RULE 424(b)(5)
REGISTRATION NO. 333-28537
PROSPECTUS SUPPLEMENT
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(TO PROSPECTUS DATED JULY 7, 1997)
[LOGO]
1,650,000 UNITS
MERRILL LYNCH & CO., INC.
S&P 500 INFLATION ADJUSTED MARKET INDEX TARGET-TERM SECURITIES DUE SEPTEMBER
24, 2007
"MITTS(R)"
($10 PRINCIPAL AMOUNT PER UNIT)
GENERAL:
. Senior unsecured debt securities . Not redeemable prior to maturity
. No payments prior to maturity . Transferable only in whole Units
PAYMENT AT MATURITY:
Adjusted Principal Amount + Supplemental Redemption Amount
The Adjusted Principal Amount will equal the principal amount of the MITTS you
hold adjusted to reflect any increase in the Consumer Price Index over the
term of the MITTS. The Supplemental Redemption Amount will be based on the
percentage increase, if any, in the S&P 500 Composite Stock Price Index above
a benchmark value of 1089.38 which exceeds the closing value of such Index on
the date of this Prospectus Supplement by 15%.
The Supplemental Redemption Amount will not exceed $10 per Unit regardless of
the increase in the S&P 500 Index. The Supplemental Redemption Amount may be
ZERO, but will not be less than zero.
BEFORE YOU DECIDE TO INVEST IN THE MITTS, CAREFULLY READ THIS PROSPECTUS
SUPPLEMENT AND PROSPECTUS, ESPECIALLY THE RISK FACTORS BEGINNING ON PAGE S-9.
Neither the SEC nor any state securities commission has approved these
securities or passed upon the adequacy of this Prospectus Supplement or the
attached Prospectus. Any representation to the contrary is a criminal offense.
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INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT COMPANY(1)
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Per MITTS........................ $10 $.30 $9.70
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Total............................ $16,500,000 $495,000 $16,005,000
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(1) Before deduction of expenses payable by the Company.
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We expect that the MITTS will be ready for delivery in book-entry form only
through the facilities of DTC, on or about September 24, 1997 against payment
in immediately available funds.
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MERRILL LYNCH & CO.
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The date of this Prospectus Supplement is September 18, 1997.
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"MITTS" is a registered service mark and "Market Index Target-Term Securities"
is a service mark owned by Merrill Lynch & Co., Inc.
STABILIZATION
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), as
underwriter, may engage in transactions that stabilize, maintain or otherwise
affect the price of the MITTS. Such transactions may include stabilizing and
the purchase of MITTS to cover short positions. For a description of these
activities, see "Underwriting".
REQUIRED DISCLOSURES
"Standard & Poor's"
Standard & Poor's ("S&P") does not guarantee the accuracy and/or the
completeness of the S&P 500 Index or any data included in the S&P 500 Index.
S&P makes no warranty, express or implied, as to results to be obtained by the
Company, the Underwriter, the holders of the MITTS, or any other person or
entity from the use of the S&P 500 Index or any data included therein in
connection with the rights licensed under the license agreement described
herein or for any other use. S&P makes no express or implied warranties, and
expressly disclaims all warranties of merchantability or fitness for a
particular purpose with respect to the S&P 500 Index or any data included
therein. Without limiting the generality of the foregoing, in no event shall
S&P have any liability for any special, punitive, indirect or consequential
damages (including lost profits), even if notified of the possibility of such
damages.
"Standard & Poor's(R)"; "S&P(R)"; "S&P 500"; and "Standard & Poor's 500" are
trademarks of The McGraw-Hill Companies, Inc., which have been licensed for
use by Merrill Lynch Capital Services, Inc. The Company is an authorized
sublicensee.
"State of North Carolina"
We are required to disclose that the Commissioner of Insurance of the State
of North Carolina has not approved or disapproved the offering of the MITTS
nor has the Commissioner determined the accuracy or adequacy of this
Prospectus Supplement or the Prospectus.
CONTENT OF PROSPECTUS
You should rely only on the information contained in this document or in
documents we filed with the Securities and Exchange Commission ("SEC") that we
have referred you to. We have not authorized anyone to provide you with
different information. You should not assume that the information in the
Prospectus or Prospectus Supplement is accurate as of any date other than the
date on the front of this document.
LIMITATIONS ON OFFERS OR SOLICITATIONS
We do not intend this document to be an offer or solicitation:
(A) if used in a jurisdiction in which such offer or solicitation is not
authorized;
(B) if the person making such offer or solicitation is not qualified to
do so; or
(C) if such offer or solicitation is made to anyone to whom it is
unlawful to make such offer or solicitation.
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TABLE OF CONTENTS
PAGE
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THE PROSPECTUS SUPPLEMENT:
SUMMARY INFORMATION--Q&A........... S-4
What are the MITTS?............... S-4
What will I receive at maturity of
the MITTS?....................... S-4
How have the CPI and S&P 500 Index
performed historically?.......... S-6
What about taxes?................. S-7
Who publishes the S&P 500 Index
and what does it measure?........ S-7
Will the MITTS be listed on a
stock exchange?.................. S-7
What is the role of our subsidi-
ary, MLPF&S?..................... S-7
How would proposed changes in the
CPI affect the MITTS?............ S-7
Can you tell me more about the
Company?......................... S-8
Are there any risks associated
with my investment?.............. S-8
WHERE YOU CAN FIND MORE
INFORMATION....................... S-9
RISK FACTORS....................... S-9
The Supplemental Redemption
Amount........................... S-9
Your yield may be lower than the
yield on a standard debt security
of comparable maturity........... S-9
Your return will not reflect the
payment of dividends............. S-9
Consumer Price Index.............. S-10
Uncertain trading market.......... S-10
Factors affecting trading value of
the MITTS........................ S-10
State law limits on interest paid. S-11
Purchases and sales by Merrill
Lynch............................ S-12
Potential conflicts............... S-12
RATIO OF EARNINGS TO FIXED CHARGES. S-12
DESCRIPTION OF SECURITIES.......... S-13
General........................... S-13
Payment at Maturity............... S-13
PAGE
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Hypothetical Returns.............. S-14
Adjustments to the CPI............ S-16
Adjustments to the Index; Market
Disruption Events................ S-16
Discontinuance of the Index....... S-17
Events of Default and Accelera-
tion............................. S-17
Depository......................... S-17
Same-Day Settlement and Payment.... S-20
THE INDEX.......................... S-20
General........................... S-20
Computation of the Index.......... S-20
Historical Data on the Index...... S-22
License Agreement................. S-23
CPI................................ S-24
General........................... S-24
Historical Data on the CPI........ S-24
CERTAIN UNITED STATES FEDERAL
INCOME TAX CONSIDERATIONS......... S-26
General........................... S-26
U.S. Holders...................... S-27
Non-U.S. Holders.................. S-29
Backup Withholding................ S-29
USE OF PROCEEDS.................... S-29
UNDERWRITING....................... S-30
VALIDITY OF SECURITIES............. S-30
INDEX OF DEFINED TERMS............. S-31
THE PROSPECTUS:
AVAILABLE INFORMATION.............. 2
INCORPORATION OF CERTAIN DOCUMENTS
BY REFERENCE...................... 2
MERRILL LYNCH & CO., INC. ......... 3
USE OF PROCEEDS.................... 3
DESCRIPTION OF DEBT SECURITIES..... 4
DESCRIPTION OF DEBT WARRANTS....... 8
DESCRIPTION OF CURRENCY WARRANTS... 9
DESCRIPTION OF INDEX WARRANTS...... 10
PLAN OF DISTRIBUTION............... 14
EXPERTS............................ 15
S-3
SUMMARY INFORMATION--Q&A
This summary includes questions and answers that highlight selected
information from the Prospectus and Prospectus Supplement to help you
understand the S&P 500 Inflation Adjusted Market Index Target-Term Securities
due September 24, 2007 (the "MITTS" or the "Securities"). You should carefully
read the Prospectus and Prospectus Supplement to fully understand the terms of
the MITTS, the S&P 500 Composite Stock Price Index (the "S&P 500 Index" or the
"Index"), the Consumer Price Index (as described below, the "CPI"), as well as
the tax and other considerations that are important to you in making a
decision about whether to invest in the MITTS. You should, in particular,
carefully review the "Risk Factors" section, which highlights certain risks,
to determine whether an investment in the MITTS is appropriate for you.
WHAT ARE THE MITTS?
The MITTS are a series of senior debt securities issued by Merrill Lynch &
Co., Inc. (the "Company") and are not secured by collateral. The MITTS will
rank equally with all other unsecured and unsubordinated debt of the Company.
The MITTS mature on September 24, 2007 and do not provide for earlier
redemption. We will make no payments on the MITTS until maturity.
Each "Unit" of MITTS represents $10 principal amount of MITTS. You may
transfer the MITTS only in whole Units. You will not have the right to receive
physical certificates evidencing your ownership except under limited
circumstances. Instead, we will issue the MITTS in the form of a global
certificate, which will be held by The Depository Trust Company ("DTC"), or
its nominee. Direct and indirect participants in DTC will record beneficial
ownership of the MITTS by individual investors. You should refer to the
section "Description of the MITTS--Depository" in this Prospectus Supplement.
WHAT WILL I RECEIVE AT MATURITY OF THE MITTS?
We have designed the MITTS for investors who want to protect their
investment by receiving at least the principal amount of their investment (as
adjusted for inflation) at maturity and who also want to participate in
possible increases in the S&P 500 Index. At maturity, you will receive a
payment on the MITTS equal to the sum of two amounts: the "Adjusted Principal
Amount" and the "Supplemental Redemption Amount".
"Adjusted Principal Amount"
The Adjusted Principal Amount per Unit will equal the greater of:
(a) the principal amount of such Unit ($10); and
(b) the principal amount of such Unit ($10) X Final CPI
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Initial CPI
"Initial CPI" equals 160.3.
"Final CPI" will be determined by the Calculation Agent and will equal the
value of the CPI for the third calendar month prior to September 24, 2007 as
reported on the seventh calendar day prior to the maturity date. We will pay
you the Adjusted Principal Amount of the MITTS regardless of whether any
Supplemental Redemption Amount is payable. "CPI" means the non-seasonally
adjusted U.S. City Average All Items Consumer Price Index for All Urban
Consumers published by the Bureau of Labor Statistics of the Department of
Labor.
"Supplemental Redemption Amount"
The Supplemental Redemption Amount per Unit will equal:
$10 x EIV - BIV
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BIV
but will not be less than zero or more than $10 per Unit of MITTS.
EIV = Ending Index Value
BIV = Benchmark Index Value
"ENDING INDEX VALUE" means the average of the values of the S&P 500 Index at
the close of the market on five business days before the maturity of the
MITTS. We may calculate the Ending Index Value by reference to fewer than five
or even a single day's closing value if, during the days prior to the maturity
date of the MITTS, there is a disruption in the trading of the securities
comprising the S&P 500 Index.
"BENCHMARK INDEX VALUE" equals 1089.38 and was determined as described
herein. The closing value of the S&P 500 Index on the date of this Prospectus
Supplement was 947.29 (the "Starting Index Value") and the Benchmark Index
Value exceeds such closing value by 15%.
For more specific information about the Adjusted Principal Amount and the
Supplemental
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Redemption Amount, please see the section "Description of Securities" in this
Prospectus Supplement.
The Ending Index Value would need to be more than 15% higher than the
Starting Index Value, before any amount would be paid to you based on an
increase in the S&P 500 Index. If the S&P 500 Index reaches a value of two
times the Benchmark Index Value, you will receive a Supplemental Redemption
Amount of $10. Since $10 is the maximum Supplemental Redemption Amount we will
pay, you will not receive any incremental benefit from increases beyond that
value. IF THE ENDING INDEX VALUE IS LESS THAN, OR EQUAL TO, THE BENCHMARK
INDEX VALUE, THE SUPPLEMENTAL REDEMPTION AMOUNT WILL BE ZERO.
Examples
Here are four examples of Adjusted Principal Amount and Supplemental
Redemption Amount calculations:
Example 1 - CPI declines; S&P 500 Index does not increase above Benchmark
Index Value:
Initial CPI: 160.3
Hypothetical Final CPI: 150.3
Starting Index Value: 947.29
Benchmark Index Value: 1089.38
Hypothetical Ending Index Value: 1060
Adjusted Principal Amount = greater of: (a) $10
(b) $10 x 150.3 = $9.38
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160.3
(Supplemental Redemption
Amount cannot be less
Supplemental Redemption Amount (Per Unit) = $10 x 1060-1089.38 = -$0.27 than zero)
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1089.38
Total payment at maturity (Per Unit) = $10 + $0 = $10
Example 2 - CPI stays level; S&P 500 Index increases above Benchmark Index
Value:
Initial CPI: 160.3
Hypothetical Final CPI: 160.3
Starting Index Value: 947.29
Benchmark Index Value: 1089.38
Hypothetical Ending Index Value: 1730
Adjusted Principal Amount = greater of: (a) $10
(b) $10 x 160.3 = $10.00
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160.3
Supplemental Redemption Amount (Per Unit) = $10 x 1730 - 1089.38 = $5.88
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1089.38
Total payment at maturity (Per Unit) = $10 + $5.88 = $15.88
S-5
Example 3 - CPI increases; S&P 500 Index does not increase above Benchmark
Index Value:
Initial CPI: 160.3
Hypothetical Final CPI: 230
Starting Index Value: 947.29
Benchmark Index Value: 1089.38
Hypothetical Ending Index Value: 1060
Adjusted Principal Amount = greater of: (a) $10
(b) $10 x 230 = $14.35
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160.3
(Supplemental Redemption
Amount cannot be less
Supplemental Redemption Amount (Per Unit) = $10 x 1060 - 1089.38 = -$0.27 than zero)
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1089.38
Total payment at maturity (Per Unit) = $14.35 + $0 = $14.35
Example 4 - CPI increases; S&P 500 Index is greater than two times the
Benchmark Index Value:
Initial CPI: 160.3
Hypothetical Final CPI: 230
Starting Index Value: 947.29
Benchmark Index Value: 1089.38
Hypothetical Ending Index Value: 2300
Adjusted Principal Amount = greater of: (a) $10
(b) $10 x 230 = $14.35
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160.3
Supplemental Redemption Amount (Per Unit) = $10 x 2300 - 1089.38 = $11.11 (subject to $10 maximum)
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1089.38
Total payment at maturity (Per Unit) = $14.35 + $10.00 = $24.35
HOW HAVE THE CPI AND S&P 500 INDEX PERFORMED HISTORICALLY?
"CPI"
We have provided a table showing the value of the CPI at the end of each
calendar year from 1947 to 1996 and for each month from January 1992 through
August 1997 as published by the Bureau of Labor Statistics. You can find this
table in the section "CPI--Historical Data on the CPI" in this Prospectus
Supplement. We have provided this historical information to help you evaluate
the behavior of the CPI in various economic environments; however, past
performance of the CPI is not necessarily indicative of how the CPI will
perform in the future.
"S&P 500 Index"
We have provided a table showing the closing values of the S&P 500 Index on
the last business day of each year from 1947 through 1996, and the closing
values of the S&P 500 Index on the last business day of each month from 1989
to the present, as published by S&P. You can find this table in the section
"The Index--Historical Data on the Index" in the Prospectus Supplement. We
have provided this historical information to help you evaluate the behavior of
the S&P 500 Index in various economic environments; however, past performance
of the S&P 500 Index is not necessarily indicative of how the Index will
perform in the future.
S-6
WHAT ABOUT TAXES?
Each year, you will be required to pay taxes on ordinary income from the
MITTS over their term based upon an estimated yield for the MITTS, even though
you will not receive any payments from us until maturity. We have determined
this estimated yield, in accordance with regulations issued by the Treasury
Department, solely in order for you to figure the amount of taxes that you
will owe each year as a result of owning a MITTS. This amount is neither a
prediction nor a guarantee of what either the actual Adjusted Principal Amount
or the actual Supplemental Redemption Amount will be, or that either the
actual Adjusted Principal Amount will exceed $10 or that the actual
Supplemental Redemption Amount will even exceed zero. We have determined that
this estimated yield will equal 6.58% per annum (compounded semiannually).
Based upon this estimated yield, if you pay your taxes on a calendar year
basis and if you buy a MITTS for $10 and hold the MITTS until maturity, you
will be required to pay taxes on the following amounts of ordinary income from
the MITTS each year: $0.1774 in 1997, $0.6794 in 1998, $0.7241 in 1999,
$0.7758 in 2000, $0.8265 in 2001, $0.8817 in 2002, $0.9392 in 2003, $1.0051 in
2004, $1.0707 in 2005, $1.1423 in 2006, and $0.8751 in 2007. However, in 2007,
the amount of ordinary income that you will be required to pay taxes on from
owning a MITTS may be greater or less than $0.8751, depending upon the
Adjusted Principal Amount and the Supplemental Redemption Amount, if any, you
receive. Also, if the sum of the Adjusted Principal Amount and the
Supplemental Redemption Amount is less than $19.0973, you may have a loss
which you could deduct against other income you may have in 2007, but under
current tax regulations, you would neither be required nor allowed to amend
your tax returns for prior years. For further information, see "Certain United
States Federal Income Tax Considerations" in this Prospectus Supplement.
WHO PUBLISHES THE S&P 500 INDEX AND WHAT DOES IT MEASURE?
The S&P 500 Index is published by S&P. The purpose of the S&P 500 Index is
to provide a picture of the movement in prices of common stocks over time. S&P
calculates the value of the S&P 500 Index, which is based on the relative
value of the common stocks of 500 companies at a particular time as compared
to the aggregate average market value of 500 similar companies during the base
period from the years 1941 through 1943. S&P may revise the S&P 500 Index by
adding or deleting certain companies as it determines may be necessary to
achieve the purpose of the S&P 500 Index.
WILL THE MITTS BE LISTED ON A STOCK EXCHANGE?
The MITTS have been approved for listing on the New York Stock Exchange
("NYSE") under the symbol "IEM". You should be aware that the listing of the
MITTS on the New York Stock Exchange will not necessarily ensure that a liquid
trading market will be available for the MITTS. You should review "Risk
Factors--Uncertain Trading Market".
WHAT IS THE ROLE OF OUR SUBSIDIARY, MLPF&S?
Our subsidiary, MLPF&S, is the underwriter for the offering and sale of the
MITTS. After the initial offering, MLPF&S intends to buy and sell MITTS to
create a secondary market for holders of the MITTS, and to stabilize or
maintain the market price of the MITTS. However, MLPF&S will not be obligated
to engage in any of these market activities, or continue them once it has
started.
MLPF&S will also be our agent (the "Calculation Agent") for purposes of
calculating the Final CPI and the Ending Index Value and the other amounts for
the MITTS, including the Adjusted Principal Amount and the Supplemental
Redemption Amount. Under certain circumstances, these duties could result in a
conflict of interest between MLPF&S's status as a subsidiary of the Company
and its responsibilities as Calculation Agent.
HOW WOULD PROPOSED CHANGES IN THE CPI AFFECT THE MITTS?
There are discussions to change how the CPI is calculated that we review in
the section entitled "Risk Factors--Consumer Price Index". If the method of
calculating the CPI is changed, the Calculation Agent can adjust the values of
the CPI used in calculating payments due on the MITTS in order to determine an
index value comparable to the CPI as if such change had not been made. If the
CPI is
S-7
discontinued, the Calculation Agent may select a successor index with the goal
of trying to maintain the intended economic benefits of the MITTS to you. You
should be aware that the Calculation Agent is controlled by the Company which
is the issuer of the MITTS and therefore potential conflicts of interest could
arise; however, the Calculation Agent is subject to limits and has certain
duties. In the case of the CPI, the Calculation Agent could only adjust a
value of the CPI to undo a change to how the CPI is calculated or select a
successor measure for inflation to maintain the intended economic benefits of
the MITTS to you if the CPI is discontinued. The Calculation Agent could not
otherwise adjust a value of the CPI or replace the CPI with another measure of
inflation. See "Risk Factors--Potential Conflicts".
CAN YOU TELL ME MORE ABOUT THE COMPANY?
Merrill Lynch & Co., Inc. is a holding company with various subsidiary and
affiliated companies that provide investment, financing, insurance and related
services on a global basis. For information about the Company see the section
"Merrill Lynch & Co., Inc." in the Prospectus. You should also read the other
documents the Company has filed with the SEC, which you can find by referring
to the section "Where You Can Find More Information" in this Prospectus
Supplement.
ARE THERE ANY RISKS ASSOCIATED WITH MY INVESTMENT?
Yes, the MITTS are subject to certain risks. Please refer to the section
"Risk Factors" in this Prospectus Supplement.
S-8
WHERE YOU CAN FIND MORE INFORMATION
The Company files annual, quarterly and current reports, proxy statements
and other information with the SEC. Some of these documents are incorporated
by reference in, and form a part of, this Prospectus Supplement and the
Prospectus, as described in the section "Incorporation of Certain Documents by
Reference" in the Prospectus. You may read and copy any document we file by
visiting the SEC's public reference rooms in Washington, D.C. at 450 Fifth
Street, Room 1024, N.W., Washington, D.C., 20549; or at the SEC's regional
offices at 500 West Madison Street, Suite 400, Chicago, Illinois 60661-2511
and Seven World Trade Center, New York, New York 10048. Please call the SEC at
1-800-SEC-0330 for further information about the public reference rooms.
Copies of our SEC filings can also be obtained from the SEC's Internet web
site at http://www.sec.gov. You may also read copies of these documents at the
offices of the New York Stock Exchange, the American Stock Exchange, the
Chicago Stock Exchange, and the Pacific Exchange.
We will send you copies of our SEC filings, excluding exhibits, at no cost
upon request. Please address your request to Lawrence M. Egan, Jr., Corporate
Secretary's Office, Merrill Lynch & Co., Inc., 100 Church Street, 12th Floor,
New York, New York 10080-6512; telephone number (212) 602-8439.
RISK FACTORS
Your investment in MITTS will involve certain risks. For example, there is
the risk that you might not earn a return on your investment, and the risk
that you will be unable to sell your MITTS prior to their maturity. You should
carefully consider the following discussion of risks before deciding whether
an investment in the MITTS is suitable for you.
THE SUPPLEMENTAL REDEMPTION AMOUNT.
The Benchmark Index Value exceeds the closing value of the S&P 500 Index
(i.e., the Starting Index Value) on the date the MITTS were priced for initial
sale to the public (the "Pricing Date") by 15%. You should be aware that if
the Ending Index Value does not exceed the Starting Index Value at maturity by
more than 15%, the Supplemental Redemption Amount will be zero. This will be
true even if the value of the S&P 500 Index was higher than the Benchmark
Index Value at some time during the life of the MITTS but later falls below
the Benchmark Index Value. If the Supplemental Redemption Amount is zero, we
will pay you only the Adjusted Principal Amount of your MITTS.
You will not receive a Supplemental Redemption Amount that exceeds $10 per
Unit regardless of how much the Index increases. If the S&P 500 Index reaches
a value of two times the Benchmark Index Value, you will receive a
Supplemental Redemption Amount of $10. Since $10 is the maximum Supplemental
Redemption Amount we will pay, you will not receive any incremental benefit
from increases beyond that value. If we pay you the maximum Supplemental
Redemption Amount of $10 per unit, this will represent a maximum annualized
rate of return of 7.05% compounded semi-annually over a term of ten years.
This limitation does not apply to the Adjusted Principal Amount which is
dependent on changes in the CPI.
YOUR YIELD MAY BE LOWER THAN THE YIELD ON A STANDARD DEBT SECURITY OF
COMPARABLE MATURITY.
The amount we pay you at maturity may be less than the return you could earn
on other investments. Your yield may be less than the yield you would earn if
you bought a standard senior non-callable debt security of the Company with
the same maturity date. Your investment may not reflect the full opportunity
cost to you when you consider the effect of factors that affect the time value
of money.
YOUR RETURN WILL NOT REFLECT THE PAYMENT OF DIVIDENDS.
S&P calculates the Index by reference to the prices of the common stocks
comprising the Index without taking into consideration the value of dividends
paid on those stocks. Therefore, the return you earn on the
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MITTS, if any, will not be the same as the return that you would earn if you
actually owned each of the common stocks in the Index and received the
dividends paid on those stocks.
CONSUMER PRICE INDEX.
The Adjusted Principal Amount will be affected by changes in the CPI. Such
changes may be significant. See, "CPI-Historical Data on the CPI", below.
Changes in the CPI are a function of the changes in specified consumer prices
over time, which result from the interaction of many factors over which the
Company has no control.
In the past, the CPI has experienced periods of volatility and such
volatility may occur in the future. Fluctuations and trends in the CPI that
have occurred in the past are not necessarily indicative, however, of
fluctuations that may occur in the future.
In addition, the Congressionally-appointed Boskin Commission concluded in
its report released in December 1996 that the CPI overstates increases in the
cost of living and recommended significant adjustments to the calculation of
the index. Chairman of the Federal Reserve Board, Alan Greenspan, also
recently testified before Congress to similar effect. Recently Congressional
leaders and the President proposed that a panel be formed to review the
accuracy of the CPI as a measure of inflation. To date, neither the BLS nor
Congress has adopted or mandated any change in the manner in which the CPI is
calculated. However, there can be no assurance that such a change will not be
adopted or mandated. As a result of any such change, the Adjusted Principal
Amount payable on the MITTS, and therefore the value of the MITTS could be
significantly reduced. If the CPI is substantially altered, a substitute index
may be employed to calculate the Adjusted Principal Amount as described under
"Description of Securities--Payment at Maturity".
UNCERTAIN TRADING MARKET.
The MITTS have been approved for listing on the NYSE under the symbol "IEM".
While there have been a number of issuances of Market Index Target-Term
Securities, trading volumes have varied historically from one transaction to
another and it is therefore impossible to predict how the MITTS will trade.
You cannot assume that a trading market will develop for the MITTS. If such a
trading market does develop, there can be no assurance that there will be
liquidity in the trading market. The development of a trading market for the
MITTS will depend on the financial performance of the Company, and other
factors such as the appreciation, if any, of the value of the Index and
changes in the value or the method of calculating the CPI.
If the trading market for the MITTS is limited, there may be a limited
number of buyers when you decide to sell your MITTS if you do not wish to hold
your investment until maturity. This may affect the price you receive.
FACTORS AFFECTING TRADING VALUE OF THE MITTS.
We believe that the market value of the MITTS will be affected by the value
of the Index and the CPI and by a number of other factors. Some of these
factors are interrelated in complex ways; as a result, the effect of any one
factor may be offset or magnified by the effect of another factor. The
following paragraphs describe the expected impact on the market value of the
MITTS given a change in a specific factor, assuming all other conditions
remain constant.
. INDEX VALUE. We expect that the market value of the MITTS will depend
substantially on the amount by which the Index exceeds the Benchmark
Index Value. If you choose to sell your MITTS when the value of the Index
exceeds the Benchmark Index Value, you may receive substantially less
than the amount that would be payable at maturity based on that Index
value because of the expectation that the Index will continue to
fluctuate until the Ending Index Value is determined. If you choose to
sell your
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MITTS when the value of the Index is below the Benchmark Index Value, you
may receive less than the $10 principal amount per Unit of MITTS. In
general, rising U.S. dividend rates (i.e., dividends per share) may
increase the value of the Index while falling U.S. dividend rates may
decrease the value of the Index. Political, economic and other
developments that affect the stocks underlying the Index may also affect
the value of the Index and the value of the MITTS.
. INTEREST RATES. Because the MITTS repay, at a minimum, the principal
amount at maturity, we expect that the trading value of the MITTS will be
affected by changes in interest rates. In general, if U.S. interest rates
increase, we expect that the trading value of the MITTS will decrease. If
U.S. interest rates decrease, we expect the trading value of the MITTS
will increase. Interest rates may also affect the U.S. economy and, in
turn, the value of the Index. Rising interest rates may lower the value
of the Index and, thus, the MITTS. Falling rates may increase the value
of the Index and, thus, may increase the value of the MITTS.
. CPI. The Adjusted Principal Amount of the MITTS will generally be higher
in direct proportion to the percentage increase, if any, in the CPI from
when the Initial CPI is fixed to when the Final CPI is determined.
However, interim increases in the CPI may or may not result in increases
in the trading value of the MITTS because of other economic factors. For
example, an increase in the CPI may be accompanied by higher interest
rates. Such higher interest rates could offset any positive impact of
increases in the CPI on the trading value of the MITTS.
. VOLATILITY OF THE INDEX OR OF THE CPI. Volatility is the term used to
describe the size and frequency of market fluctuations. If the volatility
of the Index or of the CPI increases, we expect that the trading value of
the MITTS will increase. If the volatility of the Index or of the CPI
decreases, we expect that the trading value of the MITTS will decrease.
. TIME REMAINING TO MATURITY. The MITTS may trade at a value above that
which would be expected based on the level of interest rates and the
Index. This difference will reflect a "time premium" due to expectations
concerning the value of the Index during the period prior to maturity of
the MITTS. However, as the time remaining to maturity of the MITTS
decreases, we expect that this time premium will decrease, lowering the
trading value of the MITTS.
. DIVIDEND YIELDS. If dividend yields on the stocks comprising the Index
increase, we expect that the value of the MITTS will decrease.
Conversely, if dividend yields on the stocks comprising the Index
decrease, we expect that the value of the MITTS will increase.
. COMPANY CREDIT RATINGS. Real or anticipated changes in the Company's
credit ratings may affect the market value of the MITTS.
We want you to understand that the impact of one of the factors specified
above, such as an increase in interest rates, may offset some or all of any
increase in the trading value of the MITTS attributable to another factor,
such as an increase in the Index value.
In general, assuming all relevant factors are held constant, we expect that
the effect on the trading value of the MITTS of a given change in most of the
factors listed above will be less if it occurs later in the term of the MITTS
than if it occurs earlier in the term of the MITTS except that we expect that
the effect on the trading value of the MITTS of a given increase in the value
of the Index or the CPI will be greater if it occurs later in the term of the
MITTS than if it occurs earlier in the term of the MITTS.
STATE LAW LIMITS ON INTEREST PAID.
New York State laws govern the 1983 Indenture. New York has certain usury
laws that limit the amount of interest that can be charged and paid on loans,
which includes debt securities like the MITTS. Under present New York law, the
maximum rate of interest is 25% per annum on a simple interest basis. This
limit may not apply to debt securities in which $2,500,000 or more has been
invested.
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While we believe that New York law would be given effect by a state or
Federal court sitting outside of New York, many other states also have laws
that regulate the amount of interest that may be charged to and paid by a
borrower. We will promise, for the benefit of the MITTS holders, to the extent
permitted by law, not to voluntarily claim the benefits of any laws concerning
usurious rates of interest.
PURCHASES AND SALES BY MERRILL LYNCH.
The Company, MLPF&S and other affiliates of the Company may from time to
time buy or sell the stocks underlying the Index for their own accounts for
business reasons or in connection with hedging the Company's obligations under
the MITTS. These transactions could affect the price of such stocks and the
value of the Index.
POTENTIAL CONFLICTS.
The Calculation Agent is a subsidiary of the Company, the issuer of the
MITTS. Under certain circumstances, MLPF&S's roles as a subsidiary of the
Company and its responsibilities as Calculation Agent for the MITTS could give
rise to conflicts of interests. You should be aware that because the
Calculation Agent is controlled by the Company, potential conflicts of
interest could arise; however, the Calculation Agent is subject to limits and
has certain duties. For example, in the case of the CPI, the Calculation Agent
could only adjust a value of the CPI to undo a change to how the CPI is
calculated or select a successor measure for inflation to maintain the
intended economic benefits of the MITTS to you if the CPI is discontinued. The
Calculation Agent could not otherwise adjust a value of the CPI or replace the
CPI with another measure of inflation.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the historical ratios for earnings to fixed
charges for the periods indicated:
SIX MONTHS
YEAR ENDED LAST FRIDAY IN DECEMBER ENDED
-------------------------------------- JUNE 27,
1992 1993 1994 1995 1996 1997
------ ------ ------ ------ ------ ----
Ratio of earnings to fixed
charges.......................... 1.3 1.4 1.2 1.2 1.2 1.2
For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" consists of earnings from continuing operations before income taxes
and fixed charges. "Fixed charges" consists of interest costs, amortization of
debt expense, preferred stock dividend requirements of majority-owned
subsidiaries, and that portion of rentals estimated to be representative of
the interest factor.
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DESCRIPTION OF SECURITIES
GENERAL
The Securities are to be issued as a series of Senior Debt Securities under
the Senior Indenture, referred to as the "1983 Indenture", which is more fully
described in the accompanying Prospectus. The Securities will mature on
September 24, 2007.
While at maturity a beneficial owner of a Security will receive the Adjusted
Principal Amount of such Security plus the Supplemental Redemption Amount, if
any, there will be no other payment of interest, periodic or otherwise. See
"Payment at Maturity" below.
The Securities are not subject to redemption by the Company or at the option
of any beneficial owner prior to maturity. Upon the occurrence of an Event of
Default with respect to the Securities, beneficial owners of the Securities
may accelerate the maturity of the Securities, as described under "Description
of Securities--Events of Default and Acceleration" in this Prospectus
Supplement and "Description of Debt Securities--General Events of Default" in
the accompanying Prospectus.
The Securities are to be issued in denominations of whole Units.
PAYMENT AT MATURITY
"General"
At maturity, a beneficial owner of a Security will be entitled to receive
the Adjusted Principal Amount thereof plus a Supplemental Redemption Amount,
if any, all as provided below. If the Ending Index Value does not exceed the
Benchmark Index Value, a beneficial owner of a Security will be entitled to
receive only the Adjusted Principal Amount thereof.
"Determination of the Adjusted Principal Amount"
The Adjusted Principal Amount for a Security will be determined by MLPF&S,
as calculation agent, and will equal the greater of:
(a) the principal amount of such Security ($10 for each Unit); and
(b) the principal amount of such Security X Final CPI
-----------
Initial CPI
Initial CPI equals 160.3, the value of the CPI for the third calendar month
prior to the month containing the Pricing Date. Final CPI shall be determined
by the Calculation Agent and will equal the value of the CPI for the third
calendar month prior to September 24, 2007 as reported on the seventh calendar
day prior to the maturity date. CPI means the non-seasonally adjusted U.S.
City Average All Items Consumer Price Index for All Urban Consumers, published
monthly by the Bureau of Labor Statistics of the Department of Labor (the
"BLS").
If a previously reported CPI value is revised by the BLS after the Final CPI
is determined, the Calculation Agent will continue to use the previously
reported CPI value in calculating the Adjusted Principal Amount.
If the CPI is rebased to a different year, the Calculation Agent will
continue to use the CPI based on the base reference period in effect on the
Pricing Date for such purposes, as long as the CPI continues to be published.
"Determination of the Supplemental Redemption Amount"
The Supplemental Redemption Amount for a Security will be determined by the
Calculation Agent and will equal:
Principal Amount of such Security ($10 per Unit) X Ending Index Value--Benchmark Index Value
-----------------------------------------
Benchmark Index Value
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provided, however, that in no event will the Supplemental Redemption Amount be
less than zero or more than $10 per Unit. As indicated in the formula above,
the Supplemental Redemption Amount for the MITTS will be calculated using the
principal amount of the MITTS, not the Adjusted Principal Amount which may be
greater if the CPI has increased over the term of the MITTS.
The Benchmark Index Value equals 1089.38. The Benchmark Index Value was
determined on the Pricing Date by multiplying the Starting Index Value by a
factor equal to 115%. The Ending Index Value will be determined by the
Calculation Agent and will equal the average (arithmetic mean) of the closing
values of the Index determined on each of the first five Calculation Days
during the Calculation Period. If there are fewer than five Calculation Days,
then the Ending Index Value will equal the average (arithmetic mean) of the
closing values of the Index on such Calculation Days, and if there is only one
Calculation Day, then the Ending Index Value will equal the closing value of
the Index on such Calculation Day. If no Calculation Days occur during the
Calculation Period because of Market Disruption Events, then the Ending Index
Value will equal the closing value of the Index determined on the last
scheduled Index Business Day in the Calculation Period, regardless of the
occurrences of a Market Disruption Event on such day. The "Calculation Period"
means the period from and including the seventh scheduled Index Business Day
prior to the maturity date to and including the second scheduled Index
Business Day prior to the maturity date. "Calculation Day" means any Index
Business Day during the Calculation Period on which a Market Disruption Event
has not occurred. For purposes of determining the Ending Index Value, an
"Index Business Day" is a day on which the NYSE and the American Stock
Exchange are open for trading and the Index or any Successor Index, as defined
below, is calculated and published. All determinations made by the Calculation
Agent shall be at the sole discretion of the Calculation Agent and, absent a
determination by the Calculation Agent of a manifest error, shall be
conclusive for all purposes and binding on the Company and beneficial owners
of the Securities.
HYPOTHETICAL RETURNS
The following table provides the amount payable to beneficial owners of
Securities related to the pretax annualized rates of return given in the table
on the following page for a range of hypothetical annualized rates of change
in the CPI and percentage changes in the Index from the Starting Index Value
to the Ending Index Value.
ANNUALIZED RATE OF CHANGE IN CPI
-------------------------------------------------------
PERCENTAGE CHANGE
IN INDEX
FROM
STARTING INDEX VALUE -3.00% -1.00% 0.00% 1.00% 3.00% 5.00% 7.00% 9.00%
-------------------- ------ ------ ------ ------ ------ ------ ------ ------
-50.00%................. $10.00 $10.00 $10.00 $11.05 $13.44 $16.29 $19.67 $23.67
-30.00%................. 10.00 10.00 10.00 11.05 13.44 16.29 19.67 23.67
-10.00%................. 10.00 10.00 10.00 11.05 13.44 16.29 19.67 23.67
0.00%................. 10.00 10.00 10.00 11.05 13.44 16.29 19.67 23.67
10.00%................ 10.00 10.00 10.00 11.05 13.44 16.29 19.67 23.67
30.00%................ 11.30 11.30 11.30 12.35 14.74 17.59 20.98 24.98
50.00%................ 13.04 13.04 13.04 14.09 16.48 19.33 22.71 26.72
70.00%................ 14.78 14.78 14.78 15.83 18.22 21.07 24.45 28.46
90.00%................ 16.52 16.52 16.52 17.57 19.96 22.81 26.19 30.20
110.00%................ 18.26 18.26 18.26 19.31 21.70 24.55 27.93 31.93
130.00%................ 20.00 20.00 20.00 21.05 23.44 26.29 29.67 33.67
150.00%................ 20.00 20.00 20.00 21.05 23.44 26.29 29.67 33.67
170.00%................ 20.00 20.00 20.00 21.05 23.44 26.29 29.67 33.67
190.00%................ 20.00 20.00 20.00 21.05 23.44 26.29 29.67 33.67
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The following table provides the pretax annualized rate of return to
beneficial owners of the Securities for a range of hypothetical annualized
rates of change in the CPI and percentage changes in the Index from the
Starting Index Value to the Ending Index Value. The far right column of the
table provides the pretax annualized rate of return of an investment in the
stocks underlying the Index (which includes an assumed aggregate dividend
yield of 1.60% per annum, as more fully described below).
ANNUALIZED RATE OF CHANGE IN CPI (1)
--------------------------------------------------------
PERCENTAGE CHANGE PRETAX ANNUALIZED
IN INDEX RATE OF RETURN OF
FROM STARTING STOCKS UNDERLYING
INDEX VALUE -3.00% -1.00% 0.00% 1.00% 3.00% 5.00% 7.00% 9.00% THE INDEX (2)
----------------- ------ ------ ----- ----- ----- ----- ----- ----- -----------------
-50.00%................. 0.00% 0.00% 0.00% 1.00% 2.98% 4.94% 6.88% 8.81% -5.24%
-30.00%................. 0.00% 0.00% 0.00% 1.00% 2.98% 4.94% 6.88% 8.81% -1.95%
-10.00%................. 0.00% 0.00% 0.00% 1.00% 2.98% 4.94% 6.88% 8.81% 0.55%
0.00%................. 0.00% 0.00% 0.00% 1.00% 2.98% 4.94% 6.88% 8.81% 1.60%
10.00%................ 0.00% 0.00% 0.00% 1.00% 2.98% 4.94% 6.88% 8.81% 2.56%
30.00%................ 1.23% 1.23% 1.23% 2.12% 3.92% 5.73% 7.55% 9.37% 4.25%
50.00%................ 2.67% 2.67% 2.67% 3.46% 5.06% 6.70% 8.38% 10.07% 5.71%
70.00%................ 3.95% 3.95% 3.95% 4.65% 6.09% 7.59% 9.15% 10.74% 7.00%
90.00%................ 5.08% 5.08% 5.08% 5.72% 7.03% 8.42% 9.86% 11.36% 8.15%
110.00%................ 6.11% 6.11% 6.11% 6.69% 7.90% 9.19% 10.54% 11.95% 9.20%
130.00%................ 7.05% 7.05% 7.05% 7.58% 8.70% 9.90% 11.18% 12.52% 10.15%
150.00%................ 7.05% 7.05% 7.05% 7.58% 8.70% 9.90% 11.18% 12.52% 11.02%
170.00%................ 7.05% 7.05% 7.05% 7.58% 8.70% 9.90% 11.18% 12.52% 11.84%
190.00%................ 7.05% 7.05% 7.05% 7.58% 8.70% 9.90% 11.18% 12.52% 12.60%
- ---------------------
(1) The annualized rates of return specified in the preceding table are
calculated on a semiannual bond equivalent basis.
(2) This rate of return assumes (a) an investment of a fixed amount in the
stocks underlying the Index with the allocation of such amount reflecting
the current relative weights of such stocks in the Index; (b) a percentage
change in the aggregate price of such stocks that equals the percentage
change in the Index from the Starting Index Value to the relevant
hypothetical Ending Index Value; (c) a constant dividend yield of 1.60% per
annum, paid quarterly from the date of initial delivery of Securities,
applied to the value of the Index at the end of each such quarter assuming
such value increases or decreases linearly from the Starting Index Value to
the applicable hypothetical Ending Index Value; (d) no transaction fees or
expenses; (e) a term for the Securities from September 24, 1997 to September
24, 2007; and (f) a final Index value equal to the Ending Index Value. The
aggregate dividend yield of the stocks underlying the Index as of September
18, 1997 was approximately 1.60%.
As you can see from the foregoing tables, if you assume a 3% per annum
change in the CPI during the term of the Securities and a 70% increase in the
Index from the Starting Index Value to the Ending Index Value, $18.22 would be
payable at the maturity of the Securities and the pretax annualized rate of
return to beneficial owners of the Securities calculated on a semi-annual bond
equivalent basis would be 6.09%. Given a fixed annual percentage change in the
CPI, any increase in the value of the Index above 230% of the Starting Index
Value (i.e., a percentage increase in the Index from the Starting Index Value
of 130%) will not increase the pretax annualized rate of return on the
Securities.
The above figures are for purposes of illustration only. The actual
Supplemental Redemption Amount received by investors and the total and pretax
annualized rate of return resulting therefrom will depend entirely on the
actual Ending Index Value determined by the Calculation Agent as provided
herein. Historical data regarding the Index is included in this Prospectus
Supplement under "The Index--Historical Data on the Index".
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ADJUSTMENTS TO THE CPI
If at any time the method of calculating the CPI, or the value thereof, is
changed in any material respect, or if the CPI is in any other way modified so
that such CPI does not, in the opinion of the Calculation Agent, fairly
represent the value of the CPI had such changes or modifications not been
made, then, from and after such time, the Calculation Agent shall make such
adjustments for purposes of determining the Final CPI as, in the good faith
judgment of the Calculation Agent, may be necessary in order to arrive at a
calculation of a value of an inflation index comparable to the CPI as if such
changes or modifications had not been made.
If the CPI is discontinued while the Securities are outstanding, the
Calculation Agent shall determine an alternative index that in the Calculation
Agent's sole discretion is comparable to the CPI (the "Successor CPI"). Upon
the Calculation Agent's notification of such determination to the Trustee and
the Company, the Calculation Agent will substitute the Successor CPI for the
CPI. The Calculation Agent may make such adjustments to the values of the
Successor CPI in order to maintain the intended economic benefits to the
Company and the Holders of the Securities. Upon any selection by the
Calculation Agent of a Successor CPI, the Company shall cause notice thereof
to be given to the Holders of the Securities.
ADJUSTMENTS TO THE INDEX; MARKET DISRUPTION EVENTS
If at any time the method of calculating the Index, or the value thereof, is
changed in any material respect, or if the Index is in any other way modified
so that such Index does not, in the opinion of the Calculation Agent, fairly
represent the value of the Index had such changes or modifications not been
made, then, from and after such time, the Calculation Agent shall, at the
close of business in New York, New York, on each date that the closing value
with respect to the Ending Index Value is to be calculated, make such
adjustments as, in the good faith judgment of the Calculation Agent, may be
necessary in order to arrive at a calculation of a value of a stock index
comparable to the Index as if such changes or modifications had not been made,
and calculate such closing value with reference to the Index, as adjusted.
Accordingly, if the method of calculating the Index is modified so that the
value of such Index is a fraction or a multiple of what it would have been if
it had not been modified (e.g., due to a split in the Index), then the
Calculation Agent shall adjust such Index in order to arrive at a value of the
Index as if it had not been modified (e.g., as if such split had not
occurred).
"Market Disruption Event" means either of the following events, as
determined by the Calculation Agent:
(a) the suspension or material limitation (limitations pursuant to New York
Stock Exchange Rule 80A (or any applicable rule or regulation enacted or
promulgated by the New York Stock Exchange or any other self regulatory
organization or the Securities and Exchange Commission of similar scope as
determined by the Calculation Agent) on trading during significant market
fluctuations shall be considered "material" for purposes of this definition),
in each case, for more than two hours of trading in 100 or more of the
securities included in the Index, or
(b) the suspension or material limitation, in each case, for more than two
hours of trading (whether by reason of movements in price otherwise exceeding
levels permitted by the relevant exchange or otherwise) in (A) futures
contracts related to the Index which are traded on the Chicago Mercantile
Exchange or (B) option contracts related to the Index which are traded on the
Chicago Board Options Exchange, Inc.
For the purposes of this definition, a limitation on the hours in a trading
day and/or number of days of trading will not constitute a Market Disruption
Event if it results from an announced change in the regular business hours of
the relevant exchange.
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DISCONTINUANCE OF THE INDEX
If S&P discontinues publication of the Index and S&P or another entity
publishes a successor or substitute index that the Calculation Agent
determines, in its sole discretion, to be comparable to such Index (any such
index being referred to hereinafter as a "Successor Index"), then, upon the
Calculation Agent's notification of such determination to the Trustee and the
Company, the Calculation Agent will substitute the Successor Index as
calculated by S&P or such other entity for the Index and calculate the Ending
Index Value as described above under "Payment at Maturity". Upon any selection
by the Calculation Agent of a Successor Index, the Company shall cause notice
thereof to be given to Holders of the Securities.
If S&P discontinues publication of the Index and a Successor Index is not
selected by the Calculation Agent or is no longer published on any of the
Calculation Days, the value to be substituted for the Index for any such
Calculation Day used to calculate the Supplemental Redemption Amount at
maturity will be a value computed by the Calculation Agent for each
Calculation Day in accordance with the procedures last used to calculate the
Index prior to any such discontinuance. If a Successor Index is selected or
the Calculation Agent calculates a value as a substitute for the Index as
described below, such Successor Index or value shall be substituted for the
Index for all purposes, including for purposes of determining whether a Market
Disruption Event exists.
If S&P discontinues publication of the Index prior to the period during
which the Supplemental Redemption Amount is to be determined and the
Calculation Agent determines that no Successor Index is available at such
time, then on each Business Day until the earlier to occur of (a) the
determination of the Ending Index Value and (b) a determination by the
Calculation Agent that a Successor Index is available, the Calculation Agent
shall determine the value that would be used in computing the Supplemental
Redemption Amount as described in the preceding paragraph as if such day were
a Calculation Day. The Calculation Agent will cause notice of each such value
to be published not less often than once each month in The Wall Street Journal
(or another newspaper of general circulation), and arrange for information
with respect to such values to be made available by telephone. Notwithstanding
these alternative arrangements, discontinuance of the publication of the Index
may adversely affect trading in the Securities.
EVENTS OF DEFAULT AND ACCELERATION
In case an Event of Default with respect to any Securities shall have
occurred and be continuing, the amount payable to a beneficial owner of a
Security upon any acceleration permitted by the Securities, with respect to
each $10 principal amount thereof, will be equal to the Adjusted Principal
Amount and the Supplemental Redemption Amount, if any, calculated as though
the date of early repayment were the stated maturity date of the Securities.
See "Description of Securities--Payment at Maturity" in this Prospectus
Supplement. If a bankruptcy proceeding is commenced in respect of the Company,
the claim of the beneficial owner of a Security may be limited, under Section
502(b)(2) of Title 11 of the United States Code, to the principal amount of
the Security plus an additional amount of contingent interest calculated as
though the date of the commencement of the proceeding were the maturity date
of the Securities.
In case of default in payment at the maturity date of the Securities
(whether at their stated maturity or upon acceleration), from and after the
maturity date the Securities shall bear interest, payable upon demand of the
beneficial owners thereof, at the rate of 6.58% per annum (to the extent that
payment of such interest shall be legally enforceable) on the unpaid amount
due and payable on such date in accordance with the terms of the Securities to
the date payment of such amount has been made or duly provided for.
DEPOSITORY
Upon issuance, all Securities will be represented by one or more fully
registered global securities (the "Global Securities"). Each such Global
Security will be deposited with, or on behalf of, The Depository Trust Company
("DTC"), as Depository, registered in the name of Cede & Co. (DTC's
partnership nominee). Unless and until it is exchanged in whole or in part for
Securities in definitive form, no Global Security may be
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transferred except as a whole by the Depository to a nominee of such
Depository or by a nominee of such Depository to such Depository or another
nominee of such Depository or by such Depository or any such nominee to a
successor of such Depository or a nominee of such successor.
So long as DTC, or its nominee, is a registered owner of a Global Security,
DTC or its nominee, as the case may be, will be considered the sole owner or
Holder of the Securities represented by such Global Security for all purposes
under the 1983 Indenture. Except as provided below, the actual owner of the
Securities represented by a Global Security (the "Beneficial Owner") will not
be entitled to have the Securities represented by such Global Securities
registered in their names, will not receive or be entitled to receive physical
delivery of the Securities in definitive form, except in the event that use of
the book-entry system for the Securities is discontinued, and will not be
considered the owners or Holders thereof under the 1983 Indenture, including
for purposes of receiving any reports delivered by the Company or the Trustee
pursuant to the 1983 Indenture. Accordingly, each Person owning a beneficial
interest in a Global Security must rely on the procedures of DTC and, if such
Person is not a participant of DTC (a "Participant"), on the procedures of the
Participant through which such person owns its interest, to exercise any
rights of a Holder under the 1983 Indenture. The Company understands that
under existing industry practices, in the event that the Company requests any
action of Holders or that an owner of a beneficial interest in such a Global
Security desires to give or take any action which a Holder is entitled to give
or take under the 1983 Indenture, DTC would authorize the Participants holding
the relevant beneficial interests to give or take such action, and such
Participants would authorize Beneficial Owners owning through such
Participants to give or take such action or would otherwise act upon the
instructions of Beneficial Owners. Conveyance of notices and other
communications by DTC to Participants, by Participants to Indirect
Participants, as defined below, 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.
If (x) the Depository is at any time unwilling or unable to continue as
Depository and a successor depository is not appointed by the Company within
60 days, (y) the Company executes and delivers to the Trustee a Company Order
to the effect that the Global Securities shall be exchangeable or (z) an Event
of Default has occurred and is continuing with respect to the Securities, the
Global Securities will be exchangeable for Securities in definitive form of
like tenor and of an equal aggregate principal amount, in denominations of $10
and integral multiples thereof. Such definitive Securities shall be registered
in such name or names as the Depository shall instruct the Trustee. It is
expected that such instructions may be based upon directions received by the
Depository from Participants with respect to ownership of beneficial interests
in such Global Securities.
The following is based on information furnished by DTC:
DTC will act as securities depository for the Securities. The Securities
will be issued as fully registered securities registered in the name of Cede &
Co. (DTC's partnership nominee). One or more fully registered Global Security
will be issued for the Securities in the aggregate principal amount of such
issue, and will be deposited with DTC.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended. DTC holds securities that its Participants
deposit with DTC. DTC also facilitates the settlement among Participants of
securities transactions, such as transfers and pledges, in deposited
securities through electronic computerized book-entry changes in Participants'
accounts, thereby eliminating the need for physical movement of securities
certificates. Direct Participants of DTC ("Direct Participants") include
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. DTC is owned by a number of its Direct
Participants and by The New York Stock Exchange, Inc., the American Stock
Exchange, Inc., and the National Association of Securities Dealers, Inc.
Access to the DTC's system is also available to
S-18
others such as securities brokers and dealers, banks and trust companies that
clear through or maintain a custodial relationship with a Direct Participant,
either directly or indirectly ("Indirect Participants"). The rules applicable
to DTC and its Participants are on file with the Securities and Exchange
Commission.
Purchases of Securities under the DTC's system must be made by or through
Direct Participants, which will receive a credit for the Securities on the
DTC's records. The ownership interest of each Beneficial Owner is in turn to
be recorded on the records of Direct Participants and Indirect Participants.
Beneficial Owners will not receive written confirmation from DTC of their
purchase, but Beneficial Owners are expected to receive written confirmations
providing details of the transaction, as well as periodic statements of their
holdings, from the Direct Participants or Indirect Participants through which
such Beneficial Owner entered into the transaction. Transfers of ownership
interests in the Securities are to be accomplished by entries made on the
books of Participants acting on behalf of Beneficial Owners. Beneficial Owners
will not receive certificates representing their ownership interests in
Securities, except in the event that use of the book-entry system for the
Securities is discontinued.
To facilitate subsequent transfers, all Securities deposited with DTC are
registered in the name of DTC's partnership nominee, Cede & Co. The deposit of
Securities with DTC and their registration in the name of Cede & Co. effect no
change in beneficial ownership. DTC has no knowledge of the actual Beneficial
Owners of the Securities; DTC's records reflect only the identity of the
Direct Participants to whose accounts such Securities are credited, which may
or may not be the Beneficial Owners. The Participants will remain responsible
for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
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.
Neither DTC nor Cede & Co. will consent or vote with respect to the
Securities. Under its usual procedures, DTC mails an Omnibus Proxy to the
Company as soon as possible after the applicable record date. The Omnibus
Proxy assigns Cede & Co.'s consenting or voting rights to those Direct
Participants to whose accounts the Securities are credited on the record date
(identified in a listing attached to the Omnibus Proxy).
Principal, premium, if any, and/or interest, if any, payments on the
Securities will be made in immediately available funds to DTC. DTC's practice
is to credit Direct Participants' accounts on the applicable payment date in
accordance with their respective holdings shown on the Depository's records
unless DTC has reason to believe that it will not receive payment on such
date. Payments by Participants to Beneficial Owners will be governed by
standing instructions and customary practices, as is 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 Participant and not of DTC, the
Trustee or the Company, subject to any statutory or regulatory requirements as
may be in effect from time to time. Payment of principal, premium, if any,
and/or interest, if any, to DTC is the responsibility of the Company or the
Trustee, disbursement of such payments to Direct Participants shall be the
responsibility of DTC, and disbursement of such payments to the Beneficial
Owners shall be the responsibility of Direct Participants and Indirect
Participants.
DTC may discontinue providing its services as securities depository with
respect to the Securities at any time by giving reasonable notice to the
Company or the Trustee. Under such circumstances, in the event that a
successor securities depository is not obtained, Security certificates are
required to be printed and delivered.
The Company may decide to discontinue use of the system of book-entry
transfers through DTC (or a successor securities depository). In that event,
Security certificates will be printed and delivered.
The information in this section concerning DTC and DTC's system has been
obtained from sources that the Company believes to be reliable, but the
Company takes no responsibility for the accuracy thereof.
S-19
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Securities will be made by the underwriter in immediately
available funds. All payments of Adjusted Principal Amount and the
Supplemental Redemption Amount, if any, will be made by the Company in
immediately available funds so long as the Securities are maintained in book-
entry form.
THE INDEX
All disclosure contained in this Prospectus Supplement regarding the Index,
including, without limitation, its make-up, method of calculation and changes
in its components, is derived from publicly available information prepared by
S&P.
GENERAL
The Index is published by S&P and is intended to provide an indication of
the pattern of common stock price movement. The calculation of the value of
the Index (discussed below in further detail) is based on the relative value
of the aggregate Market Value (as defined below) of the common stocks of 500
companies as of a particular time as compared to the aggregate average Market
Value of the common stocks of 500 similar companies during the base period of
the years 1941 through 1943. As of August 31, 1997, the 500 companies included
in the Index represented approximately 79% of the aggregate Market Value of
common stocks traded on the NYSE; however, these 500 companies are not the 500
largest companies listed on the NYSE and not all of these 500 companies are
listed on such exchange. As of August 31, 1997, the aggregate market value of
the 500 companies included in the Index represented approximately 71% of the
aggregate market value of United States domestic, public companies. S&P
chooses companies for inclusion in the Index with the aim of achieving a
distribution by broad industry groupings that approximates the distribution of
these groupings in the common stock population of the NYSE, which S&P uses as
an assumed model for the composition of the total market. Relevant criteria
employed by S&P include the viability of the particular company, the extent to
which that company represents the industry group to which it is assigned, the
extent to which the market price of that Company's common stock is generally
responsive to changes in the affairs of the respective industry and the Market
Value and trading activity of the common stock of that company. As of August
31, 1997, the 500 companies included in the Index were divided into 103
individual groups. These individual groups comprised the following four main
groups of companies (with the number of companies currently included in each
group indicated in parentheses): Industrials (383), Utilities (37),
Transportation (11) and Financial (69). S&P may from time to time, in its sole
discretion, add companies to, or delete companies from, the Index to achieve
the objectives stated above.
COMPUTATION OF THE INDEX
S&P currently computes the Index as of a particular time as follows:
(1) the product of the market price per share and the number of then
outstanding shares of each component stock is determined as of such time
(such product referred to as the "Market Value" of such stock);
(2) the Market Value of all component stocks as of such time (as
determined under clause (1) above) are aggregated;
(3) the mean average of the Market Values as of each week in the base
period of the years 1941 through 1943 of the common stock of each company
in a group of 500 substantially similar companies is determined;
(4) the mean average Market Values of all such common stocks over such
base period (as determined under clause (3) above) are aggregated (such
aggregate amount being referred to as the "Base Value");
(5) the aggregate Market Value of all component stocks as of such time
(as determined under clause (2) above) is divided by the Base Value; and
(6) the resulting quotient (expressed in decimals) is multiplied by ten.
S-20
While S&P currently employs the above methodology to calculate the Index, no
assurance can be given that S&P will not modify or change such methodology in
a manner that may affect the Supplemental Redemption Amount, if any, payable
to beneficial owners of Securities upon maturity or otherwise.
S&P adjusts the foregoing formula to negate the effect of changes in the
Market Value of a component stock that are determined by S&P to be arbitrary
or not due to true market fluctuations. Such changes may result from such
causes as the issuance of stock dividends, the granting to shareholders of
rights to purchase additional shares of such stock, the purchase thereof by
employees pursuant to employee benefit plans, certain consolidations and
acquisitions, the granting to shareholders of rights to purchase other
securities of the company, the substitution by S&P of particular component
stocks in the Index, and other reasons. In all such cases, S&P first
recalculates the aggregate Market Value of all component stocks (after taking
account of the new market price per share of the particular component stock or
the new number of outstanding shares thereof or both, as the case may be) and
then determines the New Base Value in accordance with the following formula:
Old Base Value X New Market Value = New Base Value
----------------
Old Market Value
The result is that the Base Value is adjusted in proportion to any change in
the aggregate Market Value of all component stocks resulting from the causes
referred to above to the extent necessary to negate the effects of such causes
upon the Index.
S-21
HISTORICAL DATA ON THE INDEX
The following table sets forth the closing values of the Index on the last
business day of each year from 1947 through 1996, as published by S&P. The
historical experience of the Index should not be taken as an indication of
future performance and no assurance can be given that the value of the Index
will not decline and thereby reduce the Supplemental Redemption Amount which
may be payable to beneficial owners of Securities at maturity or otherwise.
YEAR END VALUE OF THE INDEX
YEAR CLOSING VALUE YEAR CLOSING VALUE YEAR CLOSING YEAR YEAR CLOSING YEAR
------ ------------- ---- ------------- ---- ------------ ---- ------------
1947 15.30 1960 58.11 1973 97.55 1986 242.17
1948 15.20 1961 71.55 1974 68.56 1987 247.08
1949 16.79 1962 63.10 1975 90.19 1988 277.72
1950 20.43 1963 75.02 1976 107.46 1989 353.40
1951 23.77 1964 84.75 1977 95.10 1990 330.22
1952 26.57 1965 92.43 1978 96.11 1991 417.09
1953 24.81 1966 80.33 1979 107.94 1992 435.71
1954 35.98 1967 96.47 1980 135.76 1993 466.45
1955 45.48 1968 103.86 1981 122.55 1994 459.27
1956 46.67 1969 92.06 1982 140.64 1995 615.93
1957 39.99 1970 92.15 1983 164.93 1996 740.74
1958 55.21 1971 102.09 1984 167.24
1959 59.89 1972 118.05 1985 211.28
The following table sets forth the level of the Index at the end of each
month, in the period from January 1989 through August 1997. These historical
data on the Index are not necessarily indicative of the future performance of
the Index or what the value of the Securities may be. Any historical upward or
downward trend in the level of the Index during any period set forth below is
not any indication that the Index is more or less likely to increase or
decrease at any time during the term of the Securities.
1989 1990 1991 1992 1993 1994 1995 1996 1997
------ ------ ------ ------ ------ ------ ------ ------ ------
January......... 297.47 329.08 343.93 408.78 438.78 481.61 470.42 636.02 786.16
February........ 288.86 331.89 367.07 412.70 443.38 467.14 487.39 640.43 790.82
March........... 294.87 339.94 375.22 403.69 451.67 445.76 500.71 645.50 757.12
April........... 309.64 330.80 375.34 414.95 440.19 450.91 514.71 654.17 801.34
May............. 320.52 361.23 389.83 415.35 450.19 456.51 533.40 669.12 848.28
June............ 317.98 358.02 371.16 408.14 450.53 444.27 544.75 670.63 885.14
July............ 346.08 356.15 387.81 424.22 448.13 458.26 562.06 639.95 954.29
August.......... 351.45 322.56 395.43 414.03 463.56 475.50 561.88 651.99 899.47
September....... 349.15 306.05 387.86 417.80 458.93 462.71 584.41 687.31
October......... 340.36 304.00 392.45 418.68 467.83 472.35 581.50 705.27
November........ 345.99 322.22 375.22 431.35 461.79 453.69 605.37 757.02
December........ 353.40 330.22 417.09 435.71 466.45 459.27 615.93 740.74
S-22
The following graph sets forth the historical performance of the Index at
the end of each year from 1947 through 1996. Past movements of the Index are
not necessarily indicative of the future Index values. On September 18, 1997
the closing level of the Index was 947.29.
[The graph sets forth the year-end closing levels of the Index from 1947 through
1996, with the vertical axis specifying the year-end closing level of the S&P
500 Index in a range from 0 to 800 in increments of 100 and the horizontal axis
specifying the time period in increments of 1 year from 1947 to 1996.]
LICENSE AGREEMENT
S&P and Merrill Lynch Capital Services, Inc. have entered into a non-
exclusive license agreement providing for the license to Merrill Lynch Capital
Services, Inc., in exchange for a fee, of the right to use indices owned and
published by S&P in connection with certain securities, including the
Securities, and the Company is an authorized sublicensee thereof.
The license agreement between S&P and Merrill Lynch Capital Services, Inc.
provides that the following language must be stated in this Prospectus
Supplement:
"The Securities are not sponsored, endorsed, sold or promoted by S&P. S&P
makes no representation or warranty, express or implied, to the Holders of
the Securities or any member of the public regarding the advisability of
investing in securities generally or in the Securities particularly or the
ability of the Index to track general stock market performance. S&P's only
relationship to Merrill Lynch Capital Services, Inc. and the Company (other
than transactions entered into in the ordinary course of business) is the
licensing of certain servicemarks and trade names of S&P and of the Index
which is determined, composed and calculated by S&P without regard to the
Company or the Securities. S&P has no obligation to take the needs of the
Company or the Holders of the Securities into consideration in determining,
composing or calculating the Index. S&P is not responsible for and has not
participated in the determination of the timing of the sale of the
Securities, prices at which the Securities are to initially be sold, or
quantities of the Securities to be issued or in the determination or
calculation of the equation by which the Securities are to be converted
into cash. S&P has no obligation or liability in connection with the
administration, marketing or trading of the Securities."
S-23
CPI
GENERAL
The CPI is a measure of the average change in consumer prices over time for
a fixed market basket of goods and services, including food, clothing,
shelter, fuels, transportation, charges for doctors and dentists services, and
drugs. In calculating the index, price changes for the various items are
averaged together with weights that represent their importance in the spending
of urban households in the United States. The contents of the market basket of
goods and services and the weights assigned to the various items are updated
periodically by the BLS to take into account changes in consumer expenditure
patterns.
All disclosure contained in this Prospectus Supplement regarding the CPI,
including, without limitation, its composition, method of calculation and
changes in its components, is derived from publicly available information
prepared by the United States Government. Neither the Company nor the
underwriter takes any responsibility for the accuracy or completeness of such
information.
The CPI is expressed in relative terms in relation to a time base reference
period for which the level is set at 100. For example, if the CPI for the
1982-1984 reference period is 100, an increase of 16.5 percent from that
period would result in a CPI value equal to 116.5. The CPI for a particular
month is released and published during the following month. From time to time,
the CPI is rebased to a more recent base reference period. The base reference
period for these Notes will be the 1982-1984 average which is equal to 100.
HISTORICAL DATA ON THE CPI
The following table sets forth the closing values of the CPI on the last
business day of each year from 1947 through 1996, as published by the BLS. The
historical experience of the CPI should not be taken as an indication of
future performance and no assurance can be given that the value of the CPI
will not decline and thereby reduce the Adjusted Principal Amount which may be
payable to beneficial owners of Securities at maturity or otherwise.
YEAR END VALUE OF THE CPI
YEAR CLOSING VALUE YEAR CLOSING VALUE YEAR CLOSING VALUE YEAR CLOSING VALUE
---- ------------- ---- ------------- ---- ------------- ---- -------------
1947 23.4 1960 29.8 1973 46.2 1986 110.5
1948 24.1 1961 30.0 1974 51.9 1987 115.4
1949 23.6 1962 30.4 1975 55.5 1988 120.5
1950 25.0 1963 30.9 1976 58.2 1989 126.1
1951 26.5 1964 31.2 1977 62.1 1990 133.8
1952 26.7 1965 31.8 1978 67.7 1991 137.9
1953 26.9 1966 32.9 1979 76.7 1992 141.9
1954 26.7 1967 33.9 1980 86.3 1993 145.8
1955 26.8 1968 35.5 1981 94.0 1994 149.7
1956 27.6 1969 37.7 1982 97.6 1995 153.5
1957 28.4 1970 39.8 1983 101.3 1996 158.6
1958 28.9 1971 41.1 1984 105.3
1959 29.4 1972 42.5 1985 109.3
S-24
The table below sets forth the CPI, as published by the Bureau of Labor
Statistics, for the periods indicated. Fluctuations in the CPI that have
occurred in the past are not necessarily indicative of fluctuations in the CPI
that may occur over the term of the Securities. The CPI may be higher or lower
or may fluctuate more or less widely during the term of the Securities than it
has in the period shown. Future rates of inflation, including the rate of
increase in the CPI, are not readily predictable, particularly over extended
periods of time.
CONSUMER PRICE INDEX VALUE
(AS PUBLISHED BY THE BUREAU OF LABOR STATISTICS)
1992 1993 1994 1995 1996 1997
----- ----- ----- ----- ----- -----
January................................ 138.1 142.6 146.2 150.3 154.4 159.1
February............................... 138.6 143.1 146.7 150.9 154.9 159.6
March.................................. 139.3 143.6 147.2 151.4 155.7 160.0
April.................................. 139.5 144.0 147.4 151.9 156.3 160.2
May.................................... 139.7 144.2 147.5 152.2 156.6 160.1
June................................... 140.2 144.4 148.0 152.5 156.7 160.3
July................................... 140.5 144.4 148.4 152.5 157.0 160.5
August................................. 140.9 144.8 149.0 152.9 157.3 160.8
September.............................. 141.3 145.1 149.4 153.2 157.8
October................................ 141.8 145.7 149.5 153.7 158.3
November............................... 142.0 145.8 149.7 153.6 158.6
December............................... 141.9 145.8 149.7 153.5 158.6
The following graph sets forth the historical performance of the CPI at the
end of each year from 1947 through 1996. Past movements of the CPI are not
necessarily indicative of the future CPI values.
[The graph sets forth the year-end closing levels of the CPI from 1947 through
1996, with the vertical axis specifying the year-end closing level of the Index
in a range from 0 to 180 in increments of 20 and the horizontal axis specifying
the time period in increments of 1 year from 1947 to 1996.]
S-25
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
Set forth in full below is the opinion of Brown & Wood LLP, counsel to the
Company, as to certain United States Federal income tax consequences of the
purchase, ownership and disposition of the Securities. Such opinion is based
upon laws, regulations, rulings and decisions now in effect, all of which are
subject to change (including retroactive changes in effective dates) or
possible differing interpretations. The discussion below deals only with
Securities held as capital assets and does not purport to deal with persons in
special tax situations, such as financial institutions, insurance companies,
regulated investment companies, dealers in securities or currencies, tax-
exempt entities, persons holding Securities in a tax-deferred or tax-
advantaged account, or persons holding Securities as a hedge against currency
risks, as a position in a "straddle" or as part of a "hedging" or "conversion"
transaction for tax purposes. It also does not deal with holders other than
original purchasers (except where otherwise specifically noted herein). The
following discussion also assumes that the issue price of the Securities, as
determined for United States Federal income tax purposes, equals the principal
amount thereof. Persons considering the purchase of the Securities should
consult their own tax advisors concerning the application of the United Stated
Federal income tax laws to their particular situations as well as any
consequences of the purchase, ownership and disposition of the Securities
arising under the laws of any other taxing jurisdiction.
As used herein, the term "U.S. Holder" means a beneficial owner of a
Security that is for United States Federal income tax purposes (a) a citizen
or resident of the United States, (b) a corporation, partnership or other
entity created or organized in or under the laws of the United States or of
any political subdivision thereof (other than a partnership that is not
treated as a United States person under any applicable Treasury regulations),
(c) an estate the income of which is subject to United States Federal income
taxation regardless of its source, (d) a trust if a court within the United
States is able to exercise primary supervision over the administration of the
trust and one or more United States fiduciaries have the authority to control
all substantial decisions of the trust, or (e) any other person whose income
or gain in respect of a Security is effectively connected with the conduct of
a United States trade or business. Notwithstanding the preceding sentence, to
the extent provided in Treasury regulations, certain trusts in existence on
August 20, 1996, and treated as United States persons prior to such date that
elect to continue to be treated as United States persons also will be a U.S.
Holder. As used herein, the term "non-U.S. Holder" means a beneficial owner of
a Security that is not a U.S. Holder.
GENERAL
There are no statutory provisions, regulations, published rulings or
judicial decisions addressing or involving the characterization, for United
States Federal income tax purposes, of the Securities or securities with terms
substantially the same as the Securities. However, although the matter is not
free from doubt, under current law, each Security should be treated as a debt
instrument of the Company for United States Federal income tax purposes. The
Company currently intends to treat each Security as a debt instrument of the
Company for United States Federal income tax purposes and, where required,
intends to file information returns with the Internal Revenue Service ("IRS")
in accordance with such treatment, in the absence of any change or
clarification in the law, by regulation or otherwise, requiring a different
characterization of the Securities. Prospective investors in the Securities
should be aware, however, that the IRS is not bound by the Company's
characterization of the Securities as indebtedness and the IRS could possibly
take a different position as to the proper characterization of the Securities
for United States Federal income tax purposes. The following discussion of the
principal United States Federal income tax consequences of the purchase,
ownership and disposition of the Securities is based upon the assumption that
each Security will be treated as a debt instrument of the Company for United
States Federal income tax purposes. If the Securities are not in fact treated
as debt instruments of the Company for United States Federal income tax
purposes, then the United States Federal income tax treatment of the purchase,
ownership and disposition of the Securities could differ from the treatment
discussed below with the result that the timing and character of income, gain
or loss recognized in respect of a Security could differ from the timing and
character of income, gain or loss recognized in respect of a Security had the
Securities in fact been treated as debt instruments of the Company for United
States Federal income tax purposes.
S-26
U.S. HOLDERS
On June 11, 1996, the Treasury Department issued final regulations (the
"Final Regulations") concerning the proper United States Federal income tax
treatment of contingent payment debt instruments such as the Securities, which
apply to debt instruments issued on or after August 13, 1996 and, accordingly,
will apply to the Securities. In general, the Final Regulations cause the
timing and character of income, gain or loss reported on a contingent payment
debt instrument to substantially differ from the timing and character of
income, gain or loss reported on a contingent payment debt instrument under
general principles of prior United States Federal income tax law.
Specifically, the Final Regulations generally require a U.S. Holder of such an
instrument to include future contingent and noncontingent interest payments in
income as such interest accrues based upon a projected payment schedule.
Moreover, in general, under the Final Regulations, any gain recognized by a
U.S. Holder on the sale, exchange, or retirement of a contingent payment debt
instrument is treated as ordinary income and all or a portion of any loss
realized could be treated as ordinary loss as opposed to capital loss
(depending upon the circumstances). The Final Regulations provide no
definitive guidance as to whether or not an instrument is properly
characterized as a debt instrument for United States Federal income tax
purposes.
In particular, solely for purposes of applying the Final Regulations to the
Securities, the Company has determined that the projected payment schedule for
the Securities will consist of payment on the maturity date of a projected
amount equal to $19.0973 per Unit (the "Projected Redemption Amount"). This
represents an estimated yield on the Securities equal to 6.58% per annum
(compounded semiannually). Accordingly, during the term of the Securities, a
U.S. Holder of a Security will be required to include in income as ordinary
interest an amount equal to the sum of the daily portions of interest on the
Security that are deemed to accrue at this estimated yield for each day during
the taxable year (or portion of the taxable year) on which the U.S. Holder
holds such Security. The amount of interest that will be deemed to accrue in
any accrual period (i.e., generally each six month period during which the
Securities are outstanding) will equal the product of this estimated yield
(properly adjusted for the length of the accrual period) and the Security's
adjusted issue price (as defined below) at the beginning of the accrual
period. The daily portions of interest will be determined by allocating to
each day in the accrual period the ratable portion of the interest that is
deemed to accrue during the accrual period. In general, for these purposes, a
Security's adjusted issue price will equal the Security's issue price (i.e.,
$10), increased by the interest previously accrued on the Security. At
maturity of a Security, in the event that the sum of the actual Adjusted
Principal Amount and the actual Supplemental Redemption Amount, if any,
exceeds $19.0973 per Unit (i.e., the Projected Redemption Amount), a U.S.
Holder will be required to include the excess of the sum of the actual
Adjusted Principal Amount and the actual Supplemental Redemption Amount over
$19.0973 per Unit (i.e., the Projected Redemption Amount) in income as
ordinary interest on the maturity date. Alternatively, in the event that the
sum of the actual Adjusted Principal Amount and the actual Supplemental
Redemption Amount, if any, is less than $19.0973 per Unit (i.e., the Projected
Redemption Amount), the excess of $19.0973 per Unit (i.e., the Projected
Redemption Amount) over the sum of the actual Adjusted Principal Amount and
the actual Supplemental Redemption Amount will be treated first as an offset
to any interest otherwise includible in income by the U.S. Holder with respect
to the Security for the taxable year in which the maturity date occurs to the
extent of the amount of such includible interest. A U.S. Holder will be
permitted to recognize and deduct, as an ordinary loss that is not subject to
the limitations applicable to miscellaneous itemized deductions, any remaining
portion of the excess of $19.0973 per Unit (i.e., the Projected Redemption
Amount) over the sum of the actual Adjusted Principal Amount and the actual
Supplemental Redemption Amount that is not treated as an interest offset
pursuant to the foregoing rules. U.S. Holders purchasing a Security at a price
that differs from the adjusted issue price of the Security as of the purchase
date (e.g., subsequent purchasers) will be subject to special rules providing
for certain adjustments to the foregoing rules and such U.S. Holders should
consult their own tax advisors concerning these rules.
Upon the sale or exchange of a Security prior to the maturity date, a U.S.
Holder will be required to recognize taxable gain or loss in an amount equal
to the difference, if any, between the amount realized by the U.S. Holder upon
such sale or exchange and the U.S. Holder's adjusted tax basis in the Security
as of the date of disposition. A U.S. Holder's adjusted tax basis in a
Security generally will equal such U.S. Holder's initial investment in the
Security increased by any interest previously included in income with respect
to the Security
S-27
by the U.S. Holder. Any such taxable gain will be treated as ordinary income.
Any such taxable loss will be treated as ordinary loss to the extent of the
U.S. Holder's total interest inclusions on the Security. Any remaining loss
generally will be treated as long-term or short-term capital loss (depending
upon the U.S. Holder's holding period for the Security). All amounts
includible in income by a U.S. Holder as ordinary interest pursuant to the
Final Regulations will be treated as original issue discount.
All prospective investors in the Securities should consult their own tax
advisors concerning the application of the Final Regulations to their
investment in the Securities. Investors in the Securities may also obtain the
projected payment schedule, as determined by the Company for purposes of the
application of the Final Regulations to the Securities, by submitting a
written request for such information to Merrill Lynch & Co., Inc., Attn:
Darryl W. Colletti, Corporate Secretary's Office, 100 Church Street, 12th
Floor, New York, New York 10080-6512.
The projected payment schedule (including both the Projected Redemption
Amount and the estimated yield on the Securities) has been determined solely
for United States Federal income tax purposes (i.e., for purposes of applying
the Final Regulations to the Securities), and is neither a prediction nor a
guarantee of what either the actual Adjusted Principal Amount or the actual
Supplemental Redemption Amount will be, or that either the actual Adjusted
Principal Amount will exceed $10 or that the actual Supplemental Redemption
Amount will even exceed zero.
The following table sets forth the amount of interest that will be deemed to
have accrued with respect to each Unit of the Securities during each accrual
period over a term of ten years for the Securities based upon a projected
payment schedule for the Securities as determined by the Company for purposes
of application of the Final Regulations to the Securities:
TOTAL INTEREST
DEEMED
INTEREST DEEMED TO TO HAVE ACCRUED ON
ACCRUE DURING SECURITIES AS OF END
ACCRUAL OF ACCRUAL PERIOD
ACCRUAL PERIOD PERIOD (PER UNIT) (PER UNIT)
-------------- ------------------ --------------------
September 24, 1997 through March 23,
1998................................... $0.3244 $0.3244
March 24, 1998 through September 23,
1998................................... $0.3415 $0.6659
September 24, 1998 through March 23,
1999................................... $0.3490 $1.0149
March 24, 1999 through September 23,
1999................................... $0.3624 $1.3773
September 24, 1999 through March 23,
2000................................... $0.3743 $1.7516
March 24, 2000 through September 23,
2000................................... $0.3867 $2.1383
September 24, 2000 through March 23,
2001................................... $0.3993 $2.5376
March 24, 2001 through September 23,
2001................................... $0.4125 $2.9501
September 24, 2001 through March 23,
2002................................... $0.4261 $3.3762
March 24, 2002 through September 23,
2002................................... $0.4401 $3.8163
September 24, 2002 through March 23,
2003................................... $0.4545 $4.2708
March 24, 2003 through September 23,
2003................................... $0.4695 $4.7403
September 24, 2003 through March 23,
2004................................... $0.4850 $5.2253
March 24, 2004 through September 23,
2004................................... $0.5009 $5.7262
September 24, 2004 through March 23,
2005................................... $0.5174 $6.2436
March 24, 2005 through September 23,
2005................................... $0.5344 $6.7780
September 24, 2005 through March 23,
2006................................... $0.5520 $7.3300
March 24, 2006 through September 23,
2006................................... $0.5701 $7.9001
September 24, 2006 through March 23,
2007................................... $0.5890 $8.4891
March 24, 2007 through September 24,
2007................................... $0.6082 $9.0973
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Projected Redemption Amount = $19.0973 per Unit.
S-28
NON-U.S. HOLDERS
A non-U.S. Holder will not be subject to United States Federal income taxes
on payments of principal, premium (if any) or interest (including original
issue discount, if any) on a Security, unless such non-U.S. Holder is a direct
or indirect 10% or greater shareholder of the Company, a controlled foreign
corporation related to the Company or a bank receiving interest described in
section 881(c)(3)(A) of the Internal Revenue Code of 1986, as amended.
However, income allocable to non-U.S. Holders will generally be subject to
annual tax reporting on IRS Form 1042S. For a non-U.S. Holder to qualify for
the exemption from taxation, the last United States payor in the chain of
payment prior to payment to a non-U.S. Holder (the "Withholding Agent") must
have received in the year in which a payment of interest or principal occurs,
or in either of the two preceding calendar years, a statement that (a) is
signed by the beneficial owner of the Security under penalties of perjury, (b)
certifies that such owner is not a U.S. Holder and (c) provides the name and
address of the beneficial owner. The statement may be made on an IRS Form W-8
or a substantially similar form, and the beneficial owner must inform the
Withholding Agent of any change in the information on the statement within 30
days of such change. If a Security is held through a securities clearing
organization or certain other financial institutions, the organization or
institution may provide a signed statement to the Withholding Agent. However,
in such case, the signed statement must be accompanied by a copy of the IRS
Form W-8 or the substitute form provided by the beneficial owner to the
organization or institution. The Treasury Department is considering
implementation of further certification requirements.
Under current law, a Security will not be includible in the estate of a non-
U.S. Holder unless the individual is a direct or indirect 10% or greater
shareholder of the Company or, at the time of such individual's death,
payments in respect of such Security would have been effectively connected
with the conduct by such individual of a trade or business in the United
States.
BACKUP WITHHOLDING
Backup withholding of United States Federal income tax at a rate of 31% may
apply to payments made in respect of the Securities to registered owners who
are not "exempt recipients" and who fail to provide certain identifying
information (such as the registered owner's taxpayer identification number) in
the required manner. Generally, individuals are not exempt recipients, whereas
corporations and certain other entities generally are exempt recipients.
Payments made in respect of the Securities to a U.S. Holder must be reported
to the IRS, unless the U.S. Holder is an exempt recipient or establishes an
exemption. Compliance with the identification procedures described in the
preceding section would establish an exemption from backup withholding for
those non-U.S. Holders who are not exempt recipients.
In addition, upon the sale of a Security to (or through) a broker, the
broker must withhold 31% of the entire purchase price, unless either (a) the
broker determines that the seller is a corporation or other exempt recipient
or (b) the seller provides, in the required manner, certain identifying
information and, in the case of a non-U.S. Holder, certifies that such seller
is a non-U.S. Holder (and certain other conditions are met). Such a sale must
also be reported by the broker to the IRS, unless either (a) the broker
determines that the seller is an exempt recipient or (b) the seller certifies
its non-U.S. status (and certain other conditions are met). Certification of
the registered owner's non-U.S. status would be made normally on an IRS Form
W-8 under penalties of perjury, although in certain cases it may be possible
to submit other documentary evidence.
Any amounts withheld under the backup withholding rules from a payment to a
beneficial owner would be allowed as a refund or a credit against such
beneficial owner's United States Federal income tax provided the required
information is furnished to the IRS.
USE OF PROCEEDS
The net proceeds from the sale of the Securities will be used as described
under "Use of Proceeds" in the attached Prospectus and to hedge market risks
of the Company associated with its obligation to pay the Adjusted Principal
Amount and the Supplemental Redemption Amount.
S-29
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter") has
agreed, subject to the terms and conditions of the Underwriting Agreement and
a Terms Agreement, to purchase from the Company $16,500,000 aggregate
principal amount of Securities. The Underwriting Agreement provides that the
obligations of the Underwriter are subject to certain conditions precedent and
that the Underwriter will be obligated to purchase all of the Securities if
any are purchased.
The Underwriter has advised the Company that it proposes initially to offer
all or part of the Securities directly to the public at the offering prices
set forth on the cover page of this Prospectus Supplement. After the initial
public offering, the public offering price may be changed. The Underwriter is
offering the Securities subject to receipt and acceptance and subject to the
Underwriter's right to reject any order in whole or in part.
The underwriting of the Securities will conform to the requirements set
forth in the applicable sections of Rule 2720 of the Conduct Rules of the
National Association of Securities Dealers, Inc.
The Underwriter is permitted to engage in certain transactions that
stabilize the price of the Securities. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Securities.
If the Underwriter creates a short position in the Securities in connection
with the offering, i.e., if they sell more Units of the Securities than are
set forth on the cover page of this Prospectus Supplement, the Underwriter may
reduce that short position by purchasing Units of the Securities in the open
market.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases.
Neither the Company nor the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Securities. In
addition, neither the Company nor the Underwriter makes any representation
that the Underwriter will engage in such transactions or that such
transactions, once commenced, will not be discontinued without notice.
The Underwriter may use this Prospectus Supplement and the accompanying
Prospectus for offers and sales related to market-making transactions in the
Securities. The Underwriter may act as principal or agent in these
transactions, and the sales will be made at prices related to prevailing
market prices at the time of sale.
VALIDITY OF SECURITIES
The validity of the Securities will be passed upon for the Company and for
the Underwriter by Brown & Wood LLP, New York, New York.
S-30
INDEX OF DEFINED TERMS
PAGE
----
Adjusted Principal Amount.................................................. S-4
Base Value................................................................. S-20
Benchmark Index Value...................................................... S-4
Beneficial Owner........................................................... S-18
BLS........................................................................ S-13
Calculation Agent.......................................................... S-7
Calculation Day............................................................ S-14
Calculation Period......................................................... S-14
Company.................................................................... S-4
CPI........................................................................ S-4
Direct Participants........................................................ S-18
DTC........................................................................ S-4
Ending Index Value......................................................... S-4
Final CPI.................................................................. S-4
Final Regulations.......................................................... S-27
Global Securities.......................................................... S-17
Index...................................................................... S-4
Index Business Day......................................................... S-14
Indirect Participants...................................................... S-19
Initial CPI................................................................ S-4
IRS........................................................................ S-26
Market Disruption Event.................................................... S-16
Market Value............................................................... S-20
MITTS...................................................................... S-1
MLPF&S..................................................................... S-2
Non-U.S. Holder............................................................ S-26
1983 Indenture............................................................. S-13
NYSE....................................................................... S-7
Participant................................................................ S-18
Pricing Date............................................................... S-9
Projected Redemption Amount................................................ S-27
SEC........................................................................ S-2
Securities................................................................. S-4
S&P........................................................................ S-2
S&P 500 Index.............................................................. S-4
Starting Index Value....................................................... S-4
Successor CPI.............................................................. S-16
Successor Index............................................................ S-17
Supplemental Redemption Amount............................................. S-4
Underwriter................................................................ S-30
Unit....................................................................... S-4
U.S. Holder................................................................ S-26
Withholding Agent.......................................................... S-29
S-31
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[LOGO]
1,650,000 UNITS
MERRILL LYNCH & CO., INC.
S&P 500 INFLATION ADJUSTED MARKET
INDEX TARGET-TERM SECURITIES (SM)
DUE SEPTEMBER 24, 2007
"MITTS(R)"
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PROSPECTUS SUPPLEMENT
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MERRILL LYNCH & CO.
SEPTEMBER 18, 1997
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