such STRYPES if the Maturity Price of the MGIC
Common Stock exceeds the Threshold Appreciation
Price (which represents an appreciation of %
over the Initial Price). Moreover, holders of the
STRYPES will only be entitled to receive on the
Maturity Date % (the percentage equal to the
Initial Price divided by the Threshold Apprecia-
tion Price) of any appreciation of the value of
MGIC Common Stock in excess of the Threshold Ap-
preciation Price. Holders of the STRYPES will not
be entitled to any rights with respect to the MGIC
Common Stock (including, without limitation, vot-
ing rights and rights to receive any dividends or
other distributions in respect thereof) unless and
until such time, if any, as the Company shall have
delivered shares of MGIC Common Stock for STRYPES
on the Maturity Date and unless the applicable
record date, if any, for the exercise of such
rights occurs after such delivery.
Use of Proceeds........... For general corporate purposes. The net proceeds
will be temporarily invested by the Company or ap-
plied by the Company to the reduction of short-
term indebtedness pending their application. See
"Use of Proceeds."
5
RISK FACTORS
COMPARISON TO OTHER DEBT SECURITIES; RELATIONSHIP TO MGIC COMMON STOCK
The terms of the STRYPES differ from those of ordinary debt securities in
that the value of the MGIC Common Stock (or, pursuant to the option of the
Company, the amount of cash) that a holder of a STRYPES will receive on the
Maturity Date is not fixed, but is based on the Maturity Price of the MGIC
Common Stock (see "Description of the STRYPES"). THERE CAN BE NO ASSURANCE
THAT SUCH AMOUNT RECEIVABLE BY THE HOLDER ON THE MATURITY DATE WILL BE EQUAL
TO OR GREATER THAN THE ISSUE PRICE OF THE STRYPES. IF THE MATURITY PRICE OF
THE MGIC COMMON STOCK IS LESS THAN THE INITIAL PRICE, SUCH AMOUNT RECEIVABLE
ON THE MATURITY DATE WILL BE LESS THAN THE ISSUE PRICE PAID FOR THE STRYPES,
IN WHICH CASE AN INVESTMENT IN STRYPES WILL RESULT IN A LOSS. ACCORDINGLY, A
HOLDER OF STRYPES ASSUMES THE RISK THAT THE MARKET VALUE OF THE MGIC COMMON
STOCK MAY DECLINE, AND THAT SUCH DECLINE COULD BE SUBSTANTIAL. REFERENCE IS
MADE TO THE ACCOMPANYING PROSPECTUS OF MGIC INVESTMENT, INCLUDING THE
INFORMATION UNDER THE CAPTION "RISK FACTORS" THEREIN.
In addition, the opportunity for equity appreciation afforded by an
investment in the STRYPES is less than the opportunity for equity appreciation
afforded by a direct investment in the MGIC Common Stock, because the amount
receivable by a holder of a STRYPES on the Maturity Date will only exceed the
issue price of such STRYPES if the Maturity Price of the MGIC Common Stock
exceeds the Threshold Appreciation Price (which represents an appreciation of
% over the Initial Price). Moreover, holders of the STRYPES will only be
entitled to receive on the Maturity Date % (the percentage equal to the
Initial Price divided by the Threshold Appreciation Price) of any appreciation
of the value of MGIC Common Stock in excess of the Threshold Appreciation
Price. Because the price of the MGIC Common Stock is subject to market
fluctuations, the value of the MGIC Common Stock (or, pursuant to the option
of the Company, the amount of cash) received by a holder of a STRYPES on the
Maturity Date, determined as described herein, may be more or less than the
issue price of the STRYPES.
The trading prices of the STRYPES in the secondary market will be directly
affected by the trading prices of the MGIC Common Stock in the secondary
market. It is impossible to predict whether the price of MGIC Common Stock
will rise or fall. Trading prices of MGIC Common Stock will be influenced by
MGIC Investment's operating results and prospects and by economic, financial
and other factors and market conditions that can affect the capital markets
generally, including the level of, and fluctuations in, the trading prices of
stocks generally and sales of substantial amounts of MGIC Common Stock in the
market subsequent to the offering of the STRYPES or the perception that such
sales could occur.
Holders of the STRYPES will not be entitled to any rights with respect to
the MGIC Common Stock (including, without limitation, voting rights and rights
to receive any dividends or other distributions in respect thereof) unless and
until such time, if any, as the Company shall have delivered shares of MGIC
Common Stock for STRYPES on the Maturity Date and, unless the applicable
record date, if any, for the exercise of such rights occurs after such date.
For example, in the event that an amendment is proposed to the Articles of
Incorporation or By-Laws of MGIC Investment and the record date for
determining the stockholders of record entitled to vote on such amendment
occurs prior to such delivery, holders of the STRYPES will not be entitled to
vote on such amendment.
NO AFFILIATION BETWEEN THE COMPANY AND MGIC INVESTMENT
The Company has no affiliation with MGIC Investment, and MGIC Investment has
no obligations with respect to the STRYPES or amounts to be paid to holders
thereof, including any obligation to take the needs of the Company or of
holders of the STRYPES into consideration for any reason. MGIC Investment will
not receive any of the proceeds of the offering of the STRYPES made hereby and
is not responsible for, and has not participated in, the determination of the
timing of, prices for or quantities of the STRYPES to be issued or the
determination or calculation of the amount receivable by holders of the
STRYPES at maturity. MGIC Investment is not involved with the administration
or trading of the STRYPES and has no obligations with respect to the amount
receivable by holders of the STRYPES at maturity.
6
PURCHASE FROM THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
The Company has entered into a contract (the "Purchase Contract") to
purchase from The Northwestern Mutual Life Insurance Company ("NML")
immediately prior to the Maturity Date of the STRYPES a number of shares of
MGIC Common Stock equal to the number required by the Company to pay and
discharge all of the STRYPES (including any STRYPES issued pursuant to the
over-allotment option granted by the Company to the Underwriter) at an
aggregate purchase price equal to the total issue price for the STRYPES, less
the total underwriting discount, plus an adjustment for an interest
differential factor. See "Certain Arrangements With NML." NML will be
obligated to deliver such shares of MGIC Common Stock pursuant to the Purchase
Contract only upon payment by the Company of the consideration therefor. The
net proceeds from the sale of the STRYPES will be used by the Company for
general corporate purposes. See "Use of Proceeds."
The Company has no affiliation with NML, and NML has no obligations with
respect to the STRYPES or amounts to be paid to holders thereof, including any
obligation to take the needs of the Company or of holders of the STRYPES into
consideration for any reason. NML is not responsible for the determination or
calculation of the amount receivable by holders of the STRYPES at maturity.
The Purchase Contract between the Company and NML is a commercial transaction
and does not create any rights in, or for the benefit of, any third party,
including any holder of STRYPES.
TAX MATTERS
Because of an absence of authority as to the proper characterization of the
STRYPES, their ultimate tax treatment is uncertain. Accordingly, no assurances
can be given that any particular characterization and treatment of the STRYPES
will be accepted by the Internal Revenue Service ("IRS") or upheld by a court.
However, it is the opinion of Brown & Wood, counsel to the Company, that the
characterization and tax treatment of the STRYPES described herein (and
described in greater detail under "Certain United States Federal Income Tax
Considerations"), while not the only reasonable characterization and tax
treatment, is based on reasonable interpretations of law currently in effect
and, even if successfully challenged by the IRS, will not result in the
imposition of penalties. The Indenture will require that any holder subject to
U.S. Federal income tax include currently in income, for U.S. Federal income
tax purposes, payments denominated as interest that are made with respect to a
STRYPES in accordance with such holder's regular method of tax accounting. The
Indenture also requires the Company and holders to treat each STRYPES for tax
purposes as a unit (a "Unit") consisting of (i) a debt instrument (the "Debt
Instrument") with a fixed principal amount unconditionally payable on the
Maturity Date equal to the issue price of the STRYPES and bearing interest at
the stated interest rate on the STRYPES and (ii) a forward purchase contract
(the "Forward Contract") pursuant to which the holder agrees to use the
principal payment due on the Debt Instrument to purchase on the Maturity Date
the MGIC Common Stock which the Company is obligated under the STRYPES to
deliver at that time (subject to the Company's right to deliver cash with an
equal value in lieu of the MGIC Common Stock). The Indenture also requires
that upon the acquisition of a STRYPES and upon a holder's sale or other
disposition of a STRYPES prior to the Maturity Date, the amount paid or
realized by the holder be allocated between the Debt Instrument and the
Forward Contract based upon their relative fair market values (as determined
on the date of acquisition or disposition). For these purposes, with respect
to acquisitions of STRYPES in connection with the original issuance thereof,
the Company and each holder agrees, pursuant to the terms of the Indenture, to
allocate $ of the entire initial purchase price of a STRYPES (i.e., the
issue price of a STRYPES) to the Debt Instrument and to allocate the remaining
$ of the entire initial purchase price of a STRYPES to the Forward
Contract. As previously mentioned, the appropriate character and timing of
income, gain or loss to be recognized on a STRYPES is uncertain and investors
are urged to consult their own tax advisers as to the proper tax treatment of
the STRYPES. The tax consequences of investing in the STRYPES are described in
greater detail under "Certain United States Federal Income Tax
Considerations."
DILUTION OF MGIC COMMON STOCK
The number of shares of MGIC Common Stock (or cash with an equal value) that
holders of the STRYPES are entitled to receive on the Maturity Date is subject
to adjustment for certain events arising from stock splits
7
and combinations, stock dividends and certain other actions of MGIC Investment
that modify its capital structure. See "Description of the STRYPES--Dilution
Adjustments." Such number of shares of MGIC Common Stock (or cash amount) to
be received by such holders on the Maturity Date will not be adjusted for
other events, such as offerings of MGIC Common Stock for cash or in connection
with acquisitions, that may adversely affect the price of the MGIC Common
Stock and, because of the relationship of the number of shares (or cash
amount) to be received on the Maturity Date to the price of the MGIC Common
Stock, such other events may adversely affect the trading price of the
STRYPES.
POSSIBLE ILLIQUIDITY OF THE SECONDARY MARKET
It is not possible to predict how the STRYPES will trade in the secondary
market or whether such market will be liquid or illiquid. The STRYPES are
novel securities and there is currently no secondary market for the STRYPES.
Application will be made to list the STRYPES on the NYSE. However there can be
no assurance that an active trading market for the STRYPES will develop, that
such listing will provide the holders of the STRYPES with liquidity of
investment, or that the STRYPES will not later be delisted or that trading of
the STRYPES on the NYSE will not be suspended. In the event of a delisting or
suspension of trading on the NYSE, the Company will apply for listing of the
STRYPES on another national securities exchange or for quotation on another
trading market. If the STRYPES are not listed or traded on any securities
exchange or trading market, or if trading of the STRYPES is suspended, pricing
information for the STRYPES may be more difficult to obtain and the liquidity
of the STRYPES may be adversely affected.
MERRILL LYNCH & CO., INC.
Merrill Lynch & Co., Inc. is a holding company that, through its
subsidiaries and affiliates, provides investment, financing, insurance, and
related services on a global basis. Its principal subsidiary, MLPF&S, one of
the largest securities firms in the world, is a leading broker in securities,
options contracts, and commodity and financial futures contracts; a leading
dealer in options and in corporate and municipal securities; a leading
investment banking firm that provides advice to, and raises capital for, its
clients; and an underwriter of selected insurance products. Other subsidiaries
provide financial services on a global basis similar to those of MLPF&S and
are engaged in such other activities as international banking, lending, and
providing other investment and financing services. Merrill Lynch International
Incorporated, through subsidiaries and affiliates, provides investment,
financing, and related services outside the United States and Canada. Merrill
Lynch Government Securities Inc. is a primary dealer in obligations issued or
guaranteed by the U.S. Government and by Federal agencies or
instrumentalities. Merrill Lynch Capital Services, Inc., Merrill Lynch
Derivative Products, Inc., and Merrill Lynch Capital Markets PLC are the
Company's primary derivative product dealers and enter into interest rate and
currency swaps and other derivative transactions as intermediaries and as
principals. Merrill Lynch Asset Management L.P., with its related affiliates,
is one of the largest mutual fund managers in the world and provides
investment advisory services. The Company's insurance underwriting operations
consist of the underwriting of life insurance and annuity products. Banking,
trust, and mortgage lending operations conducted through subsidiaries of the
Company include issuing certificates of deposit, offering money market deposit
accounts, making secured loans, and providing foreign exchange facilities and
other related services.
The principal executive office of the Company is located at World Financial
Center, North Tower, 250 Vesey Street, New York, New York 10281; its telephone
number is (212) 449-1000.
8
SUMMARY FINANCIAL INFORMATION
The following summary of consolidated financial information was derived
from, and is qualified in its entirety by reference to, the financial
statements, condensed financial statements and other information and data
contained in the Company's Annual Report on Form 10-K for the year ended
December 30, 1994 and Quarterly Report on Form 10-Q for the period ended March
31, 1995 (the "Quarterly Report"). See "Incorporation of Certain Documents by
Reference." The condensed consolidated financial statements contained in the
Company's Quarterly Report are unaudited; however, in the opinion of
management of the Company, all adjustments (consisting only of normal
recurring accruals) necessary for a fair statement of the results of
operations have been included. The year-end results include 52 weeks for 1990,
1991, 1992 and 1994 and 53 weeks for 1993.
The Company conducts its business in highly volatile markets. Consequently,
the Company's results can be affected by many factors, including general
market conditions, the liquidity of secondary markets, the level and
volatility of interest rates and currency values, the valuation of securities
positions, competitive conditions, and the size, number, and timing of
transactions. In periods of unfavorable market activity, profitability can be
adversely affected because certain expenses remain relatively fixed. As a
result, net earnings and revenues can vary significantly from period to
period. Thus, interim results may not necessarily be representative of the
full year results of operations.
YEAR ENDED LAST FRIDAY IN DECEMBER THREE MONTHS ENDED
---------------------------------------------------------------- -------------------------
APRIL 1, MARCH 31,
1990 1991 1992 1993 1994 1994 1995
----------- ----------- ------------ ------------ ------------ ------------ ------------
INCOME STATEMENT
INFORMATION
(In thousands, except
ratios)
Revenues................ $11,147,229 $12,352,812 $ 13,412,668 $ 16,588,177 $ 18,233,091 $ 4,738,811 $ 5,203,877
Net revenues(1)......... $ 5,783,329 $ 7,246,468 $ 8,577,401 $ 10,558,230 $ 9,624,521 $ 2,831,828 $ 2,420,485
Earnings before income
taxes and cumulative
effect of changes in
accounting
principles(2).......... $ 282,328 $ 1,017,418 $ 1,621,389 $ 2,424,808 $ 1,729,604 $ 652,208 $ 378,792
Cumulative effect of
changes in accounting
principles (net of
applicable income
taxes)(2).............. -- -- $ (58,580) $ (35,420) -- -- --
Net earnings(2)......... $ 191,856 $ 696,117 $ 893,825 $ 1,358,939 $ 1,016,761 $ 371,759 $ 227,275
Ratio of earnings to
fixed charges(3)....... 1.1 1.2 1.3 1.4 1.2 1.3 1.1
BALANCE SHEET
INFORMATION
(In thousands)
Total assets(4)......... $68,129,527 $86,259,343 $107,024,173 $152,910,362 $163,749,327 $179,683,796 $176,732,993
Long-term borrowings(5). $ 6,341,559 $ 7,964,424 $ 10,871,100 $ 13,468,900 $ 14,863,383 $ 14,852,894 $ 14,484,523
Stockholders' equity.... $ 3,225,430 $ 3,818,088 $ 4,569,104 $ 5,485,913 $ 5,817,545 $ 5,603,067 $ 5,704,148
- --------
(1) Net revenues are revenues net of interest expense.
(2) Net earnings for 1992 were reduced by $58,580,000 to reflect the adoption
of Statement of Financial Accounting Standards ("SFAS") No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," and
SFAS No. 109, "Accounting for Income Taxes." Net earnings for 1993 were
reduced by $35,420,000 to reflect the adoption of SFAS No. 112, "Employers'
Accounting for Postemployment Benefits."
(3) For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" consists of earnings from continuing operations before income
taxes and fixed charges. "Fixed charges" consists of interest costs and
that portion of rentals estimated to be representative of the interest
factor.
(4) In 1994, the Company adopted Financial Accounting Standards Board ("FASB")
Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts,"
and FASB Interpretation No. 41, "Offsetting of Amounts Related to Certain
Repurchase and Reverse Repurchase Agreements," which increased assets and
liabilities at December 30, 1994 by approximately $8,500,000,000.
(5) To finance its diverse activities, the Company and certain of its
subsidiaries borrow substantial amounts of short-term funds on a regular
basis. Although the amount of short-term borrowings significantly varies
with the level of general business activity, on March 31, 1995,
$538,157,000 of bank loans and $14,821,594,000 of commercial paper were
outstanding. In addition, certain of the Company's subsidiaries lend
securities and enter into repurchase agreements to obtain financing. At
March 31, 1995, cash deposits for securities loaned and securities sold
under agreements to repurchase amounted to $5,406,241,000 and
$57,110,193,000, respectively. From April 1, 1995 to June 12, 1995, long-
term borrowings, net of repayments and repurchases, increased by
approximately $1,268,680,000.
9
FISCAL YEAR 1994
Financial markets, strong from 1991 through the first six weeks of 1994,
changed significantly after inflationary fears prompted the Federal Reserve to
increase short-term interest rates in February 1994. As the U.S. economy
continued to expand, the Federal Reserve acted to further curb inflation and
to moderate growth by increasing short-term interest rates five additional
times during the year. The combination of rising interest rates, a falling
U.S. dollar, unsettled global stock, bond, and currency markets, reduced
foreign investment in U.S. financial markets, and overall investor caution
contributed to lower earnings for most U.S. securities firms. These conditions
affected the Company's 1994 fourth quarter and full year results. Net earnings
for the 1994 fourth quarter were $161.6 million, down 30% from the 1994 third
quarter and down 53% from the 1993 fourth quarter.
Net earnings for 1994 were $1,016.8 million, down 25% from record 1993
earnings of $1,358.9 million. Net earnings for 1993 included a $35.4 million
cumulative effect charge (net of $25.1 million of applicable income tax
benefits) related to the adoption of Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits." Earnings
for 1993 before the cumulative effect of the change in accounting principle
were $1,394.4 million. Earnings per common share in 1994 were $4.75 primary
and $4.74 fully diluted, compared with $5.98 primary and $5.95 fully diluted
($6.14 primary and $6.11 fully diluted before the accounting change) in 1993.
As previously reported, 1993 results included a non-recurring pretax lease
charge totaling $103.0 million ($59.7 million after income taxes) related to
the Company's decision not to occupy certain space at the World Financial
Center Headquarters ("Headquarters") facility. This space was sublet in 1994.
Total revenues were $18,233 million, up 10% from 1993. Net revenues
(revenues after interest expense) totaled $9,625 million in 1994, down 9% from
1993.
Commission revenues were $2,871 million, virtually unchanged from $2,894
million in 1993. Higher commission revenues from mutual funds and commodity
transactions were offset by lower revenues from money market instruments,
particularly medium-term notes, and listed securities transactions. Sales of
mutual funds, particularly front-end funds, declined as investors were less
active due to uncertain markets and rising interest rates. For the first time
since 1974, both stock and bond funds fell in value industrywide, on average,
in the same year. Distribution fees from deferred charge funds benefited from
strong mutual fund sales in prior periods, while redemption fees increased as
investors repositioned their portfolios primarily from fixed-income funds to
stock and money market funds. Commissions on listed securities transactions
decreased due to a decline in the relative amount of business by retail
clients versus institutional clients. Other commission revenues declined
principally as a result of lower commissions from money market instruments,
partially offset by higher revenues from commodity transactions.
Interest and dividend revenues increased 35% to $9,578 million from $7,099
million in 1993. Interest expense, which includes dividend expense, rose 43%
to $8,609 million from $6,030 million in 1993. Net interest and dividend
profit decreased 9% to $969 million as a significant increase in short-term
interest rates, year over year, led to a substantial flattening of the yield
curve. The change in the yield curve, the relationship between interest rates
and maturities, resulted from short-term interest rates rising faster than
long-term interest rates in 1994. As a result, interest spreads declined,
while financing and hedging costs increased from 1993.
Principal transactions revenues fell 20% to $2,335 million from the 1993
record $2,920 million due to rising interest rates, a declining U.S. dollar,
and volatile world financial markets. Revenues from taxable fixed-income
securities, equities and equity derivatives, and foreign exchange and
commodities decreased, while interest rate and currency swaps, and municipal
securities revenues increased. Taxable fixed-income revenues declined 52% to
$462 million as higher interest rates, wider credit spreads, and uncertainty
in emerging markets led to reduced demand and lower inventory values. Equities
and equity derivatives trading revenues decreased 28% to $627 million,
reflecting lower trading results in virtually all categories, including a loss
in convertible securities. Foreign exchange and commodities revenues, in the
aggregate, declined 31% to $109 million. Weakness in the
10
U.S. dollar versus other major currencies depressed foreign exchange trading,
while commodities trading revenues benefited from increased volume. Interest
rate and currency swaps revenues advanced 24% to $749 million reflecting
higher revenues from U.S. dollar-denominated swap trading activities,
particularly those related to structured financing transactions. Municipal
securities trading revenues increased 20% to $388 million due to strong retail
investor demand for tax-exempt investments.
Investment banking revenues were $1,239 million, down 32% from $1,831
million in 1993 due primarily to the effects of rising interest rates and
reduced demand. Underwriting revenues declined in almost all categories, with
significant decreases in equities, corporate bonds and preferred stock, and
convertible securities. Strategic services revenues, which include fees for
debt restructuring, merger and acquisition activity, and other advisory
services, benefited from increased merger and acquisition advisory assignments
in various industries.
Asset management and portfolio services fees rose 12% from $1,558 million in
1993 to a record $1,739 million. Asset management fees advanced due primarily
to an increase in stock funds under management. Portfolio service fees
advanced due to the continued growth in the number of Asset Power(R) accounts,
a product with fees and transaction limits based on asset levels, and
increased revenues from the ML Consults(R) product.
Other revenues were $471 million, up 65% from $285 million in 1993. The
increase in other revenues was attributable to net realized investment gains
related to merchant banking activities of $81 million, compared with
unrealized losses of $133 million in 1993.
Non-interest expenses were $7,895 million, down 3% from $8,133 million in
the year-ago period. Excluding the 1993 non-recurring lease charge totaling
$103.0 million, non-interest expenses declined 2%.
Compensation and benefits expense, which represented approximately 63% of
total non-interest expenses, declined 6% due principally to lower incentive
and production-related compensation. Compensation and benefits expense, as a
percentage of net revenues, was 51.5% in 1994, compared with 49.8% in 1993.
Occupancy costs declined 24% (7% excluding the 1993 non-recurring lease
charge) benefiting from continued relocation of support staff to lower-cost
facilities and reduced space requirements at the Headquarters facility. Other
facilities costs, which include communications and equipment rental, and
depreciation and amortization, were up 9% due to increased use of market data,
news, and statistical services and higher depreciation expense from the
acquisition of technology-related equipment.
Advertising and market development expenses were down 1% with discretionary
costs decreasing as business conditions became less favorable. Lower sales
promotion and a reduction in advertising campaigns were partially offset by
increased travel related to international business activities. Professional
fees increased 26% due primarily to the use of system and management
consultants to upgrade technology and processing capabilities in trading,
credit, and customer services, as well as higher legal fees. Brokerage,
clearing, and exchange fees increased 20% reflecting higher international
equity volume and expanded risk management activities related to volatile
global market conditions. Other expenses increased 1% from 1993, due to an
increase in office supplies and postage costs.
Income tax expense totaled $713 million in 1994, down 31% from $1,030
million in 1993. The effective tax rate was 41.2% in 1994 versus 42.5% in 1993
as a result of lower state income taxes.
The Company's Annual Report on Form 10-K for the year ended December 30,
1994 describes an action commenced against the Company by Orange County,
California (the "County") and the Orange County Investment Pools (the
"Pools"). See "Incorporation of Certain Documents by Reference." The County
and the Pools seek relief in excess of $2 billion in connection with various
securities transactions between the County and/or the Pools and the Company
and its subsidiaries. Other actions have also been commenced against the
Company and its subsidiaries arising out of the Company's dealings with the
County Treasurer and the Pools.
11
The Company will vigorously contest these actions and believes it has
meritorious defenses. Although the ultimate outcome of these actions cannot be
ascertained at this time and the results of legal proceedings cannot be
predicted with certainty, it is the opinion of management that the resolution
of these actions will not have a material adverse effect on the consolidated
financial condition or results of operations of the Company for the year ended
December 30, 1994.
The Company has also received inquiries from various governmental entities
examining the underlying events and is cooperating with these inquiries.
CERTAIN BALANCE SHEET INFORMATION AS OF DECEMBER 30, 1994
On January 1, 1994, the Company adopted Financial Accounting Standards Board
Interpretation No. 39 ("Interpretation No. 39"), "Offsetting of Amounts Related
to Certain Contracts." Interpretation No. 39 affects the financial statement
presentation of balances related to swap, forward, and other similar exchange
or conditional type contracts, and unconditional type contracts. To offset
unconditional contracts, such as resale and repurchase agreements, net cash
settlement of the related receivable and payable balances is also required by
Interpretation No. 39, as modified by Interpretation No. 41, "Offsetting of
Amounts Related to Certain Repurchase and Reverse Repurchase Agreements." Prior
to the adoption of these Interpretations, the Company followed industry
practice in reporting balances related to certain types of contracts on a net
basis. Unrealized gains and losses for swap, forward, and other similar
contracts were reported net on the balance sheet by contract type, while
certain receivables and payables related to resale and repurchase agreements
were reported net by counterparty. The effect of these Interpretations
increased assets and liabilities at December 30, 1994 by approximately $8.5
billion.
The Company believes that its equity base is adequate relative to the level
and composition of its assets and the mix of its business.
In the normal course of business, the Company underwrites, trades, and holds
non-investment grade securities in connection with its market-making,
investment banking, and derivative structuring activities. These activities
are subject to risks related to the creditworthiness of the issuers and the
liquidity of the market for such securities, in addition to the usual risks
associated with investing in, extending credit, underwriting, and trading in
investment grade instruments.
At December 30, 1994, the fair value of long and short non-investment grade
trading inventories amounted to $3,309 million and $456 million, respectively,
and in the aggregate (i.e., the sum of long and short trading inventories)
represented 4.3% of aggregate consolidated trading inventories.
At December 30, 1994, the carrying value of extensions of credit provided to
corporations entering into leveraged transactions aggregated $257 million
(excluding unutilized revolving lines of credit and other lending commitments
of $50 million), consisting primarily of senior term and subordinated
financings to 35 medium-sized corporations. At December 30, 1994, the Company
had no bridge loans outstanding. Loans to highly leveraged corporations are
carried at unpaid principal balance less a reserve for estimated losses. The
allowance for loan losses is estimated based on a review of each loan, and
consideration of economic, market, and credit conditions. Direct equity
investments made in conjunction with the Company's investment and merchant
banking activities aggregated $289 million at December 30, 1994, representing
investments in 80 enterprises. Equity investments in privately-held
corporations for which sale is restricted by government or contractual
requirements are carried at the lower of cost or estimated net realizable
value. At December 30, 1994, the Company held interests in partnerships,
totaling $93 million (recorded on the cost basis), that invest in highly
leveraged transactions and non-investment grade securities. Prior to July 1,
1994, the Company had a co-investment arrangement to enter into direct equity
investments. At December 30, 1994, the Company also committed to invest an
additional $80 million in partnerships that invest in leveraged transactions.
The Company's insurance subsidiaries hold non-investment grade securities.
As a percentage of total insurance investments, non-investment grade
securities were 5.5% at December 30, 1994. Non-investment grade
12
securities of insurance subsidiaries were classified as available-for-sale and
were carried at fair value at December 30, 1994.
At December 30, 1994, the largest non-investment grade concentration
consisted of various issues of a South American sovereign totaling $235
million, of which $60 million represented on-balance-sheet hedges for off-
balance-sheet instruments. No one industry sector accounted for more than 21%
of total non-investment grade positions. At December 30, 1994, the Company
held an aggregate carrying value of $292 million in debt and equity securities
of issuers in various stages of bankruptcy proceedings. Approximately 71% of
this amount resulted from the Company's market-making activities in such
securities.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1995
Financial markets, which steadily weakened throughout 1994, improved in the
first quarter of 1995 on the prospects of a slowing U.S. economy, relatively
stable interest rates, and heightened investor activity. Net earnings were
$227 million in the 1995 first quarter, down 39% from the record $372 million
in the 1994 first quarter, but up 41% from $162 million in the 1994 fourth
quarter. Total revenues in the 1995 first quarter were $5,204 million, up 10%
and 16% from the 1994 first and fourth quarters, respectively. Net revenues in
the 1995 first quarter were $2,420 million, down 15% from the 1994 first
quarter, but up 16% from the 1994 fourth quarter. Non-interest expenses were
$2,042 million, down 6% from the 1994 first quarter, but up 11% from the 1994
fourth quarter.
Commission revenues were $685 million, down 21% from the 1994 first quarter,
primarily as a result of lower mutual fund and listed securities transactions
revenues. Mutual fund commissions were affected by lower volumes due to
declines in value experienced by most stock and bond mutual funds throughout
1994. Commission on listed securities transactions also decreased, primarily
reflecting a change in the mix of transactions between institutional and
retail clients.
Interest and dividend revenues rose 38% from the 1994 first quarter to
$3,029 million. Interest expense, which includes dividend expense, increased
46% to $2,783 million. Net interest profit declined 16% to $246 million as a
result of a significant increase in short-term interest rates, quarter over
quarter, and the continued flattening of the yield curve, which is the
difference between short-term and long-term interest rates. As a result,
interest spreads declined, while financing and hedging costs increased from
the 1994 first quarter.
Principal transactions revenues increased 1% from the first quarter of 1994
to $675 million. Taxable fixed-income trading revenues increased as a result
of higher revenues from corporate bonds and preferred stock and money market
instruments. Trading results were negatively affected by higher interest
rates, leading to a modest loss in mortgage-backed products and lower revenues
from U.S. Government and agencies securities. Net trading results from
mortgage-backed products were positive, however, when combined with related
net interest income. Revenues from interest rate and currency swaps increased
due to higher trading revenues from non-U.S. dollar and U.S. dollar
denominated swap transactions. Municipal securities revenues advanced due to
continued demand for tax-exempt investments. Equities and equity derivatives
trading revenues decreased primarily as a result of lower revenues from
international equities. Foreign exchange and commodities trading revenues
decreased due primarily to lower commodity trading volume.
Investment banking revenues were $248 million, down 44% from the first
quarter of 1994, as domestic and global underwriting volumes industrywide
declined 50% and 44%, respectively, compared to volumes in the 1994 first
quarter. Underwriting activity continued at low levels as relatively higher
interest rates and increased cash flows from strong corporate earnings
continued to decrease demand for debt and equity issuances. Lower underwriting
revenues were reported in most categories, including equities, high yield
securities, and corporate debt and preferred stock. Strategic services
revenues, which include merger and acquisition fees and advisory fees,
benefited from increased merger and acquisition advisory assignments in
various industries.
13
Asset management and portfolio service fees increased 1% from the 1994 first
quarter to $448 million principally as a result of increased fees earned from
certain mutual fund investor services, variable annuity products, and asset
management activities. Other revenues rose 1% from the 1994 first quarter to
$117 million, reflecting higher income from partnership investments partially
offset by net losses on certain other investments.
Non-interest expenses were $2,042 million, down 6% from the 1994 first
quarter. Compensation and benefits expenses, which represented approximately
62% on non-interest expenses, decreased 11% from the 1994 first quarter, due
primarily to lower levels of variable incentive compensation. Compensation and
benefits expense as a percentage of net revenues was 52.5% in the first
quarter of 1995, compared with 50.5% in the year-ago period.
Occupancy costs decreased 3% from the 1994 first quarter, benefiting from
continued relocation of support staff to lower cost facilities and reduced
space requirements at the headquarters facility. Other facilities-related
costs, which include communications and equipment rental expense and
depreciation and amortization expense, rose 11% primarily due to increased
usage of market information services, as well as higher depreciation expense
from the purchase of technology-related equipment over the past year.
Advertising and market development expenses decreased 12% from the 1994
first quarter due to lower discretionary travel costs and reduced production-
related recognition costs. Professional fees increased 5% from the year-ago
quarter, due primarily to higher legal fees, partially offset by lower systems
and management consulting fees. Brokerage, clearing, and exchange fees
decreased 3% from the 1994 first quarter as a result of lower commodity
exchange fees related to reduced trading volume. Other expenses increased 9%
from the 1994 first quarter due primarily to a $26 million charge for the
write-off of an asset related to a technology contract.
Income tax expense totaled $152 million in the 1995 first quarter. The
effective tax rate in the 1995 first quarter was 40.0%, compared with 43.0% in
the year-ago period. The decrease in the effective tax rate was attributable
to lower state income taxes and higher tax-exempt interest and dividend
income.
CERTAIN BALANCE SHEET INFORMATION AS OF MARCH 31, 1995
The Company believes that its equity base is adequate relative to the level
and composition of its assets and the mix of its business.
In the normal course of business, the Company underwrites, trades, and holds
non-investment grade securities in connection with its investment banking,
market-making, and derivative structuring activities. These activities are
subject to risks related to the creditworthiness of the issuers of, and the
liquidity of the market for, such securities, in addition to the usual risks
associated with investing in, financing, underwriting, and trading in
investment grade instruments.
At March 31, 1995, the fair value of long and short non-investment grade
trading inventories amounted to $3,446 million and $471 million, respectively,
and in the aggregate (i.e. the sum of long and short trading inventories),
represented 4.1% of aggregate consolidated trading inventories.
At March 31, 1995, the carrying value of extensions of credit provided to
corporations entering into leveraged transactions aggregated $225 million
(excluding unutilized revolving lines of credit and other lending commitments
of $45 million), consisting primarily of senior term and subordinated
financings to 34 medium-sized corporations. Subsequent to March 31, 1995, the
Company extended financing to a non-investment grade counterparty totaling $15
million. At March 31, 1995, the Company had no bridge loans outstanding. Loans
to highly leveraged corporations are carried at unpaid principal balances less
a reserve for estimated losses. The allowance for loan losses is estimated
based on a review of each loan, and consideration of economic, market, and
credit conditions. Direct equity investments made in conjunction with the
Company's investment and merchant banking activities aggregated $261 million
at March 31, 1995, representing investments in 76 enterprises. Equity
investments in privately-held companies for which sale is restricted by
government or
14
contractual requirements are carried at the lower of cost or estimated net
realizable value. At March 31, 1995, the Company held interests in
partnerships, totaling $102 million (recorded on the cost basis), that invest
in highly leveraged transactions and non-investment grade securities. At March
31, 1995, the Company also committed to invest an additional $91 million in
partnerships that invest in leveraged transactions.
The Company's insurance subsidiaries hold non-investment grade securities.
As a percentage of total insurance investments, non-investment grade
securities were 4.5% at March 31, 1995. Non-investment grade securities of
insurance subsidiaries are classified as available-for-sale and are carried at
fair value.
At March 31, 1995, the largest non-investment grade concentration consisted
of government and corporate obligations of a Latin American sovereign totaling
$307 million, of which $38 million represented on-balance-sheet hedges for
off-balance-sheet financial instruments. No one industry sector accounted for
more than 23% of total non-investment grade positions. At March 31, 1995, the
Company held an aggregate carrying value of $227 million in debt and equity
securities of issuers in various stages of bankruptcy proceedings or in
default, of which 75% of this amount resulted from the Company's market-making
activities in such securities.
MGIC INVESTMENT CORPORATION
MGIC Investment Corporation is a holding company which, through its indirect
wholly owned subsidiary, Mortgage Guaranty Insurance Corporation, is a leading
provider of private mortgage insurance coverage in the United States to
mortgage bankers, savings institutions, commercial banks, mortgage brokers,
credit unions and other lenders. Private mortgage insurance covers residential
first mortgage loans and expands home ownership opportunities by enabling
people to purchase homes with less than 20% down payments. If the home owner
defaults, private mortgage insurance reduces and, in some instances,
eliminates the loss to the insured institution. Private mortgage insurance
also facilitates the sale of low down payment mortgage loans in the secondary
mortgage market, principally to the Federal National Mortgage Association and
the Federal Home Loan Mortgage Corporation. In addition to mortgage insurance,
MGIC Investment, through other subsidiaries, provides various underwriting and
contract services related to home mortgage lending.
MGIC Investment is subject to the informational requirements of the Exchange
Act. Accordingly, MGIC Investment files reports, proxy and information
statements and other information with the Commission. Copies of such material
can be inspected and copied at the public reference facilities maintained by
the Commission at the addresses specified under "Available Information."
Reports, proxy and information statements and other information concerning
MGIC Investment may also be inspected at the offices of the NYSE.
THE COMPANY IS NOT AFFILIATED WITH MGIC INVESTMENT, AND MGIC INVESTMENT HAS
NO OBLIGATIONS WITH RESPECT TO THE STRYPES. THIS PROSPECTUS RELATES ONLY TO
THE STRYPES OFFERED HEREBY AND DOES NOT RELATE TO MGIC INVESTMENT OR THE MGIC
COMMON STOCK. MGIC INVESTMENT FILED A REGISTRATION STATEMENT ON FORM S-3 WITH
THE COMMISSION ON JUNE 20, 1995, COVERING THE SHARES OF MGIC COMMON STOCK THAT
MAY BE RECEIVED BY A HOLDER OF STRYPES ON THE MATURITY DATE. THE PROSPECTUS OF
MGIC INVESTMENT (THE "MGIC PROSPECTUS") CONSTITUTING A PART OF SUCH
REGISTRATION STATEMENT INCLUDES INFORMATION RELATING TO MGIC INVESTMENT AND
THE MGIC COMMON STOCK, INCLUDING CERTAIN RISK FACTORS RELEVANT TO AN
INVESTMENT IN MGIC COMMON STOCK. THE MGIC PROSPECTUS IS BEING ATTACHED HERETO
AND DELIVERED TO PROSPECTIVE PURCHASERS OF STRYPES TOGETHER WITH THIS
PROSPECTUS FOR CONVENIENCE OF REFERENCE ONLY. THE MGIC PROSPECTUS DOES NOT
CONSTITUTE A PART OF THIS PROSPECTUS, NOR IS IT INCORPORATED BY REFERENCE
HEREIN.
15
PRICE RANGE OF MGIC COMMON STOCK AND DIVIDENDS
MGIC Common Stock is listed on the NYSE under the trading symbol "MTG." The
following table sets forth the high and low sales prices of the MGIC Common
Stock for the periods indicated as reported on the NYSE Composite Tape and the
cash dividends per share of MGIC Common Stock paid during such periods. Data
reflected in the table for periods prior to MGIC Investment's 100% stock
dividend paid in December 1993 have been adjusted to reflect such stock
dividend.
The future payment of cash dividends is subject to the discretion of the
Board of Directors of MGIC Investment and will be dependent on MGIC
Investment's results of operations, financial condition, cash requirements and
other relevant factors. MGIC Investment is a holding company whose principal
source of cash flow is dividends from its subsidiaries, including Mortgage
Guaranty Insurance Corporation.
DIVIDENDS
PERIOD HIGH LOW PER SHARE
- ------ ------- ------- ---------
1993:
First Quarter....................................... $30.375 $24.750 $.035
Second Quarter...................................... 29.813 26.563 .035
Third Quarter....................................... 35.688 28.438 .035
Fourth Quarter...................................... 35.375 28.125 .040
1994:
First Quarter....................................... $32.875 $27.500 $.040
Second Quarter...................................... 31.500 25.000 .040
Third Quarter....................................... 31.125 26.125 .040
Fourth Quarter...................................... 34.250 28.500 .040
1995:
First Quarter....................................... $42.375 $32.750 $.040
Second Quarter (through , 1995).................
For a recent closing price of the MGIC Common Stock, see the cover page of
this Prospectus.
The Company makes no representation as to the amount of dividends, if any,
that MGIC Investment will pay in the future. In any event, holders of STRYPES
will not be entitled to receive any dividends that may be payable on MGIC
Common Stock until such time as the Company, if it so elects, delivers MGIC
Common Stock at the Maturity Date of the STRYPES, and then only with respect
to dividends having a record date on or after the date of delivery of such
MGIC Common Stock. See "Description of the STRYPES."
USE OF PROCEEDS
The Company intends to use the net proceeds from the sale of the STRYPES for
general corporate purposes. Such uses may include the funding of investments
in, or extensions of credit to, its subsidiaries, the funding of assets held
by the Company or its subsidiaries, including securities inventories, customer
receivables and loans (including business loans, home equity loans, and loans
in connection with investment banking-related merger and acquisition
activities), and the refunding of maturing indebtedness. The precise amount
and timing of investments in, and extensions of credit to, its subsidiaries
will depend upon their funding requirements and the availability of other
funds to the Company and its subsidiaries. Pending such applications, the net
proceeds will be temporarily invested or applied to the reduction of short-
term indebtedness. Management of the Company expects that it will, on a
recurrent basis, engage in additional financings as the need arises to finance
the growth of the Company or to lengthen the average maturity of its
borrowings. To the extent that STRYPES being purchased for resale by MLPF&S
are not resold, the aggregate proceeds to the Company and its subsidiaries
would be reduced.
16
DESCRIPTION OF THE STRYPES
The STRYPES are a series of Senior Debt Securities to be issued under an
indenture, dated as of April 1, 1983, as amended and supplemented as of ,
1995 (the indenture dated as of April 1, 1983, as amended and supplemented
from time to time, the "Indenture") between the Company and Chemical Bank
(successor by merger to Manufacturers Hanover Trust Company), as trustee (the
"Trustee"). The following summary of certain provisions of the Indenture does
not purport to be complete and is qualified in its entirety by reference to
the Indenture, a copy of which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part. All capitalized terms not
otherwise defined herein have the meanings specified in the Indenture.
Whenever defined terms of the Indenture are referred to herein, such defined
terms are incorporated by reference herein.
GENERAL
The aggregate number of STRYPES to be issued under the Indenture will be
limited to 5,000,000, plus such additional number of STRYPES as may be issued
pursuant to the over-allotment option granted by the Company to the
Underwriter. See "Underwriting." No fractional STRYPES will be issued. The
STRYPES will be unsecured obligations and will rank pari passu with all other
unsecured and unsubordinated indebtedness of the Company. Since the Company is
a holding company, the right of the Company, and hence the right of creditors
of the Company (including the holders of the STRYPES), to participate in any
distribution of the assets of any subsidiary upon its liquidation or
reorganization or otherwise is necessarily subject to the prior claims of
creditors of the subsidiary, except to the extent that claims of the Company
itself as a creditor of the subsidiary may be recognized. In addition,
dividends, loans and advances from certain subsidiaries, including MLPF&S, to
the Company are restricted by net capital requirements under the Exchange Act
and under rules of certain exchanges and other regulatory bodies.
Each STRYPES, which will be issued at a price of $ , will bear interest
at the annual rate of % of the issue price per annum (or $ per annum)
from , 1995, or from the most recent Interest Payment Date to which
interest has been paid or provided for until such STRYPES is paid and
discharged on the Maturity Date pursuant to the terms thereof. Interest on the
STRYPES will be payable in cash quarterly in arrears on January 15, April 15,
July 15 and October 15, commencing , 1995, and on the Maturity Date
(each, an "Interest Payment Date"), to the persons in whose names the STRYPES
are registered at the close of business on the last day (whether or not a
Business Day) of the calendar month immediately preceding such Interest
Payment Date. Interest on the STRYPES will be computed on the basis of a 360-
day year of twelve 30-day months. If an Interest Payment Date falls on a day
that is not a Business Day, the interest payment to be made on such Interest
Payment Date will be made on the next succeeding Business Day with the same
force and effect as if made on such Interest Payment Date, and no additional
interest will accrue as a result of such delayed payment.
The STRYPES will mature on , 1998. On the Maturity Date, the Company
will pay and discharge each STRYPES by delivering to the holder thereof a
number of shares of MGIC Common Stock (or, at the Company's option, which may
be exercised with respect to all, but not less than all, shares of all MGIC
Common Stock deliverable on the Maturity Date, cash with an equal value) based
on the Payment Rate (as defined below). ACCORDINGLY, THERE CAN BE NO ASSURANCE
THAT THE AMOUNT RECEIVABLE BY HOLDERS OF THE STRYPES ON THE MATURITY DATE WILL
BE EQUAL TO OR GREATER THAN THE ISSUE PRICE OF THE STRYPES.
The "Payment Rate" is equal to, subject to adjustment as a result of certain
dilution events, (a) if the Maturity Price (as defined below) per share of
MGIC Common Stock is greater than or equal to the Threshold Appreciation
Price, shares of MGIC Common Stock per STRYPES, (b) if the Maturity Price
is less than the Threshold Appreciation Price but is greater than the Initial
Price, a fractional share of MGIC Common Stock per STRYPES so that the value
thereof (determined at the Maturity Price) is equal to the Initial Price and
(c) if the Maturity Price is less than or equal to the Initial Price, one
share of MGIC Common Stock per STRYPES. Notwithstanding the foregoing, the
Company may, at its option, in lieu of delivering shares of MGIC Common Stock,
deliver cash in an amount equal to the value of such number of shares of MGIC
Common Stock at the Maturity Price. Such option, if exercised by the Company,
must be exercised with respect to all shares of MGIC
17
Common Stock otherwise deliverable on the Maturity Date in payment of all
outstanding STRYPES. On or prior to the fifth Business Day prior to the
Maturity Date, the Company will notify the Trustee and publish a notice in The
Wall Street Journal or another daily newspaper of national circulation stating
whether the STRYPES will be paid and discharged with shares of MGIC Common
Stock or cash. If the Company elects to deliver shares of MGIC Common Stock,
holders of the STRYPES will be responsible for the payment of any and all
brokerage costs upon their subsequent sale of such stock.
The "Maturity Price" is defined as the average Closing Price per share of
MGIC Common Stock on the 20 Trading Days immediately prior to, but not
including, the Maturity Date. The "Closing Price" of any security on any date
of determination means the closing sale price (or, if no closing price is
reported, the last reported sale price) of such security on the NYSE on such
date or, if such security is not listed for trading on the NYSE on any such
date, as reported in the composite transactions for the principal United
States securities exchange on which such security is so listed, or if such
security is not so listed on a United States national or regional securities
exchange, as reported by the National Association of Securities Dealers, Inc.
Automated Quotation System, or, if such security is not so reported, the last
quoted bid price for such security in the over-the-counter market as reported
by the National Quotation Bureau or similar organization, or, if such bid
price is not available, the market value of such security on such date as
determined by a nationally recognized independent investment banking firm
retained for this purpose by the Company. In the event that the Payment Rate
is adjusted as described under "--Dilution Adjustments" below, the Maturity
Price is subject to adjustment to reflect the average Closing Price per share
of MGIC Common Stock on a pre-adjusted basis. A "Trading Day" is defined as a
day on which the security the Closing Price of which is being determined (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 the national or regional securities exchange or
association or over-the-counter market that is the primary market for the
trading of such security.
For illustrative purposes only, the following chart shows the number of
shares of MGIC Common Stock or the amount of cash that a holder of STRYPES
would receive for each STRYPES at various Maturity Prices. The table assumes
that there will be no dilution adjustments to the Payment Rate as described
below. There can be no assurance that the Maturity Price will be within the
range set forth below. Given the Initial Price of $ and the Threshold
Appreciation Price of $ , a STRYPES holder would receive on the Maturity
Date the following number of shares of MGIC Common Stock or amount of cash (if
the Company elects to pay and discharge the STRYPES with cash) per STRYPES:
NUMBER OF
MATURITY PRICE SHARES OF
OF MGIC MGIC
COMMON STOCK COMMON STOCK AMOUNT OF CASH
-------------- ------------ --------------
$ $
DILUTION ADJUSTMENTS
The Payment Rate is subject to adjustment if MGIC Investment shall: (i) pay
a stock dividend or make a distribution with respect to MGIC Common Stock in
shares of such stock; (ii) subdivide or split the outstanding shares of MGIC
Common Stock into a greater number of shares; (iii) combine the outstanding
shares of MGIC Common Stock into a smaller number of shares; (iv) issue by
reclassification of shares of MGIC Common Stock any shares of common stock of
MGIC Investment; (v) issue rights or warrants to all holders of MGIC Common
Stock entitling them to subscribe for or purchase shares of MGIC Common Stock
at a price per share less than the then current market price of the MGIC
Common Stock (other than rights to purchase MGIC 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 MGIC 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
18
Dividends (as defined below)) or issue to all holders of MGIC Common Stock
rights or warrants to subscribe for or purchase any of its securities (other
than those referred to in clause (v) above). In the case of the events
referred to in clauses (i), (ii), (iii) and (iv) above, the Payment Rate shall
be adjusted so that each holder of any STRYPES shall thereafter be entitled to
receive, upon payment and discharge of such STRYPES on the Maturity Date, the
number of shares of MGIC Common Stock which such holder would have owned or
been entitled to receive immediately following any event described above had
such STRYPES been paid and discharged immediately prior to such event or any
record date with respect thereto. Nevertheless, the Maturity Price shall equal
the average Closing Price per share of MGIC Common Stock on the 20 Trading
Days immediately prior to, but not including, the Maturity Date. In the case
of the event referred to in clause (v) above, the Payment Rate shall be
adjusted by multiplying the Payment Rate in effect immediately prior to the
date of issuance of the rights or warrants referred to in clause (v) above, by
a fraction, of which the numerator shall be the number of shares of MGIC
Common Stock outstanding on the date of issuance of such rights or warrants,
immediately prior to such issuance, plus the number of additional shares of
MGIC Common Stock offered for subscription or purchase pursuant to such rights
or warrants, and of which the denominator shall be the number of shares of
MGIC Common Stock outstanding on the date of issuance of such rights or
warrants, immediately prior to such issuance, plus the number of additional
shares of MGIC Common Stock which the aggregate offering price of the total
number of shares of MGIC Common Stock so offered for subscription or purchase
pursuant to such rights or warrants would purchase at the market price
(determined as the average Closing Price per share of MGIC Common Stock on the
20 Trading Days immediately prior to the date such rights or warrants are
issued), which shall be determined by multiplying such total number of shares
by the exercise price of such rights or warrants and dividing the product so
obtained by such market price. To the extent that shares of MGIC Common Stock
are not delivered after the expiration of such rights or warrants, the Payment
Rate shall be readjusted to the Payment Rate 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 shares of MGIC Common Stock
actually delivered. In the case of the event referred to in clause (vi) above,
the Payment Rate shall be adjusted by multiplying the Payment Rate in effect
on the record date, by a fraction of which the numerator shall be the market
price per share of the MGIC Common Stock on the record date for the
determination of stockholders entitled to receive the dividend or distribution
referred to in clause (vi) above (such market price being determined as the
average Closing Price per share of MGIC Common Stock on the 20 Trading Days
immediately prior to such record date), and of which the denominator shall be
such market price per share of MGIC Common Stock less the fair market value
(as determined by the Board of Directors of the Company, whose determination
shall be conclusive, and described in a resolution adopted with respect
thereto) as of such record date of the portion of the assets or evidences of
indebtedness so distributed or of such subscription rights or warrants
applicable to one share of MGIC Common Stock. An "Extraordinary Cash Dividend"
means, with respect to any consecutive 12-month period, all cash dividends on
the MGIC Common Stock during such period to the extent such dividends exceed
on a per share basis 10% of the average Closing Price of the MGIC Common Stock
over such period (less any such dividends for which a prior adjustment to the
Payment Rate was previously made). All adjustments to the Payment Rate will be
calculated to the nearest 1/10,000th of a share of MGIC 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 in the Payment Rate shall be required unless such
adjustment would require an increase or decrease of at least one percent
therein; 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 MGIC Investment, or any
surviving entity or subsequent surviving entity of MGIC Investment (a "MGIC
Successor"), with or into another entity (other than a merger or consolidation
in which MGIC Investment is the continuing corporation and in which the MGIC
Common Stock outstanding immediately prior to the merger or consolidation is
not exchanged for cash, securities or other property of MGIC Investment or
another corporation), (B) any sale, transfer, lease or conveyance to another
corporation of the property of MGIC Investment or any MGIC Successor as an
entirety or substantially as an entirety, (C) any statutory exchange of
securities of MGIC Investment or any MGIC Successor with another corporation
(other than in connection with a merger or acquisition) or (D) any
liquidation, dissolution or winding up of MGIC Investment or any MGIC
Successor (any such event described in clause (A), (B), (C) or (D), a
19
"Reorganization Event"), the Payment Rate used to determine the amount payable
on the Maturity Date for each STRYPES will be adjusted to provide that each
holder of STRYPES will receive on the Maturity Date for each STRYPES cash in
an amount equal to (a) if the Transaction Value (as defined below) is greater
than or equal to the Threshold Appreciation Price, multiplied by the
Transaction Value, (b) if the Transaction Value is less than the Threshold
Appreciation Price but greater than the Initial Price, the Initial Price and
(c) if the Transaction Value is less than or equal to the Initial Price, the
Transaction Value. "Transaction Value" means (i) for any cash received in any
such Reorganization Event, the amount of cash received per share of MGIC
Common Stock, (ii) for any property other than cash or securities received in
any such Reorganization Event, an amount equal to the market value on the
Maturity Date of such property received per share of MGIC Common Stock as
determined by a nationally recognized independent investment banking firm
retained for this purpose by the Company and (iii) for any securities received
in any such Reorganization Event, an amount equal to the average Closing Price
per unit of such securities on the 20 Trading Days immediately prior to the
Maturity Date multiplied by the number of such securities received for each
share of MGIC Common Stock. Notwithstanding the foregoing, in the event that
property or securities, or a combination of cash, on the one hand, and
property or securities, on the other, are received in such Reorganization
Event, the Company may, at its option, in lieu of delivering cash as described
above, deliver the amount of cash, securities and other property, received per
share of MGIC Common Stock in such Reorganization Event determined in
accordance with clause (i), (ii) or (iii) above, as applicable. If the Company
elects to deliver securities or other property, holders of the STRYPES will be
responsible for the payment of any and all brokerage and other transaction
costs upon any subsequent sale of such securities or other property. The kind
and amount of securities with which the STRYPES shall be paid and discharged
after consummation of such transaction shall be subject to adjustment as
described in the immediately preceding paragraph following the date of
consummation of such transaction.
No adjustments will be made for certain other events, such as offerings of
MGIC Common Stock by MGIC Investment for cash or in connection with
acquisitions. Likewise, no adjustments will be made for any sales of MGIC
Common Stock by NML.
The Company is required, within ten Business Days following the occurrence
of an event that requires an adjustment to the Payment Rate (or if the Company
is not aware of such occurrence, as soon as practicable after becoming so
aware), to provide written notice to the Trustee and to the holders of the
STRYPES of the occurrence of such event and a statement in reasonable detail
setting forth the method by which the adjustment to the Payment Rate was
determined and setting forth the revised Payment Rate.
FRACTIONAL SHARES
No fractional shares of MGIC Common Stock will be delivered if the Company
pays and discharges the STRYPES by delivering shares of MGIC Common Stock. In
lieu of any fractional share otherwise deliverable in respect of all STRYPES
of any holder on the Maturity Date, such holder shall be entitled to receive
an amount in cash equal to the value of such fractional share at the Maturity
Price.
REDEMPTION, SINKING FUND AND PAYMENT PRIOR TO MATURITY
The STRYPES are not subject to redemption by the Company prior to the
Maturity Date and do not contain sinking fund or other mandatory redemption
provisions. The STRYPES are not subject to payment prior to the Maturity Date
at the option of the holder.
SECURITIES DEPOSITORY
Upon issuance, all STRYPES will be represented by one or more fully
registered global securities (the "Global Notes"). Each such Global Note will
be deposited with, or on behalf of, The Depository Trust Company, as
Securities Depository, registered in the name of the Securities Depository or
a nominee thereof. Unless and until it is exchanged in whole or in part for
STRYPES in definitive form under the limited circumstances described below, no
Global Note may be transferred except as a whole by the Securities Depository
to a nominee of such Securities Depository or by a nominee of such Securities
Depository to such Securities Depository or another nominee of such Securities
Depository or by such Securities Depository or any such nominee to a successor
of such Securities Depository or a nominee of such successor.
20
The Securities Depository has advised the Company as follows: The Securities
Depository is a limited-purpose trust company organized under the Banking Law
of the State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. The Securities Depository was
created to hold securities of its participants ("Participants") and to
facilitate the clearance and settlement of securities transactions among its
Participants in such securities through electronic book-entry changes in
accounts of the Participants, thereby eliminating the need for physical
movement of securities certificates. The Securities Depository's Participants
include securities brokers and dealers (including MLPF&S), banks, trust
companies, clearing corporations, and certain other organizations.
The Securities Depository is owned by a number of Participants and by the
New York Stock Exchange, Inc., the American Stock Exchange, Inc. and the
National Association of Securities Dealers, Inc. Access to the Securities
Depository book-entry system is also available to others, such as banks,
brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly
("Indirect Participants").
Purchases of STRYPES must be made by or through Participants, which will
receive a credit on the records of the Securities Depository. The ownership
interest of each actual purchaser of each STRYPES ("Beneficial Owner") is in
turn to be recorded on the Participants' or Indirect Participants' records.
Beneficial Owners will not receive written confirmations from the Securities
Depository of their purchase, but Beneficial Owners are expected to receive
written confirmation providing details of the transaction, as well as periodic
statements of their holdings, from the Participant or Indirect Participant
through which the Beneficial Owner entered into the transaction. Ownership of
beneficial interest in such Global Note will be shown on, and the transfer of
such ownership interests will be effected only through, records maintained by
the Securities Depository (with respect to interests of Participants) and on
the records of Participants (with respect to interests of persons held through
Participants). The laws of some states may require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
limits and such laws may impair the ability to own, transfer or pledge
beneficial interests in Global Notes.
So long as the Securities Depository, or its nominee, is the registered
owner of a Global Note, the Securities Depository or its nominee, as the case
may be, will be considered the sole owner or holder of the STRYPES represented
by such Global Note for all purposes under the Indenture. Except as provided
below, Beneficial Owners in a Global Note will not be entitled to have the
STRYPES represented by such Global Notes registered in their names, will not
receive or be entitled to receive physical delivery of the STRYPES in
definitive form and will not be considered the owners or holders thereof under
the Indenture. Accordingly, each Person owning a beneficial interest in a
Global Note must rely on the procedures of the Securities Depository and, if
such Person is not a Participant, on the procedures of the Participant through
which such Person owns its interest, to exercise any rights of a holder under
the Indenture. The Company understands that under existing industry practices,
in the event that the Company requests any action of holders or that an owner
of a beneficial interest in such a Global Note desires to give or take any
action which a holder is entitled to give or take under the Indenture, the
Securities Depository would authorize the Participants holding the relevant
beneficial interests to give or take such action, and such Participants would
authorize Beneficial Owners owning through such Participants to give or take
such action or would otherwise act upon the instructions of beneficial owners.
Conveyance of notices and other communications by the Securities Depository to
Participants, by Participants to Indirect Participants, and by Participants
and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements
as may be in effect from time to time.
Payment of any amount with respect to STRYPES registered in the name of the
Securities Depository or its nominee will be made to the Securities Depository
or its nominee, as the case may be, as the holder of the Global Notes
representing such STRYPES. None of the Company, the Trustee or any other agent
of the Company or agent of the Trustee will have any responsibility or
liability for any aspect of the records relating to or payments made on
account of beneficial ownership interests or for supervising or reviewing any
records relating to such beneficial ownership interests. The Company expects
that the Securities Depository, upon receipt of any payment
21
in respect of a Global Note, will credit the accounts of the Participants with
payment in amounts proportionate to their respective holdings of beneficial
interest in such Global Note as shown on the records of the Securities
Depository. The Company also expects that payments by Participants to
Beneficial Owners will be governed by standing customer instructions and
customary practices, as is now the case with securities held for the accounts
of customers in bearer form or registered in "street name", and will be the
responsibility of such Participants.
If (x) the Securities Depository is at any time unwilling or unable to
continue as Securities Depository and a successor depository is not appointed
by the Company within 60 days, (y) the Company executes and delivers to the
Trustee a Company Order to the effect that the Global Notes shall be
exchangeable or (z) an Event of Default has occurred and is continuing with
respect to the STRYPES, the Company will issue STRYPES in definitive form in
exchange for all of the Global Notes representing the STRYPES. Such definitive
STRYPES shall be registered in such name or names as the Securities Depository
shall instruct the Trustee. It is expected that such instructions may be based
upon directions received by the Securities Depository from Participants with
respect to ownership of beneficial interests in such Global Notes.
MERGER AND CONSOLIDATION
The Company may consolidate or merge with or into any other corporation, and
the Company may sell, lease or convey all or substantially all of its assets
to any corporation, provided that (i) the corporation (if other than the
Company) formed by or resulting from any such consolidation or merger or which
shall have received such assets shall be a corporation organized and existing
under the laws of the United States of America or a state thereof and shall
assume the due and punctual delivery or payment of the shares of MGIC Common
Stock (or cash with an equal value) in respect of, and interest on, the
STRYPES and the due and punctual performance and observance of all of the
covenants and conditions of the Indenture to be performed or observed by the
Company, and (ii) the Company or such successor corporation, as the case may
be, shall not immediately thereafter be in default under the Indenture.
Except as provided above, there are no "event risk" or similar provisions of
the Indenture or the STRYPES that are intended to afford protection to holders
in the event of a merger or other significant corporate event involving the
Company.
LIMITATIONS UPON LIENS
The Indenture provides that the Company may not, and may not permit any
Subsidiary to, create, assume, incur or permit to exist any indebtedness for
borrowed money secured by a pledge, lien or other encumbrance (except for
certain liens specifically permitted by the Indenture) on the Voting Stock
owned directly or indirectly by the Company of any Subsidiary (other than a
Subsidiary which, at the time of incurrence of such secured indebtedness, has
a net worth of less than $3,000,000) without making effective provision
whereby the Outstanding STRYPES will be secured equally and ratably with such
secured indebtedness.
LIMITATIONS ON DISPOSITION OF VOTING STOCK OF, AND MERGER AND SALE OF ASSETS
BY, MLPF&S
The Indenture provides that the Company may not sell, transfer or otherwise
dispose of any Voting Stock of MLPF&S or permit MLPF&S to issue, sell or
otherwise dispose of any of its Voting Stock, unless, after giving effect to
any such transaction, MLPF&S remains a Controlled Subsidiary (defined in the
Indenture to mean a corporation more than 80% of the outstanding shares of
Voting Stock of which are owned directly or indirectly by the Company). In
addition, the Indenture provides that the Company may not permit MLPF&S to (i)
merge or consolidate, unless the surviving company is a Controlled Subsidiary,
or (ii) convey or transfer its properties and assets substantially as an
entirety, except to one or more Controlled Subsidiaries.
EVENTS OF DEFAULT
Each of the following will constitute an Event of Default under the
Indenture with respect to the STRYPES: (a) failure to pay and discharge the
STRYPES with MGIC Common Stock or, if the Company so elects, to pay
22
an equivalent amount in cash in lieu thereof when due; (b) failure to pay any
interest on any STRYPES when due, continued for 30 days; (c) failure to
perform any other covenant of the Company in the Indenture, continued for 60
days after written notice has been given to the Company by the Trustee, or to
the Company and the Trustee by the holders of at least 10% of the aggregate
issue price of the Outstanding STRYPES, as provided in the Indenture; and (d)
certain events in bankruptcy, insolvency or reorganization of the Company.
If an Event of Default (other than an Event of Default described in clause
(d) of the immediately preceding paragraph) with respect to the STRYPES shall
occur and be continuing, either the Trustee or the holders of at least 25% of
the aggregate issue price of the Outstanding STRYPES by notice as provided in
the Indenture may declare an amount equal to the issue price of all the
STRYPES to be due and payable immediately. If an Event of Default described in
said clause (d) shall occur, an amount equal to the issue price of all the
STRYPES will become immediately due and payable without any declaration or
other action on the part of the Trustee or any holder. After such
acceleration, but before a judgment or decree based on acceleration, the
holders of a majority of the aggregate issue price of the Outstanding STRYPES
may, under certain circumstances, rescind and annul such acceleration if all
Events of Default, other than the non-payment of the amount equal to the issue
price of all the STRYPES due by reason of such acceleration, have been cured
or waived as provided in the Indenture. See "Modification and Waiver" below.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing, the
Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request or direction of any of the holders of
STRYPES, unless such holders shall have offered to the Trustee reasonable
security or indemnity against the costs, expenses and liabilities which might
be incurred by it in compliance with such request or direction. Subject to
such provisions for the indemnification of the Trustee, the holders of a
majority of the aggregate issue price of the STRYPES will have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee with respect to the STRYPES.
The Company will be required to furnish to the Trustee annually a statement
by certain of its officers as to whether or not the Company, to their
knowledge, is in default in the fulfillment of any of its obligations under
the Indenture and, if so, specifying all such known defaults.
MODIFICATION AND WAIVER
Modifications of and amendments to the Indenture affecting the STRYPES may
be made by the Company and the Trustee with the consent of the holders of 66
2/3% of the aggregate issue price of the Outstanding STRYPES; provided,
however, that no such modification or amendment may, without the consent of
the holder of each Outstanding STRYPES affected thereby, (a) change the
Maturity Date or the Stated Maturity of any installment of interest on any
STRYPES or reduce the amount of MGIC Common Stock payable with respect to any
STRYPES (or reduce the amount of cash payable in lieu thereof), (b) reduce the
amount of interest payable on any STRYPES or reduce the amount of cash payable
with respect to any STRYPES upon acceleration of the Maturity thereof, (c)
change the place or currency of payment of interest on, or any amount of cash
payable with respect to, any STRYPES, (d) impair the right to institute suit
for the enforcement of any payment on or with respect to any STRYPES,
including the payment of MGIC Common Stock with respect to any STRYPES, (e)
reduce the percentage of the aggregate issue price of Outstanding STRYPES, the
consent of whose holders is required to modify or amend the Indenture, (f)
reduce the percentage of the aggregate issue price of Outstanding STRYPES
necessary for waiver of compliance with certain provisions of the Indenture or
for waiver of certain defaults or (g) modify such provisions with respect to
modification and waiver.
The holders of a majority of the aggregate issue price of the STRYPES may
waive compliance by the Company with certain restrictive provisions of the
Indenture. The holders of a majority of the aggregate issue price of the
STRYPES may waive any past default under the Indenture, except a default in
the payment of MGIC Common Stock with respect to any STRYPES, or the payment
of cash payable in lieu thereof, or in the payment of interest and certain
covenants and provisions of the Indenture which cannot be amended without the
consent of the holder of each Outstanding STRYPES affected.
23
GOVERNING LAW
The Indenture and the STRYPES will be governed by, and construed in
accordance with, the laws of the State of New York.
LISTING
Application will be made to list the STRYPES on the NYSE.
CERTAIN ARRANGEMENTS WITH NML
Pursuant to the Purchase Contract, the Company is obligated to purchase from
NML immediately prior to maturity of the STRYPES a number of shares of MGIC
Common Stock equal to the number required by the Company to pay and discharge
all of the STRYPES (including any STRYPES issued pursuant to the over-
allotment option granted by the Company to the Underwriter) at an aggregate
purchase price equal to the total issue price for the STRYPES, less the total
underwriting discount, plus an adjustment for an interest differential factor.
NML has the option, exercisable in its sole discretion, to require that
obligations under the Purchase Contract be satisfied by a cash payment or net
cash settlement based upon the value of such number of shares of MGIC Common
Stock at the Maturity Price. Such option, if exercised by NML, must be
exercised with respect to all shares of MGIC Common Stock deliverable pursuant
to the Purchase Contract. The Company has agreed with NML that, without the
prior consent of NML, it will not amend the Indenture to increase the
consideration that NML is obligated to deliver pursuant to the Purchase
Contract.
The Purchase Contract does not contain any restriction on the ability of NML
to sell, pledge or otherwise convey all or any portion of the MGIC Common
Stock held by it, and no such shares of MGIC Common Stock will be pledged or
otherwise held in escrow for use at maturity of the STRYPES. In the event of a
significant sale, pledge or conveyance by NML, or an insolvency or liquidation
of NML (in which case the MGIC Common Stock, if any, owned by NML will be
subject to the claims of policyholders and/or creditors of NML), the Company
may be more likely to deliver to a holder of STRYPES cash in lieu of MGIC
Common Stock.
Until such time, if any, as NML shall have delivered shares of MGIC Common
Stock to the Company at maturity of the STRYPES pursuant to the terms of the
Purchase Contract, NML will retain all ownership rights with respect to the
MGIC Common Stock held by it (including, without limitation, voting rights and
rights to receive any dividends or other distributions in respect thereof).
For more information regarding the relationship between NML and MGIC
Investment, see the MGIC Prospectus which accompanies this Prospectus.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
Set forth in full below is the opinion of Brown & Wood, counsel to the
Company, as to certain United States Federal income tax consequences of the
purchase, ownership and disposition of the STRYPES. Such opinion is based upon
laws, regulations, rulings and decisions now in effect (or, in the case of
certain regulations, in proposed form), all of which are subject to change
(including retroactive changes in effective dates) or possible differing
interpretations. The discussion below deals only with STRYPES held as capital
assets and does not purport to deal with persons in special tax situations,
such as financial institutions, insurance companies, regulated investment
companies, dealers in securities or currencies, tax-exempt entities, or
persons holding STRYPES as a hedge against currency risks or as a position in
a "straddle" for tax purposes. It also does not deal with holders of STRYPES
other than original purchasers thereof (except where otherwise specifically
noted herein). The following discussion also does not address the tax
consequences of investing in the STRYPES
24
arising under the laws of any state, local or foreign jurisdiction. Persons
considering the purchase of the STRYPES 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 STRYPES arising under the laws of any other
taxing jurisdiction.
As used herein, the term "U.S. Holder" means a beneficial owner of a STRYPES
that is for United States Federal income tax purposes (i) a citizen or
resident of the United States, (ii) a corporation, partnership or other entity
created or organized in or under the laws of the United States or of any
political subdivision thereof, (iii) an estate or trust the income of which is
subject to United States Federal income taxation regardless of its source or
(iv) any other person whose income or gain in respect of a STRYPES is
effectively connected with the conduct of a United States trade or business.
As used herein, the term "non-U.S. Holder" means a beneficial owner of a
STRYPES that is not a U.S. Holder.
GENERAL
There are no statutory provisions, regulations (except possibly the Proposed
Regulations as described below), published rulings or judicial decisions
addressing or involving the characterization, for United States Federal income
tax purposes, of the STRYPES or securities with terms substantially the same
as the STRYPES. Accordingly, the proper United States Federal income tax
characterization and treatment of the STRYPES is uncertain. Pursuant to the
terms of the Indenture, the Company and any holder of a STRYPES agree to treat
each STRYPES as a unit (a "Unit") consisting of (i) a debt instrument (the
"Debt Instrument") with a fixed principal amount unconditionally payable on
the Maturity Date equal to the issue price of the STRYPES and bearing interest
at the stated interest rate on the STRYPES and (ii) a forward purchase
contract (the "Forward Contract") pursuant to which the holder agrees to use
the principal payment due on the Debt Instrument to purchase on the Maturity
Date the MGIC Common Stock which the Company is obligated to deliver at that
time (subject to the Company's right to deliver cash with an equal value in
lieu of the MGIC Common Stock). Therefore, the Company currently intends to
treat each STRYPES as a Unit consisting of the Debt Instrument and the Forward
Contract 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 and treatment of the STRYPES for United States Federal income
tax purposes. In the opinion of Brown & Wood, counsel to the Company, such
characterization and tax treatment of the STRYPES, although not the only
reasonable characterization and tax treatment, is based on reasonable
interpretations of law currently in effect and, even if successfully
challenged by the IRS, will not result in the imposition of penalties.
Prospective investors in the STRYPES should be aware, however, that no
ruling is being requested from the IRS with respect to the STRYPES, the IRS is
not bound by the characterization of each STRYPES by the Company and the
holders thereof as a Unit consisting of the Debt Instrument and the Forward
Contract, and the IRS could possibly assert a different position as to the
proper United States Federal income tax characterization and treatment of the
STRYPES. For instance, it is possible that the IRS could assert that each
STRYPES should be treated entirely as a single debt instrument of the Company
for United States Federal income tax purposes. Except where otherwise
specifically provided herein, the following discussion of the principal United
States Federal income tax consequences of the purchase, ownership and
disposition of the STRYPES is based upon the assumption that each STRYPES will
be characterized and treated as a Unit consisting of the Debt Instrument and
the Forward Contract for United States Federal income tax purposes. As
discussed in greater detail herein, if the STRYPES are not in fact ultimately
characterized and treated as a Unit consisting of the Debt Instrument and the
Forward Contract for United States Federal income tax purposes, then the
United States Federal income tax treatment of the purchase, ownership and
disposition of the STRYPES could significantly differ from the treatment
discussed immediately below with the result that the timing and character of
income, gain or loss recognized on a STRYPES could significantly differ from
the timing and character of income, gain or loss recognized on a STRYPES had
each STRYPES in fact been characterized and treated as a Unit consisting of
the Debt Instrument and the Forward Contract for United States Federal income
tax purposes.
25
U.S. HOLDERS
As previously discussed, pursuant to the terms of the Indenture, the Company
and any holder of a STRYPES agree to treat each STRYPES as a Unit consisting
of the Debt Instrument and the Forward Contract. Consistent with this
treatment of the STRYPES, pursuant to the terms of the Indenture, a U.S.
Holder of a STRYPES will be required to include currently in income payments
denominated as interest that are made with respect to a STRYPES in accordance
with such U.S. Holder's regular method of tax accounting. Furthermore,
pursuant to the agreement contained in the Indenture to treat each STRYPES as
a Unit consisting of the Debt Instrument and the Forward Contract, any holder
of a STRYPES agrees to allocate the purchase price paid by such holder to
acquire the STRYPES between the two components of the Unit (i.e., the Debt
Instrument and the Forward Contract) based upon their relative fair market
values (as determined on the purchase date). The portion of the total purchase
price so allocated by the holder to each component of the Unit will generally
constitute the holder's initial tax basis for each such component of the Unit.
Accordingly, in the event that the fair market value of the Debt Instrument
(as determined on the purchase date) exceeds the purchase price paid by the
holder to acquire the STRYPES, the holder would be deemed to have acquired the
Debt Instrument for an amount equal to the fair market value of the Debt
Instrument (as determined on the purchase date) and would be deemed to have
assumed the Forward Contract component of the STRYPES in exchange for a
payment in an amount equal to the excess of the fair market value of the Debt
Instrument (as determined on the purchase date) over the purchase price paid
by the holder to acquire the STRYPES. In such event, such deemed payment
received by the holder in respect of the Forward Contract should only be
includible in income by the holder as an additional amount realized with
respect to the Forward Contract on the earlier of the sale or other
disposition of the STRYPES by the holder or the Maturity Date. Pursuant to the
terms of the Indenture, with respect to acquisitions of STRYPES in connection
with the original issuance thereof, the Company and the holders agree to
allocate $ of the entire initial purchase price of a STRYPES (i.e., the
issue price of a STRYPES) to the Debt Instrument component and to allocate the
remaining $ of the entire initial purchase price of a STRYPES to the
Forward Contract component. Based upon the foregoing, pursuant to the
agreement to treat each STRYPES as a Unit consisting of the Debt Instrument
and the Forward Contract, a holder who acquires a STRYPES in connection with
the original issuance thereof, will have agreed to treat such acquisition of
the STRYPES by the holder as a purchase of the Debt Instrument by the holder
for $ and the making of an initial payment by the holder with respect to
the Forward Contract of $ .
Under general principles of current United States Federal income tax law,
payments of interest on a debt instrument (e.g., the Debt Instrument)
generally will be taxable to a U.S. Holder as ordinary interest income at the
time such payments are accrued or are received (in accordance with the U.S.
Holder's regular method of tax accounting). In addition, a debt instrument
will be treated as having been issued with original issue discount for United
States Federal income tax purposes to the extent that the stated redemption
price at maturity of the debt instrument (generally the debt instrument's
stated principal amount) exceeds the debt instrument's issue price, if such
excess equals or exceeds a de minimis amount (generally 1/4 of 1% of the debt
instrument's stated redemption price at maturity multiplied by the number of
complete years to maturity from its issue date). Pursuant to the agreement to
treat each STRYPES as a Unit consisting of the Debt Instrument and the Forward
Contract, each such Debt Instrument component will be treated for these
purposes as having an issue price equal to $ . Since the stated redemption
price at maturity of each such Debt Instrument component (i.e., $ ) does not
exceed its issue price (i.e., $ ) by an amount that is equal to or greater
than $ (i.e., the applicable de minimis amount), the Debt Instrument
component of each Unit will not be treated as having been issued with any
original issue discount.
Under the foregoing principles and in accordance with the agreement to treat
each STRYPES as a Unit consisting of the Debt Instrument and the Forward
Contract, the quarterly interest payments payable with respect to the STRYPES
at the stated interest rate of % of the issue price of the STRYPES per annum
(the "Interest Payments") generally will be taxable to a U.S. Holder as
ordinary interest income on the respective dates that such Interest Payments
are accrued or are received (in accordance with the U.S. Holder's regular
method of tax accounting). On the Maturity Date, pursuant to the agreement to
treat each STRYPES as a Unit consisting of the Debt Instrument and the Forward
Contract, a U.S. Holder will recognize capital gain or loss with respect to
the Debt Instrument in an amount equal to the difference, if any, between the
principal amount of the Debt
26
Instrument (i.e., the issue price of the STRYPES) and such U.S. Holder's
adjusted tax basis in the Debt Instrument. Such capital gain or loss will
generally be long-term capital gain or loss if the STRYPES has been held by
the U.S. Holder for more than one year as of the Maturity Date. In addition,
pursuant to the agreement to treat each STRYPES as a Unit consisting of the
Debt Instrument and the Forward Contract, on the Maturity Date, if the Company
delivers MGIC Common Stock upon payment of the STRYPES, a U.S. Holder will
generally not realize any taxable gain or loss on the exchange, pursuant to
the Forward Contract, of the principal amount of the Debt Instrument for the
MGIC Common Stock. However, a U.S. Holder will generally be required to
recognize taxable gain or loss with respect to any cash received in lieu of
fractional shares. The amount of such gain or loss recognized by a U.S. Holder
will be equal to the difference, if any, between the amount of cash received
by the U.S. Holder and the portion of the sum of the principal amount of the
Debt Instrument and the U.S. Holder's tax basis in the Forward Contract that
is allocable to the fractional shares. Any such taxable gain or loss will be
treated as short-term capital gain or loss. A U.S. Holder will have an initial
tax basis in any MGIC Common Stock received on the Maturity Date in an amount
equal to the sum of the principal amount of the Debt Instrument and the U.S.
Holder's tax basis in the Forward Contract less the portion of such sum that
is allocable to any fractional shares (as described above) and will realize
taxable gain or loss with respect to such MGIC Common Stock received on the
Maturity Date only upon the subsequent sale or disposition by the U.S. Holder
of such MGIC Common Stock. In addition, a U.S. Holder's holding period for any
MGIC Common Stock received by such U.S. Holder on the Maturity Date will begin
on the day immediately following the Maturity Date and will not include the
period during which the U.S. Holder held such STRYPES.
Alternatively, pursuant to the agreement to treat the STRYPES as a Unit
consisting of the Debt Instrument and the Forward Contract, if the Company
pays the STRYPES in cash on the Maturity Date, a U.S. Holder will recognize
taxable gain or loss on the Maturity Date with respect to the Forward Contract
(in addition to any gain or loss recognized with respect to the Debt
Instrument as described above) in an amount equal to the difference, if any,
between the total amount of cash received by such U.S. Holder on the Maturity
Date and an amount equal to the sum of the principal amount of the Debt
Instrument and the U.S. Holder's tax basis in the Forward Contract. It is
uncertain whether such gain or loss would be treated as capital or ordinary.
If such gain or loss is properly treated as capital, then such gain or loss
will be treated as long-term capital gain or loss if the STRYPES has been held
by the U.S. Holder for more than one year as of the Maturity Date. If such
gain or loss is properly treated as ordinary gain or loss, it is possible that
the deductibility of any loss recognized on the Maturity Date with respect to
the Forward Contract by a U.S. Holder who is an individual could be subject to
the limitations applicable to miscellaneous itemized deductions provided for
under Section 67(a) of the Internal Revenue Code of 1986, as amended (the
"Code"). In general, Section 67(a) of the Code provides that an individual may
only deduct miscellaneous itemized deductions for a particular taxable year to
the extent that the aggregate amount of the individual's miscellaneous
itemized deductions for such taxable year exceed two percent of the
individual's adjusted gross income for such taxable year (although, the
miscellaneous itemized deductions allowable to high-income individuals are
generally subject to further limitations). Prospective investors in the
STRYPES are urged to consult their own tax advisors concerning the character
of any gain or loss realized on the Maturity Date with respect to the Forward
Contract in the event that the Company elects to pay the STRYPES in cash on
the Maturity Date as well as the deductibility of any such loss.
Pursuant to the agreement to treat each STRYPES as a Unit consisting of the
Debt Instrument and the Forward Contract, upon the sale or other disposition
of a STRYPES prior to the Maturity Date, a U.S. Holder generally will be
required to allocate the total amount realized by such U.S. Holder upon such
sale or other disposition between the two components of the Unit (i.e., the
Debt Instrument and the Forward Contract) based upon their relative fair
market values (as determined on the date of disposition). Accordingly, in the
event that the fair market value of the Debt Instrument (as determined on the
date of disposition) exceeds the actual amount realized by the U.S. Holder
upon the sale or other disposition of a STRYPES prior to the Maturity Date,
the U.S. Holder would be deemed to have sold the Debt Instrument for an amount
equal to the fair market value of the Debt Instrument (as determined on the
date of disposition) and would be deemed to have made a payment to the
purchaser of the STRYPES in exchange for such purchaser's assumption of the
Forward Contract in an amount equal to the excess of the fair market value of
the Debt Instrument (as determined on the date of disposition) over the actual
amount realized by the U.S. Holder upon such sale or disposition of the
STRYPES.
27
A U.S. Holder will be required to recognize taxable gain or loss with respect
to each such component in an amount equal to the difference, if any, between
the amount realized (or paid) with respect to each such component upon the
sale or disposition of the STRYPES (as determined in the manner described
above) and the U.S. Holder's adjusted tax basis in each such component. Any
such gain or loss will generally be treated as long-term capital gain or loss
if the U.S. Holder has held the STRYPES for more than one year at the time of
disposition.
As previously discussed, prospective investors in the STRYPES should be
aware that the IRS is not bound by the characterization of the STRYPES by the
Company and the holders thereof as a Unit consisting of the Debt Instrument
and the Forward Contract, and the IRS could possibly assert a different
position as to the proper United States Federal income tax characterization
and treatment of the STRYPES. For instance, it is possible that the IRS could
assert that each STRYPES should be treated entirely as a single debt
instrument of the Company for United States Federal income tax purposes.
If the STRYPES were ultimately characterized and treated entirely as debt
instruments of the Company for United States Federal income tax purposes, then
the timing and character of income, gain or loss recognized on a STRYPES would
differ from the timing and character of income, gain or loss recognized on a
STRYPES had each STRYPES in fact been characterized and treated for United
States Federal income tax purposes as a Unit consisting of the Debt Instrument
and the Forward Contract. If the STRYPES were ultimately characterized and
treated entirely as indebtedness of the Company for United States Federal
income tax purposes, under general principles of current United States Federal
income tax law, the Interest Payments generally would be taxable to a U.S.
Holder as ordinary interest income on the respective dates that such Interest
Payments are accrued or are received (in accordance with the U.S. Holder's
regular method of tax accounting). Under this same analysis and treatment of
each STRYPES as a single debt instrument of the Company for United States
Federal income tax purposes, under general principles of current United States
Federal income tax law, if the fair market value (as determined on the
Maturity Date) of the amount of MGIC Common Stock or cash payable on the
Maturity Date with respect to a STRYPES exceeds the issue price thereof, such
excess would be treated as contingent interest and generally would be
includible in income by a U.S. Holder as ordinary interest on the Maturity
Date (regardless of the U.S. Holder's regular method of tax accounting). In
addition, if the fair market value (as determined on the Maturity Date) of the
amount of MGIC Common Stock or cash payable on the Maturity Date with respect
to a STRYPES exceeds the issue price thereof, then such STRYPES would be
treated as having been retired on the Maturity Date in exchange for an amount
equal to the issue price thereof. If, however, the fair market value (as
determined on the Maturity Date) of the amount of MGIC Common Stock or cash
payable on the Maturity Date with respect to a STRYPES is equal to or less
than the issue price thereof, then such STRYPES would be treated as having
been retired on the Maturity Date in exchange for an amount equal to the fair
market value (as determined on the Maturity Date) of the entire amount payable
on the Maturity Date with respect to such STRYPES and no portion of the amount
payable on the Maturity Date with respect to such STRYPES would be treated as
contingent interest. A U.S. Holder's initial tax basis in any MGIC Common
Stock received by such U.S. Holder on the Maturity Date of a STRYPES would
equal the fair market value (as determined on the Maturity Date) of the MGIC
Common Stock received by such U.S. Holder. Furthermore, a U.S. Holder's
holding period for any MGIC Common Stock received by such U.S. Holder on the
Maturity Date of a STRYPES would begin on the day immediately following the
Maturity Date and would not include the period during which the U.S. Holder
held such STRYPES.
Moreover, under this analysis and treatment of each STRYPES as a single debt
instrument of the Company for United States Federal income tax purposes, upon
the sale, exchange or retirement of a STRYPES, a U.S. Holder generally would
recognize taxable gain or loss in an amount equal to the difference, if any,
between the amount realized on the sale, exchange or retirement (other than
amounts representing accrued and unpaid Interest Payments) and such U.S.
Holder's adjusted tax basis in the STRYPES. A U.S. Holder's adjusted tax basis
in a STRYPES generally would equal such U.S. Holder's initial investment in
the STRYPES (as adjusted pursuant to the market discount and bond premium
rules described below). Such gain or loss generally would be long-term capital
gain or loss if the STRYPES were held by the U.S. Holder for more than one
year (subject to the market discount rules, as discussed below). It is
possible, however, that under this analysis and treatment of the STRYPES the
IRS could assert that any amounts realized upon the sale or exchange of a
STRYPES prior to the
28
Maturity Date in excess of the STRYPES's issue price constitutes ordinary
interest income (subject to the bond premium rules, as discussed below).
Nonetheless, if the STRYPES were ultimately characterized and treated entirely
as indebtedness of the Company for United States Federal income tax purposes,
although the matter is not free from doubt, in the opinion of Brown & Wood,
counsel to the Company, under current law, any gain realized upon the sale or
exchange of a STRYPES prior to the Maturity Date should be treated entirely as
capital gain (subject to the market discount rules, as discussed below).
Prospective investors in the STRYPES should also be aware that on December
15, 1994, the Treasury Department issued proposed regulations (the "Proposed
Regulations") concerning the proper United States Federal income tax treatment
of contingent payment debt instruments. In the event that the STRYPES were
characterized and treated entirely as debt instruments of the Company for
United States Federal income tax purposes, the STRYPES would be treated as
contingent payment debt instruments. The Proposed Regulations, however, are
proposed to only be effective 60 days after the date on which the Proposed
Regulations are published as final Treasury regulations. Accordingly, due to
the proposed prospective effective date of the Proposed Regulations, if
ultimately adopted in their current form, the Proposed Regulations would not
apply to the STRYPES even if the STRYPES were characterized and treated
entirely as debt instruments of the Company for United States Federal income
tax purposes. Furthermore, proposed Treasury regulations are not binding upon
either the IRS or taxpayers prior to becoming effective as temporary or final
regulations. In general, if ultimately adopted in their current form, the
Proposed Regulations would cause the timing and character of income, gain or
loss reported on a contingent payment debt instrument to substantially differ
from the timing and character of income, gain or loss reported on a contingent
payment debt instrument under general principles of current United States
Federal income tax law (as described immediately above). Prospective investors
in the STRYPES are urged to consult their own tax advisers concerning the
effect, if any, of the Proposed Regulations on their investment in the
STRYPES.
Prospective investors in the STRYPES should also be aware that it is
possible that the ultimate characterization and treatment of the STRYPES for
United States Federal income tax purposes could differ from the possible
characterizations and treatments described herein with the result that the
ultimate United States Federal income tax treatment of the purchase, ownership
and disposition of the STRYPES could significantly differ from any of the
treatments described herein.
Despite the foregoing, as previously discussed, pursuant to the agreement
contained in the Indenture to treat each STRYPES as a Unit consisting of the
Debt Instrument and the Forward Contract, the Company, where required,
currently intends to file information returns with the IRS treating each
STRYPES as a Unit consisting of the Debt Instrument and the Forward Contract
for United States Federal income tax purposes (as described above), in the
absence of any change or clarification in the law, by regulation or otherwise,
requiring another characterization and treatment of the STRYPES for United
States Federal income tax purposes.
MARKET DISCOUNT AND PREMIUM
In general, if a U.S. Holder purchases a debt instrument (e.g., the Debt
Instrument component of a Unit) for an amount that is less than the principal
amount thereof, the amount of the difference will be treated as "market
discount," unless such difference is less than a specified de minimis amount
(generally 1/4 of 1% of the debt instrument's stated principal amount
multiplied by the number of complete years to maturity from the date the U.S.
Holder purchased such debt instrument).
Under the market discount rules, a U.S. Holder will be required to treat any
gain realized on the sale, exchange, retirement or other disposition of a debt
instrument as ordinary income to the extent of the lesser of (i) the amount of
such realized gain or (ii) the market discount which has not previously been
included in income and is treated as having accrued on such debt instrument at
the time of such payment or disposition. Market discount will be considered to
accrue ratably during the period from the date of acquisition to the maturity
of the debt instrument, unless the U.S. Holder elects to accrue market
discount on the basis of semiannual compounding.
29
A U.S. Holder may be required to defer the deduction of all or a portion of
the interest paid or accrued on any indebtedness incurred or maintained to
purchase or carry a debt instrument with market discount until the maturity of
the debt instrument or its earlier disposition in a taxable transaction and
certain nontaxable transactions, because a current deduction is only allowed
to the extent that the interest expense exceeds an allocable portion of the
market discount. A U.S. Holder may elect to include market discount in income
currently as it accrues (on either a ratable or semiannual compounding basis),
in which case the rules described above regarding the deferral of interest
deductions will not apply. Generally, such currently included market discount
is treated as ordinary interest income for United States Federal income tax
purposes and a U.S. Holder would increase its tax basis in a debt instrument
by the amount of any such currently included market discount. Such an election
will apply to all debt instruments acquired by the U.S. Holder on or after the
first day of the first taxable year to which such election applies and may be
revoked only with the consent of the IRS.
In general, if a U.S. Holder purchases a debt instrument for an amount that
is greater than the principal amount thereof, such U.S. Holder will be
considered to have purchased the debt instrument with "amortizable bond
premium" equal in amount to such excess. A U.S. Holder may elect to amortize
such premium using a constant yield method over the remaining term of the debt
instrument and may offset ordinary interest otherwise required to be included
in respect of the debt instrument during any taxable year by the amortized
amount of such premium for such year (or, prior years, if such amortized
premium for prior years has not yet offset interest) and would reduce its tax
basis in the debt instrument by the amount of any such interest offset taken.
Such election, if made, would apply to all debt instruments held by the U.S.
Holder at the beginning of the taxable year to which such election applies and
to all debt instruments acquired by the U.S. Holder thereafter. Such election
would also be irrevocable once made, unless the U.S. Holder making such an
election obtains the express written consent of the IRS to revoke such
election.
MISCELLANEOUS TAX MATTERS
Special tax rules may apply to persons holding a STRYPES as part of a
"synthetic security" or other integrated investment, or as part of a straddle,
hedging transaction or other combination of offsetting positions. For
instance, Section 1258 of the Code may possibly require certain U.S. Holders
of the STRYPES who enter into hedging transactions or offsetting positions
with respect to the STRYPES to treat all or a portion of any gain realized on
the STRYPES as ordinary income in instances where such gain may have otherwise
been treated as capital gain. U.S. Holders hedging their positions with
respect to the STRYPES or otherwise holding their STRYPES in a manner
described above should consult their own tax advisors regarding the
applicability of Section 1258 of the Code, or any other provision of the Code,
to their investment in the STRYPES.
NON-U.S. HOLDERS
Based on the treatment of each STRYPES as a Unit consisting of the Debt
Instrument and the Forward Contract, in the case of a non-U.S. Holder,
payments made with respect to the STRYPES should not be subject to United
States withholding tax, provided that such non-U.S. Holder complies with
applicable certification requirements. Any capital gain realized upon the sale
or other disposition of a STRYPES by a non-U.S. Holder will generally not be
subject to United States Federal income tax if (i) such gain is not
effectively connected with a United States trade or business of such non-U.S.
Holder and (ii) in the case of an individual non-U.S. Holder, such individual
is not present in the United States for 183 days or more in the taxable year
of the sale or other disposition, or the gain is not attributable to a fixed
place of business maintained by such individual in the United States and such
individual does not have a "tax home" (as defined for United States Federal
income tax purposes) in the United States.
As discussed above, alternative characterizations of the STRYPES for United
States Federal income tax purposes are possible. Should an alternative
characterization of the STRYPES, by reason of a change or clarification of the
law, by regulation or otherwise, cause payments with respect to the STRYPES to
become subject to withholding tax, the Company will withhold tax at the
statutory rate. Prospective non-U.S. Holders of the STRYPES should consult
their own tax advisors in this regard.
30
BACKUP WITHHOLDING AND INFORMATION REPORTING
A beneficial owner of a STRYPES may be subject to information reporting and
to backup withholding at a rate of 31 percent of certain amounts paid to the
beneficial owner unless such beneficial owner provides proof of an applicable
exemption or a correct taxpayer identification number, and otherwise complies
with applicable requirements of the backup withholding rules.
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.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Company has agreed to sell to Merrill Lynch, Pierce, Fenner & Smith
Incorporated (the "Underwriter"), and the Underwriter has agreed to purchase
from the Company, 5,000,000 STRYPES. Under the terms and conditions of the
Underwriting Agreement, the Underwriter is committed to take and pay for all
of the STRYPES, if any are taken.
The Underwriter has advised the Company that it proposes initially to offer
the STRYPES directly to the public at the public offering price set forth on
the cover page of this Prospectus, and to certain dealers at such price less a
concession not to exceed $ per STRYPES. The Underwriter may allow, and such
dealers may reallow, a discount not to exceed $ per STRYPES to certain
other dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
The Company has granted the Underwriter an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 750,000
additional STRYPES at the public offering price set forth on the cover page of
this Prospectus, less the underwriting discount. The Underwriter may exercise
this option only to cover over-allotments, if any, made on the sale of the
STRYPES offered hereby.
MGIC Investment and its executive officers have agreed not to offer, sell,
contract to sell or otherwise dispose of, directly or indirectly, any shares
of MGIC Common Stock, securities convertible into, exchangeable for or
repayable with such shares or rights or warrants to acquire such shares, for a
period of 90 days after the date of this Prospectus without the prior written
consent of the Underwriter. The foregoing agreement of MGIC Investment does
not apply to MGIC Common Stock offered to MGIC Investment's employees under
its existing employee benefit plans nor does it apply to rights with respect
to MGIC Common Stock under a shareholder rights plan. NML has agreed not to
offer, sell, contract to sell or otherwise dispose of, directly or indirectly,
or cause to be filed a registration statement under the Securities Act with
respect to, any shares of MGIC Common Stock, securities convertible into,
exchangeable for or repayable with such shares or rights or warrants to
acquire such shares, for a period of 90 days after the date of this Prospectus
without the prior written consent of the Underwriter.
The underwriting of the STRYPES will conform to the requirements set forth
in the applicable sections of Schedule E to the By-Laws of the National
Association of Securities Dealers, Inc.
Application will be made to list the STRYPES on the NYSE.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act relating to this
Prospectus (including the documents incorporated by reference herein).
VALIDITY OF THE STRYPES
The validity of the STRYPES offered hereby will be passed upon for the
Company and for the Underwriter by Brown & Wood, New York, New York.
31
EXPERTS
The consolidated financial statements and related financial statement
schedules of the Company and its subsidiaries included or incorporated by
reference in the Company's 1994 Annual Report on Form 10-K, and incorporated by
reference in this Prospectus, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports incorporated by reference
herein. The information under the caption "Summary Financial Information" for
each of the five years in the period ended December 30, 1994 included in this
Prospectus and the Selected Financial Data under the captions "Operating
Results," "Financial Position" and "Common Share Data" for each of the five
years in the period ended December 30, 1994 included in the 1994 Annual Report
to Stockholders of the Company, and incorporated by reference herein, has been
derived from consolidated financial statements audited by Deloitte & Touche
LLP, as set forth in their reports incorporated by reference herein. Such
consolidated financial statements and related financial statement schedules,
such Summary Financial Information and Selected Financial Data appearing or
incorporated by reference in this Prospectus and the Registration Statement of
which this Prospectus is a part, have been included or incorporated herein by
reference in reliance upon such reports of Deloitte & Touche LLP given upon
their authority as experts in accounting and auditing.
With respect to unaudited interim financial information for the periods
included in any of the Quarterly Reports on Form 10-Q which may be incorporated
herein by reference, Deloitte & Touche LLP have applied limited procedures in
accordance with professional standards for a review of such information.
However, as stated in their report included in any such Quarterly Report on
Form 10-Q and incorporated by reference herein, they did not audit and they do
not express an opinion on such interim financial information. Accordingly, the
degree of reliance on their reports on such information should be restricted in
light of the limited nature of the review procedures applied. Deloitte & Touche
LLP are not subject to the liability provisions of Section 11 of the Securities
Act for any such report on unaudited interim financial information because any
such report is not a "report" or a "part" of the registration statement
prepared or certified by an accountant within the meaning of Sections 7 and 11
of the Securities Act.
32
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING DESCRIBED HEREIN, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURI-
TIES OTHER THAN THOSE SPECIFICALLY OFFERED HEREBY OR OF ANY SECURITIES OFFERED
HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE AN OF-
FER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PRO-
SPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.
---------------
TABLE OF CONTENTS
PAGE
----
Available Information...................................................... 2
Incorporation of Certain Documents by Reference............................ 2
Prospectus Summary......................................................... 3
Risk Factors............................................................... 6
Merrill Lynch & Co., Inc................................................... 8
Summary Financial Information.............................................. 9
MGIC Investment Corporation................................................ 15
Price Range of MGIC Common Stock and Dividends............................. 16
Use of Proceeds............................................................ 16
Description of the STRYPES................................................. 17
Certain Arrangements With NML.............................................. 24
Certain United States Federal Income Tax Considerations.................... 24
Underwriting............................................................... 31
Validity of the STRYPES.................................................... 31
Experts.................................................................... 32
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
5,000,000 STRYPES
LOGO
MERRILL LYNCH & CO., INC.
% STRYPES SM
DUE , 1998
PAYABLE WITH SHARES OF COMMON STOCK
OF MGIC INVESTMENT CORPORATION
(OR CASH WITH AN EQUAL VALUE)
---------------
PROSPECTUS
---------------
MERRILL LYNCH & CO.
, 1995
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses in connection with the issuance
and distribution of the securities being registered. All the amounts shown are
estimates, except the registration fee and the NASD fee.
Registration fee.................................................. $93,438
Fees and expenses of accountants.................................. *
Fees and expenses of counsel...................................... *
NASD fee.......................................................... 27,597
Listing fees...................................................... *
Blue Sky fees and expenses........................................ *
Printing expenses................................................. *
Printing and engraving of Securities.............................. *
Rating agency fees................................................ *
Miscellaneous..................................................... *
-------
Total........................................................... $ *
=======
- --------
* To be filed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware, as
amended, provides that under certain circumstances a corporation may indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he is or
was a director, officer, employee or agent of the corporation or is or was
serving at its request in such capacity in another corporation or business
association, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
Article XIII, Section 2 of the Restated Certificate of Incorporation of the
Registrant provides in effect that, subject to certain limited exceptions, the
Registrant shall indemnify its directors and officers to the extent authorized
or permitted by the General Corporation Law of the State of Delaware.
The Form of Underwriting Agreement filed as Exhibit 1(a) provides for the
indemnification of the Registrant, its controlling persons, its directors and
certain of its officers by the Underwriter against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. The Form
of Registration Agreement filed as Exhibit 1(b) provides for the
indemnification of the Registrant and its controlling persons by MGIC
Investment against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
The directors and officers of the Registrant are insured under policies of
insurance maintained by the Registrant, subject to the limits of the policies,
against certain losses arising from any claim made against them by reason of
being or having been such directors or officers. In addition, the Registrant
has entered into contracts with all of its directors providing for
indemnification of such persons by the Registrant to the full extent
authorized or permitted by law, subject to certain limited exceptions.
II-1
ITEM 16. LIST OF EXHIBITS.
1(a)*--Form of Underwriting Agreement.
1(b)*--Form of Registration Agreement.
4(a)--Senior Indenture, dated as of April 1, 1983, as amended and
restated, between the Company and Chemical Bank (successor by merger
to Manufacturers Hanover Trust Company) incorporated herein by
reference to Exhibit 99(c) to Registrant's Registration Statement on
Form 8-A dated July 20, 1992.
4(b)+--Seventh Supplemental Indenture to the Senior Indenture, dated as of
, 1995, between the Company and Chemical Bank (successor by
merger to Manufacturers Hanover Trust Company).
4(c)+--Form of certificate representing the STRYPES.
5+--Opinion of Brown & Wood.
10+--Form of Purchase Agreement between the Company and The Northwestern
Mutual Life Insurance Company relating to shares of MGIC Common
Stock.
12*--Computation of Ratio of Earnings to Fixed Charges.
15*--Letter of Deloitte & Touche LLP regarding unaudited interim financial
information.
23(a)*--Consent of Deloitte & Touche LLP.
23(b)+--Consent of Brown & Wood (included in Exhibit 5).
24*--Powers of Attorney.
25+--Form T-1 Statement of Eligibility under the Trust Indenture Act of
1939 of Chemical Bank.
99*--Report of Deloitte & Touche LLP with respect to certain financial data
appearing in the Registration Statement.
- --------
+ To be filed by amendment.
* Filed herewith.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the registration statement is on Form S-3 and the information required to
be included in a post-effective amendment by those paragraphs is contained
in periodic reports filed by the Registrant pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 that are incorporated by reference
in the registration statement.
II-2
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to sections 13(a) or 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in this
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein and the offering of such securities
at the time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referred to in Item 15 of this
registration statement, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in such Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that: (1) for purposes of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration statement as of
the time it was declared effective; and (2) for the purpose of determining any
liability under the Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
II-3
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, MERRILL LYNCH &
CO., INC. CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL
OF THE REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED IN THE CITY OF NEW YORK AND STATE OF NEW YORK ON THE 20TH DAY
OF JUNE, 1995.
Merrill Lynch & Co., Inc.
/s/ Daniel P. Tully
By __________________________________
Daniel P. Tully
(Chairman of the Board
and Chief Executive Officer)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES WITH
MERRILL LYNCH & CO., INC. INDICATED ON THE 20TH DAY OF JUNE, 1995.
SIGNATURE TITLE
--------- -----
/s/ Daniel P. Tully Chairman of the Board,
- ------------------------------------- Chief Executive Officer
(Daniel P. Tully) and Director
/s/ David H. Komansky President, Chief
- ------------------------------------- Operating Officer and
(David H. Komansky) Director
/s/ Joseph T. Willett Senior Vice President
- ------------------------------------- and Chief Financial
(Joseph T. Willett) Officer (Principal
Financial and Accounting
Officer)
* Director
- -------------------------------------
(William O. Bourke)
* Director
- -------------------------------------
(Jill K. Conway)
* Director
- -------------------------------------
(Stephen L. Hammerman)
* Director
- -------------------------------------
(Earle H. Harbison, Jr.)
II-4
SIGNATURE TITLE
--------- -----
* Director
- -------------------------------------
(George B. Harvey)
* Director
- -------------------------------------
(William R. Hoover)
* Director
- -------------------------------------
(Robert P. Luciano)
* Director
- -------------------------------------
(Aulana L. Peters)
* Director
- -------------------------------------
(John J. Phelan, Jr.)
* Director
- -------------------------------------
(William L. Weiss)
/s/ Joseph T. Willett
*By _________________________________
Attorney-in-fact
II-5
EXHIBIT INDEX
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ------------
1(a)* --Form of Underwriting Agreement.
1(b)* --Form of Registration Agreement.
4(a) --Senior Indenture, dated as of April 1, 1983, as
amended and restated, between the Company and
Chemical Bank (successor by merger to
Manufacturers Hanover Trust Company) incorporated
herein by reference to Exhibit 99(c) to
Registrant's Registration Statement on Form 8-A
dated July 20, 1992.
4(b)+ --Seventh Supplemental Indenture to the Senior
Indenture, dated as of , 1995, between the
Company and Chemical Bank (successor by merger to
Manufacturers Hanover Trust Company).
4(c)+ --Form of certificate representing the STRYPES.
5+ --Opinion of Brown & Wood.
10+ --Form of Purchase Agreement between the Company
and The Northwestern Mutual Life Insurance Company
relating to shares of MGIC Common Stock.
12* --Computation of Ratio of Earnings to Fixed
Charges.
15* --Letter of Deloitte & Touche LLP regarding
unaudited interim financial information.
23(a)* --Consent of Deloitte & Touche LLP.
23(b)+ --Consent of Brown & Wood (included in Exhibit 5).
24* --Powers of Attorney.
25+ --Form T-1 Statement of Eligibility under the Trust
Indenture Act of 1939 of Chemical Bank.
99* --Report of Deloitte & Touche LLP with respect to
certain financial data appearing in the
Registration Statement.
- --------
+ To be filed by amendment.
* Filed herewith.
II-6