RULE NO. 424(b)(5)
REGISTRATION NO.333-44173
PROSPECTUS SUPPLEMENT LOGO MERRILL LYNCH
TO PROSPECTUS DATED JANUARY 29, 1998) PROTECTED GROWTH/SM/ INVESTING
Pursuit of Growth, Protection of Principal
1,450,000 UNITS
MERRILL LYNCH & CO., INC.
TELEBRAS INDEXED CALLABLE
PROTECTED GROWTH/SM/ SECURITIES
("PROGROSSM SECURITIES")
DUE MAY 19, 2005
($10 PRINCIPAL AMOUNT PER UNIT)
GENERAL: .100% principal protected if held to maturity
. Callable prior to the stated maturity date by Merrill
Lynch & Co., Inc., the issuer, as provided herein
. No payments prior to the stated maturity date unless
called
. Senior unsecured debt securities of Merrill Lynch & Co.,
Inc.
PAYMENT AT Principal Amount + Supplemental Redemption Amount
MATURITY:
The Supplemental Redemption Amount will be based on the
percentage increase, if any, in the price of an American
Depositary Receipt (the "ADR") which trades on the New
York Stock Exchange ("NYSE") representing the common stock
of Telecomunicacoes Brasileiras S.A.-Telebras ("Telebras")
and the value of securities, cash or property received by
holders of such ADR in certain corporate reorganizations
of Telebras over the term of the ProGroS Securities. The
Supplemental Redemption Amount may be ZERO, but will not
be less than zero.
CALL FEATURE: Merrill Lynch & Co., Inc. may call all of the ProGroS
Securities offered hereby on any Business Day during the
month of June 2004 at a Call Price equal to $20 per Unit.
In the event that Merrill Lynch & Co., Inc. elects to call
your ProGroS Securities, you will receive only $20 per
Unit and you will not receive a Supplemental Redemption
Amount.
LISTING: The ProGroS Securities have been approved for listing on
the American Stock Exchange ("AMEX") under the symbol
"PGT".
BEFORE YOU DECIDE TO INVEST IN THE PROGROS SECURITIES, CAREFULLY READ THIS
PROSPECTUS SUPPLEMENT AND PROSPECTUS, ESPECIALLY THE RISK FACTORS BEGINNING ON
PAGE S-7.
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 Unit............................... $10.00 $.30 $9.70
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Total.................................. $14,500,000 $435,000 $14,065,000
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(1) Before deduction of expenses payable by the Company.
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We expect that the ProGroS Securities will be ready for delivery in book-
entry form only through the facilities of DTC on or about May 19, 1998.
----------------
MERRILL LYNCH & CO.
----------------
The date of this Prospectus Supplement is May 13, 1998.
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* "Protected Growth" and "ProGroS" are service marks of 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 ProGroS Securities. Such transactions may include stabilizing and
the purchase of ProGroS Securities to cover short positions. For a description
of these activities, see "Underwriting".
CONTENT OF PROSPECTUS
You should rely only on the information contained in this document or in
documents referenced herein that we have filed with the Securities and
Exchange Commission ("SEC"). 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.
S-2
TABLE OF CONTENTS
PAGE
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SUMMARY INFORMATION--Q&A.................................................. S-4
What are the ProGroS Securities?........................................ S-4
What will I receive at the stated maturity date of the ProGroS
Securities?............................................................ S-4
How does the call feature work?......................................... S-5
How will announced plans to reorganize Telebras affect the Supplemental
Redemption Amount?..................................................... S-5
How has the Telebras Receipt performed historically?.................... S-6
What about taxes?....................................................... S-6
Will the ProGroS Securities be listed on a stock exchange?.............. S-6
What is the role of our subsidiary, MLPF&S?............................. S-6
Can you tell me more about the Company?................................. S-6
Are there any risks associated with my investment?...................... S-6
WHERE YOU CAN FIND MORE INFORMATION....................................... S-7
RISK FACTORS.............................................................. S-7
The ProGroS Securities are subject to early call........................ S-7
The Supplemental Redemption Amount...................................... S-7
Your yield may be lower than the yield on a standard debt security of
comparable maturity.................................................... S-8
Your return will not reflect the payment of dividends................... S-8
Uncertain trading market................................................ S-8
Factors affecting trading value of the ProGroS Securities............... S-8
American Depositary Receipts............................................ S-9
Foreign Currency Exchange Rate and Foreign Market Considerations........ S-10
No stockholder's rights................................................. S-11
PAGE
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No affiliation between the Company and Telebras.......................... S-11
State law limits on interest paid........................................ S-11
Purchases and sales by MLPF&S............................................ S-11
Potential conflicts...................................................... S-12
RATIO OF EARNINGS TO FIXED CHARGES......................................... S-12
DESCRIPTION OF THE PROGROS SECURITIES...................................... S-12
General.................................................................. S-12
Payment at Maturity...................................................... S-12
Early Call of the ProGroS Securities at the Option of the Company........ S-14
Hypothetical Returns..................................................... S-15
Dilution and Reorganization Adjustments.................................. S-16
Events of Default and Acceleration....................................... S-18
Depositary............................................................... S-19
Same-Day Settlement and Payment.......................................... S-21
THE TELEBRAS RECEIPT....................................................... S-22
Telecomunicacoes Brasileiras S.A.- Telebras.............................. S-22
Historical Data on the Telebras Receipt.................................. S-23
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS.................... S-24
General.................................................................. S-24
U.S. Holders............................................................. S-25
Non-U.S. Holders......................................................... S-26
Backup Withholding....................................................... S-27
New Withholding Regulations.............................................. S-27
USE OF PROCEEDS............................................................ S-28
UNDERWRITING............................................................... S-28
VALIDITY OF THE PROGROS SECURITIES......................................... S-28
INDEX OF DEFINED TERMS..................................................... S-29
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 Telebras Indexed Callable Protected Growth SM Securities due
May 19, 2005 (the "ProGroS Securities"). You should carefully read the
Prospectus and Prospectus Supplement to fully understand the terms of the
ProGroS Securities, as well as the tax and other considerations that are
important to you in making a decision about whether to invest in the ProGroS
Securities. You should, in particular, carefully review the "Risk Factors"
section, which highlights certain risks, to determine whether an investment in
the ProGroS Securities is appropriate for you.
WHAT ARE THE PROGROS SECURITIES?
The ProGroS Securities are a series of senior debt securities issued by
Merrill Lynch & Co., Inc. ("we" or the "Company") and are not secured by
collateral. The ProGroS Securities will rank equally with all other unsecured
and unsubordinated debt of the Company. The ProGroS Securities mature on May
19, 2005 and cannot be redeemed earlier than their stated maturity date unless
we call the ProGroS Securities as described below. We will make no payments on
the ProGroS Securities until the stated maturity date or earlier call.
Each "Unit" of ProGroS Securities represents $10 principal amount of ProGroS
Securities. You may transfer the ProGroS Securities 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
ProGroS Securities 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 ProGroS Securities
by individual investors. You should refer to the section "Description of the
ProGroS Securities--Depositary" in this Prospectus Supplement.
WHAT WILL I RECEIVE AT THE STATED MATURITY DATE OF THE PROGROS SECURITIES?
We have designed the ProGroS Securities for investors who want to protect
their investment by receiving at least the principal amount of their
investment at the stated maturity date and who also want to participate in
possible increases in the price of the ADR representing the common stock of
Telebras (such ADR, the "Telebras Receipt") and the value of securities, cash
and/or property received in certain corporate reorganizations of Telebras by
holders of the Telebras Receipt (together with the Telebras Receipt, the
"Reference Property") over the term of the ProGroS Securities. At the stated
maturity date, unless we call the ProGroS Securities earlier, you will receive
a payment on the ProGroS Securities equal to the sum of two amounts: the
"Principal Amount" and the "Supplemental Redemption Amount".
Principal Amount
The Principal Amount per Unit is $10.
Supplemental Redemption Amount
The Supplemental Redemption Amount per Unit will equal:
$10 X Ending Value - Starting Value
( ----------------------------- )
Starting Value
but will not be less than zero.
"ENDING VALUE" means the average of the closing prices of the securities
included in the Reference Property (the "Reference Securities") at the close
of the U.S. market on five selected days prior to the stated maturity date of
the ProGroS Securities, plus the value of certain cash and/or property, if
any, received in certain corporate reorganizations of Telebras by holders of
the Telebras Receipt. If, during this period prior to the stated maturity date
of the ProGroS Securities, there is a disruption in the trading of any
Reference Security, we may calculate the Ending Value by reference to the
price of such Reference Security over fewer than five days or even a single
day.
"STARTING VALUE" equals $115.4375, which was the closing price of the
Telebras Receipt at the close of trading on the NYSE on the date that the
ProGroS Securities were priced for initial sale to the public (the "Pricing
Date").
The Reference Property initially will consist of one unit of the Telebras
Receipt and shall be subject to adjustment from time to time to reflect the
distribution of any cash, securities and/or other property resulting from the
application of the adjustment provisions described below.
S-4
For more specific information about the determination of the closing prices
of the Reference Securities and the Supplemental Redemption Amount, please see
the section "Description of the ProGroS Securities" in this Prospectus
Supplement.
We will pay you a Supplemental Redemption Amount only if the Ending Value is
greater than the Starting Value. IF THE ENDING VALUE IS LESS THAN, OR EQUAL
TO, THE STARTING VALUE, THE SUPPLEMENTAL REDEMPTION AMOUNT WILL BE ZERO.
If we call the ProGroS Securities prior to the stated maturity date, you
will receive the Call Price, but will not receive any Supplemental Redemption
Amount. We will pay you the Principal Amount of the ProGroS Securities
regardless of whether any Supplemental Redemption Amount is payable.
Examples
Here are two hypothetical examples of Supplemental Redemption Amount
calculations:
EXAMPLE 1--Ending Value is less than the Starting Value at the stated
maturity date:
Starting Value: $115.44
Hypothetical Ending Value: $80.81
(Supplemental
SUPPLEMENTAL REDEMPTION AMOUNT (PER UNIT) = $10.00 X 80.81 - 115.44 Redemption
( -------------- ) = $0.00 Amount
115.44 cannot be
less than zero)
TOTAL PAYMENT AT THE STATED MATURITY DATE (PER UNIT) = $10.00 + $0.00 = $10.00
EXAMPLE 2--Ending Value is greater than the Starting Value at the stated
maturity date:
Starting Value: $115.44
Hypothetical Ending Value: $150.07
SUPPLEMENTAL REDEMPTION AMOUNT (PER UNIT) = $10.00 X 150.07 - 115.44
(---------------) = $3.00
115.44
TOTAL PAYMENT AT THE STATED MATURITY DATE (PER UNIT) = $10.00 + $3.00 = $13.00
HOW DOES THE CALL FEATURE WORK?
We may elect to call all of the ProGroS Securities at a price of $20 per
Unit (the "Call Price") on any Business Day during the month of June 2004 (the
"Call Period") by giving notice to the Trustee of the ProGroS Securities as
described herein and specifying the date on which the Call Price shall be paid
(the "Payment Date"). The Payment Date shall be no later than the 20th
Business Day after such call election.
If we elect to call your ProGroS Securities prior to the stated maturity
date, you will receive only the Call Price and you will not receive a
Supplemental Redemption Amount based on the value of the Reference Property.
If we do not call the ProGroS Securities prior to the stated maturity date,
the Principal Amount plus the Supplemental Redemption Amount, if any, that you
receive at the stated maturity date may be greater than or less than the Call
Price.
HOW WILL ANNOUNCED PLANS TO REORGANIZE TELEBRAS AFFECT THE SUPPLEMENTAL
REDEMPTION AMOUNT?
Telebras is currently controlled by the federal government of Brazil which
has announced its intention to privatize Telebras. In connection with such
privatization, the federal government of Brazil has indicated that it intends
to reorganize Telebras by creating 12 separate corporations as a result of
"spin-offs" from Telebras of various businesses of Telebras, which may result
in the distribution to holders of a Telebras Receipt of cash, securities
and/or other property, including common stock and/or warrants or rights to
purchase common stock in the new corporations. We have designed the
calculation of the Ending Value to reflect certain of these distributions if
they occur. For example, if Telebras spins off one of its businesses so that
holders of a Telebras Receipt receive a new ADR representing shares of common
stock in a new company, we generally will include such ADR received by holders
of the Telebras Receipt in the Reference Property for purposes of calculating
the Ending Value. We cannot be certain if any such privatization or
reorganization will occur and, if it does, how it will occur. You should
carefully review the discussion of how Reference Property is adjusted for
certain events affecting Telebras in the section entitled "Description of the
ProGroS Securities--Dilution and Reorganization Adjustments".
S-5
HOW HAS THE TELEBRAS RECEIPT PERFORMED HISTORICALLY?
You can find a table with the split-adjusted high and low sales prices and
dividends paid per share of the Telebras Receipt during each quarter since
1994 in the section "The Telebras Receipt--Historical Data on the Telebras
Receipt" in this Prospectus Supplement. Such information concerning the prior
performance of the Telebras Receipt is not necessarily indicative of how the
Telebras Receipt or any other Reference Security will perform in the future or
what the value of the Reference Property will be in the future.
WHAT ABOUT TAXES?
Each year, you will be required to pay taxes on ordinary income that is
deemed, for tax purposes, to accrue on the ProGroS Securities over their term
based upon an estimated yield for the ProGroS Securities, even though you will
not receive any payments from us until maturity or earlier call. 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 ProGroS Security. This
amount is neither a prediction nor a guarantee of what the actual Supplemental
Redemption Amount will be, or that the actual Supplemental Redemption Amount
will even exceed zero. We have determined that this estimated yield will equal
6.25% per annum (compounded semiannually).
Based upon this estimated yield, if you pay your taxes on a calendar year
basis and if you buy a ProGroS Security for $10 and hold the ProGroS Security
until the stated maturity date, you will be required to pay taxes on the
following amounts of ordinary income from the ProGroS Security each year:
$0.3899 in 1998, $0.6591 in 1999, $0.7018 in 2000, $0.7459 in 2001, $0.7933 in
2002, $0.8430 in 2003, $0.8977 in 2004 and $0.3581 in 2005. However, in 2005,
the amount of ordinary income that you will be required to pay taxes on from
owning a ProGroS Security may be greater or less than $0.3581, depending upon
the Supplemental Redemption Amount, if any, you receive. Also, if the
Supplemental Redemption Amount is less than $5.3888, you may have a loss which
you could deduct against other income you may have in 2005, but under current
tax regulations, you would neither be required nor permitted to amend your tax
returns for prior years. For further information, see "Certain United States
Federal Income Tax Considerations" in this Prospectus Supplement.
WILL THE PROGROS SECURITIES BE LISTED ON A STOCK EXCHANGE?
The ProGroS Securities have been approved for listing on the AMEX under the
symbol "PGT". You should be aware that the listing of the ProGroS Securities
on the AMEX will not necessarily ensure that a liquid trading market will be
available for the ProGroS Securities. It is unlikely that the secondary market
price of the ProGroS Securities will correlate exactly with the value of the
Reference Property, particularly during the early years of the ProGroS
Securities. 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
ProGroS Securities. After the initial offering, MLPF&S intends to buy and sell
ProGroS Securities to create a secondary market for beneficial owners of the
ProGroS Securities, and may stabilize or maintain the market price of the
ProGroS Securities during the initial distribution of the ProGroS Securities.
However, MLPF&S will not be obligated to engage in any of these market
activities, or continue them once it has started.
MLPF&S also will be our agent (the "Calculation Agent") for purposes of
calculating the Ending Value 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.
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 ProGroS Securities are subject to certain risks. Please refer to
the section "Risk Factors" in this Prospectus Supplement.
S-6
WHERE YOU CAN FIND MORE INFORMATION
Merrill Lynch & Co., Inc. 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 NYSE, the AMEX, 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 the ProGroS Securities will involve certain risks. For
example, there is the risk that you might not earn a return on your
investment, the risk that you will be unable to sell your ProGroS Securities
prior to the stated maturity date, and the risk that we may call the ProGroS
Securities prior to the stated maturity date at a Call Price that may be less
than the sum of the Principal Amount and the Supplemental Redemption Amount
that would have been paid to you at the stated maturity date. You should
carefully consider the following discussion of risks before deciding whether
an investment in the ProGroS Securities is suitable for you.
THE PROGROS SECURITIES ARE SUBJECT TO EARLY CALL
We may elect to call all of the ProGroS Securities by giving notice on any
Business Day during June 2004 (i.e., the Call Period). We are likely to call
the ProGroS Securities during the Call Period if the secondary market price of
the ProGroS Securities is approximately equal to the Call Price during such
period. We can, however, call the ProGroS Securities during the Call Period at
our option regardless of the secondary market price of the ProGroS Securities.
In the event that we elect to call the ProGroS Securities, you will receive
only the relevant Call Price and no Supplemental Redemption Amount based on
the price of the Reference Property.
THE SUPPLEMENTAL REDEMPTION AMOUNT
You should be aware that if the Ending Value does not exceed the Starting
Value at the stated maturity date, the Supplemental Redemption Amount will be
zero. This will be true even if the price of the Reference Property at some
time during the life of the ProGroS Securities was higher than the Starting
Value but later falls below the Starting Value. If the Supplemental Redemption
Amount is zero, we will pay you only the Principal Amount of your ProGroS
Securities.
You should compare the features of the ProGroS Securities to other available
investments before deciding to purchase the ProGroS Securities. Due to the
uncertainty as to whether the ProGroS Securities will earn a Supplemental
Redemption Amount or be called prior to the stated maturity date, the returns
which you may receive with respect to the ProGroS Securities may be higher or
lower than the returns available on other investments. It is suggested that
you reach an investment decision only after carefully considering the
suitability of the ProGroS Securities in light of your particular
circumstances.
S-7
YOUR YIELD MAY BE LOWER THAN THE YIELD ON A STANDARD DEBT SECURITY OF
COMPARABLE MATURITY
The amount we pay you at maturity may be less than the return you could earn
on other investments. Your yield may be less than the yield you would earn if
you bought a standard senior non-callable debt security of the Company with
the same stated maturity date. Your investment may not reflect the full
opportunity cost to you when you consider the effect of factors that affect
the time value of money.
YOUR RETURN WILL NOT REFLECT THE PAYMENT OF DIVIDENDS
Your return on the ProGroS Securities will not reflect the same yield as you
might realize if you purchased the Telebras Receipt at the issuance of the
ProGroS Securities and held the Telebras Receipt, or any cash, securities
and/or other property you received from ownership of the Telebras Receipt, for
the term of the ProGroS Securities. The calculation of the Starting Value and
Ending Value does not take into consideration the value of dividends paid on
the Telebras Receipt or any Reference Securities. Therefore, the return you
earn on the ProGroS Securities, if any, will not be the same as the return
that you would earn if you actually owned the Telebras Receipt and received
any dividends paid on the common stock of Telebras or any other Reference
Securities. In addition, if the proposed reorganization of Telebras occurs, or
if any other similar event occurs with respect to a Reference Security, the
Ending Value will reflect the effect of any such event only if the adjustments
described in "Description of the ProGroS Securities--Dilution and
Reorganization Adjustments" account for such event.
UNCERTAIN TRADING MARKET
The ProGroS Securities have been approved for listing on the AMEX under the
symbol "PGT". You cannot assume that a trading market will develop for the
ProGroS Securities. 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 ProGroS Securities will depend on the financial
performance of the Company, and other factors such as the appreciation, if
any, of the price of the Reference Property.
If the trading market for the ProGroS Securities is limited, there may be a
limited number of buyers if you decide to sell your ProGroS Securities. This
may affect the price you receive. Furthermore, it is unlikely that the
secondary market price of the ProGroS Securities will correlate exactly with
the value of the Reference Property, particularly during the earlier years of
the ProGroS Securities.
FACTORS AFFECTING TRADING VALUE OF THE PROGROS SECURITIES
Our ability to call the ProGroS Securities prior to the stated maturity date
of the ProGroS Securities is likely to limit the secondary market price at
which the ProGroS Securities will trade. In particular, we expect that the
secondary market price of the ProGroS Securities will not exceed the Call
Price prior to the Call Period because of our ability to call the ProGroS
Securities and pay only the Call Price. We believe that if we did not have the
right to call the ProGroS Securities, the secondary market price of the
ProGroS Securities would likely be significantly different.
We believe that the market value of the ProGroS Securities will be affected
by the value of the Reference Property and by a number of other factors in
addition to our ability to call the ProGroS Securities prior to the stated
maturity date. 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 ProGroS Securities given a change in a specific
factor, assuming all other conditions remain constant.
. REFERENCE PROPERTY VALUE. We expect that the market value of the ProGroS
Securities will depend on the amount by which the value of the Reference
Property differs from the Starting Value. If you choose to sell your
ProGroS Securities when the value of the Reference Property exceeds the
Starting Value, you may receive substantially less than the amount that
would be payable at the stated maturity
S-8
date based on that Reference Property value because of the expectation
that the price of the Reference Property will continue to fluctuate
until the Ending Value is determined. If you choose to sell your ProGroS
Securities when the value of the Reference Property is below, or not
sufficiently above, the Starting Value, you may receive less than the
$10 Principal Amount per Unit of ProGroS Securities. As a general
matter, a rising dividend rate (i.e., dividends per share) on a
Reference Security may increase the price of the Reference Security
while a falling dividend rate may decrease the price of the Reference
Security. Political, economic and other developments may also affect the
price of a Reference Security and the price of the ProGroS Securities.
. INTEREST RATES. We expect that the trading value of the ProGroS
Securities will be affected by changes in interest rates. As a general
matter during the earlier years of the ProGroS Securities, if U.S.
interest rates increase, we expect that the trading value of the ProGroS
Securities will decrease and if U.S. interest rates decrease, we expect
the trading value of the ProGroS Securities will increase. However,
interest rates in Brazil and the U.S. may also affect the economies of
Brazil and the U.S. and, in turn, the prices of the Reference
Securities. Rising interest rates may lower the prices of the Reference
Securities and the ProGroS Securities. Falling interest rates may
increase the prices of the Reference Securities and the value of the
ProGroS Securities.
. VOLATILITY OF THE REFERENCE SECURITIES. Volatility is the term used to
describe the size and frequency of market fluctuations. If the
volatility of the Reference Securities increases, we expect that the
trading value of the ProGroS Securities will increase. If the volatility
of the Reference Securities decreases, we expect that the trading value
of the ProGroS Securities will decrease.
. TIME REMAINING TO STATED MATURITY DATE. The ProGroS Securities may trade
at a value above that which would be expected based on the level of
interest rates and the price of the Reference Property. This difference
will reflect a "time premium" due to expectations concerning the price
of the Telebras Receipt during the period prior to the stated maturity
date of the ProGroS Securities. However, as the time remaining to the
stated maturity date of the ProGroS Securities decreases, we expect that
this time premium will decrease, potentially lowering the trading value
of the ProGroS Securities.
. DIVIDEND YIELD. If the dividend yield on a Reference Security were to
increase, we expect that the value of the ProGroS Securities would
decrease. Conversely, if the dividend yield on a Reference Security were
to decrease, we expect that the value of the ProGroS Securities would
increase.
. COMPANY'S CREDIT RATINGS. Real or anticipated changes in the Company's
credit ratings may affect the market value of the ProGroS Securities.
It is important for you to understand that the impact of one of the factors
specified above, such as an increase in interest rates, may offset some or all
of any increase in the trading value of the ProGroS Securities attributable to
another factor, such as an increase in the Reference Property value.
In general, assuming all relevant factors are held constant, we expect that
the effect on the trading value of the ProGroS Securities of a given change in
most of the factors listed above will be less if it occurs later in the term
of the ProGroS Securities than if it occurs earlier in the term of the ProGroS
Securities except that we expect that the effect on the trading value of the
ProGroS Securities of a given increase in the value of the Reference Property
will be greater if it occurs later in the term of the ProGroS Securities than
if it occurs earlier in the term of the ProGroS Securities.
AMERICAN DEPOSITARY RECEIPTS
The Telebras Receipt is an ADR representing 1,000 shares of common stock of
Telebras. If Telebras is reorganized, the Reference Property will be adjusted
as described below to reflect certain distributions of cash,
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securities and/or other property. Certain of the Reference Securities
distributed in any such reorganization may be ADRs. An ADR is a negotiable
receipt which is issued by a depositary, generally a bank, representing
shares, such as the common stock of Telebras, of a non-U.S. issuer (the "Non-
U.S. Issuer") that have been deposited and are held, on behalf of the holders
of the ADRs, at a custodian bank in the Non-U.S. Issuer's home country. While
the market for shares underlying an ADR generally will be in the country in
which the Non-U.S. Issuer is organized and trading in such market generally
will be based on that country's currency, ADRs will trade in U.S. dollars.
Although ADRs are distinct securities from the shares of stock underlying
such ADRs, the trading characteristics and valuations of ADRs will usually,
but not necessarily, mirror the characteristics and valuations of such shares
represented by the ADRs. Inasmuch as holders of ADRs may surrender the ADR in
order to take delivery of and trade the shares underlying such ADR (a
characteristic that allows investors in ADRs to take advantage of price
differentials between different markets), a market for the shares of stock
underlying an ADR that is not liquid generally will result in an illiquid
market for the ADR representing such underlying shares.
The depositary bank that issues an ADR generally charges a fee, based on the
price of the ADR, upon issuance and cancellation of the ADR. This fee would be
in addition to the brokerage commissions paid upon the acquisition or
surrender of the security. In addition, the depositary bank incurs expenses in
connection with the conversion of dividends or other cash distributions paid
in local currency into U.S. Dollars and such expenses are deducted from the
amount of the dividend or distribution paid to holders, resulting in a lower
payout per share of stock underlying an ADR represented by the ADR than would
be the case if such share were held directly. Certain tax considerations,
including tax rate differentials, arising from application of the tax laws of
one nation to the nationals of another and from certain practices in the ADR
market may also exist with respect to an ADR. In varying degrees, any or all
of these factors may affect the value of the ADR compared with the value of
the shares of stock underlying an ADR in the local market.
FOREIGN CURRENCY EXCHANGE RATE AND FOREIGN MARKET CONSIDERATIONS
The ProGroS Securities are U.S. dollar-denominated securities issued by the
Company, a United States corporation. Investments in the ProGroS Securities do
not give the beneficial owners any right to receive a Reference Security or
any Reference Property or any other ownership right or interest in a Reference
Security or any Reference Property or the shares of common stock represented
by the Telebras Receipt, although the return on the investment in the ProGroS
Securities is based on the Ending Value of the Reference Property. The price
of the common stock of Telebras underlying the Telebras Receipt is quoted in
Brazilian currency. To the extent there are other Reference Securities, the
prices of such other Reference Securities may also be quoted in currency other
than U.S. dollars. The U.S. dollar price of a Reference Security that is an
ADR will depend on the price of the shares underlying such ADR and the
exchange rate between the non-U.S. dollar currency and the U.S. dollar. Even
if the price of the shares underlying an ADR is unchanged, changes in the
rates of exchange between the U.S. dollar and the non-U.S. dollar currency
will affect the U.S. dollar price of such ADR. Furthermore, even if the price
in non-U.S. dollar currency of the shares underlying an ADR increases, the
U.S. dollar price of the ADR may decrease as a result of changes in the rates
of exchange between the U.S. dollar and non-U.S. dollar currency.
Rates of exchange between the U.S. dollar and a non-U.S. dollar currency are
determined by forces of supply and demand in the foreign exchange markets.
These forces are, in turn, affected by international balance of payments and
other economic and financial conditions, government intervention, speculation
and other factors. Fluctuations in foreign exchange rates, future U.S. and
non-U.S. political and economic developments and the possible imposition of
exchange controls or other foreign governmental laws or restrictions
applicable to such investments may affect the U.S. dollar value of an ADR.
Moreover, individual foreign economies, such as Brazil's, may differ favorably
or unfavorably from the U.S. economy in such respects as growth of gross
national product, rate of inflation, capital reinvestment, resources, self-
sufficiency and balance of payments position. There is the possibility of
expropriation of assets, confiscatory taxation, political or social
instability or diplomatic developments which could affect the value of
investments in countries, such as Brazil. There may be less publicly available
information about a non-U.S. company, such as Telebras, than about a U.S.
company, and
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non-U.S. companies are not typically subject to accounting, auditing and
financial reporting standards and requirements comparable to those to which
U.S. entities are subject. Non-U.S. investments may be subject to foreign
withholding taxes which could affect the value of investment. In addition,
investment laws in certain non-U.S. countries such as Brazil may limit or
restrict ownership of certain securities by foreign nationals by restricting
or eliminating voting or other rights or limiting the amount of securities
that may be so owned, and such limitations or restrictions may affect the
prices of such securities.
Brazil's financial markets, while growing in volume, have substantially less
volume than U.S. markets. The securities of many non-U.S. companies trading in
foreign markets are generally less liquid and their prices more volatile in
such markets than securities of comparable U.S. companies trading in the
domestic financial markets. Foreign markets have different trading practices
that may affect the prices of securities. Non-U.S. markets have different
clearance and settlement procedures than those in the U.S., and in certain
countries, such as Brazil, there have been instances when such procedures have
been insufficient to accommodate the volume of securities transactions, making
it difficult to conduct such transactions. There is generally less government
supervision and regulation of exchanges, brokers and issuers in Brazil than in
the U.S. In addition, the terms and conditions of depositary facilities may
result in less liquidity or lower market values for the ADRs than for the
securities underlying the ADRs.
The price of the common stock of Telebras and the price of the securities of
any spin-offs from Telebras, will depend on the financial condition and
results of operations of Telebras and such spin-offs. The financial condition
and results of operations of such entities will be affected by general
economic, political, financial and social conditions in Brazil, and in
particular, by prospects for future economic growth and its impact on demand
for telecommunications services in Brazil. Brazil has in the past experienced
economic and political instability and there can be no assurance that current
government programs to stabilize the economy will succeed.
NO STOCKHOLDER'S RIGHTS
Beneficial owners of the ProGroS Securities will not be entitled to any
rights with respect to any Reference Securities (including, without
limitation, voting rights and rights to receive any dividends or other
distributions in respect thereof).
NO AFFILIATION BETWEEN THE COMPANY AND TELEBRAS
The Company has no affiliation with Telebras, and Telebras has no
obligations with respect to the ProGroS Securities or amounts to be paid to
beneficial owners thereof, including any obligation to take the needs of the
Company or of beneficial owners of the ProGroS Securities into consideration
for any reason. Telebras will not receive any of the proceeds of the offering
of the ProGroS Securities made hereby and is not responsible for, and has not
participated in, the determination or calculation of the amount receivable by
beneficial owners of the ProGroS Securities on the stated maturity date or
upon an earlier call. In addition, Telebras is not involved with the
administration or trading of the ProGroS Securities.
STATE LAW LIMITS ON INTEREST PAID
New York State law governs the 1983 Indenture, as hereinafter defined. New
York has certain usury laws that limit the amount of interest that can be
charged and paid on loans, which includes debt securities like the ProGroS
Securities. Under present New York law, the maximum rate of interest is 25%
per annum on a simple interest basis. This limit may not apply to debt
securities in which $2,500,000 or more has been invested.
While we believe that New York law would be given effect by a state or
Federal court sitting outside of New York, many other states also have laws
that regulate the amount of interest that may be charged to and paid by a
borrower. We will promise, for the benefit of the ProGroS Securities 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 MLPF&S
The Company, MLPF&S and other affiliates of the Company may from time to
time buy or sell the Reference Securities, including shares of Telebras stock,
for their own accounts for business reasons or in connection with hedging the
Company's obligations under the ProGroS Securities. These transactions could
affect the price of the Reference Securities.
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POTENTIAL CONFLICTS
The Calculation Agent is a subsidiary of the Company, the issuer of the
ProGroS Securities. Under certain circumstances, MLPF&S's role as a subsidiary
of the Company and its responsibilities as Calculation Agent for the ProGroS
Securities 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.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the historical ratios for earnings to fixed
charges of the Company for the periods indicated:
THREE MONTHS
YEAR ENDED LAST FRIDAY IN DECEMBER ENDED
-------------------------------------- MARCH 27,
1993 1994 1995 1996 1997 1998
------ ------ ------ ------ ------ ------------
Ratio of earnings to
fixed charges.......... 1.4 1.2 1.2 1.2 1.2 1.2
For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" consist of earnings from continuing operations before income taxes
and fixed charges. "Fixed charges" consist 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.
DESCRIPTION OF THE PROGROS SECURITIES
GENERAL
The ProGroS 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 ProGroS
Securities will mature on May 19, 2005 unless called earlier at the option of
the Company.
Unless called, at the stated maturity date of a ProGroS Security, a
beneficial owner will receive the Principal Amount of such ProGroS 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 ProGroS Securities may be called by the Company as described below, but
are not subject to redemption at the option of any beneficial owner prior to
the stated maturity date. Upon the occurrence of an Event of Default with
respect to the ProGroS Securities, beneficial owners of the ProGroS Securities
may accelerate the maturity of the ProGroS Securities, as described under
"Description of the ProGroS Securities--Events of Default and Acceleration" in
this Prospectus Supplement and "Description of Debt Securities--General Events
of Default" in the accompanying Prospectus.
The ProGroS Securities are to be issued in denominations of whole Units.
PAYMENT AT MATURITY
General
At the stated maturity date, a beneficial owner of a ProGroS Security will
be entitled to receive the Principal Amount thereof plus a Supplemental
Redemption Amount, if any, as provided below. If the Ending Value does not
exceed the Starting Value, a beneficial owner of a ProGroS Security will be
entitled to receive only the Principal Amount thereof.
Determination of the Supplemental Redemption Amount
The Supplemental Redemption Amount for a ProGroS Security will be determined
by the Calculation Agent and will equal:
Ending Value - Starting Value
Principal Amount of such ProGroS Security ($10 per Unit) X (-----------------------------)
Starting Value
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provided, however, that in no event will the Supplemental Redemption Amount
be less than zero.
The Starting Value equals $115.4375, which was the Closing Price (defined
herein) of a Telebras Receipt on the Pricing Date. The Ending Value will be
determined by the Calculation Agent and will equal the Reorganization Event
Value with respect to a Reorganization Event, if any, plus the value of the
Reference Property determined as follows: (A) for any portion of the Reference
Property consisting of cash, the U.S. Dollar Equivalent (as defined herein) of
such cash plus interest on such amount accruing from the date of the payment
of such cash to holders of the relevant Reference Property for which such cash
was paid until the stated maturity date at a fixed interest rate determined on
the date of such payment equal to the interest rate that would be paid on a
fixed rate senior non-callable debt security of the Company with a term equal
to the remaining term for the ProGroS Securities as determined by the
Calculation Agent; (B) for any portion of the Reference Property consisting of
property other than cash or Reference Securities, the U.S. Dollar Equivalent
of the market value of such property on the date that such property was
delivered to holders of the relevant Reference Property for which such
property was distributed plus interest on such U.S. dollar amount accruing
from the date of such delivery until the stated maturity date at a fixed
interest rate determined as described in (A) above; and (C) for any portion of
the Reference Property consisting of Reference Securities, the average
(arithmetic mean) of the Closing Prices of each such Reference Security
determined on each of the first five Calculation Days during the Calculation
Period. If there are fewer than five Calculation Days in the Calculation
Period with respect to any such Reference Security, then the Ending Value
shall be calculated using the average (arithmetic mean) of the Closing Prices
of such Reference Security on such Calculation Days, and if there is only one
Calculation Day, then the Ending Value shall be calculated using the Closing
Price of such Reference Security on such Calculation Day. If no Calculation
Days occur during the Calculation Period with respect to such Reference
Security, then the Ending Value shall be calculated using the Closing Price of
such Reference Security determined on the last scheduled Calculation Day in
the Calculation Period, regardless of the occurrence of a Market Disruption
Event on such day.
"Reference Property" initially shall mean one unit of the Telebras Receipt,
and shall be subject to adjustment from time to time to reflect the addition,
substitution or distribution of cash, securities and/or other property
resulting from the application of the adjustment provisions described below
under "Description of the ProGroS Securities--Dilution and Reorganization
Adjustments".
"U.S. Dollar Equivalent" shall mean, with respect to cash not denominated in
U.S. dollars, such cash amount multiplied by the Spot Rate (defined below) for
the currency in which such cash is denominated at approximately the date of
payment or date of valuation of such cash.
The "Calculation Period" means the period from and including the seventh
scheduled Calculation Day prior to the stated maturity date to and including
the second scheduled Calculation Day prior to the stated maturity date.
"Calculation Day" means, with respect to any Reference Security, any Trading
Day during the Calculation Period on which a Market Disruption Event has not
occurred.
"Trading Day" means a day on which the AMEX, the NYSE and the NASDAQ
National Market System ("NASDAQ NMS") are open for trading.
"Market Disruption Event" means, with respect to a Reference Security, the
occurrence or existence on any Business Day during the one-half hour period
that ends when the Closing Price is determined, of any suspension of, or
limitation imposed on, trading in such Reference Security on the NYSE (or
other market or exchange, if applicable).
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"Closing Price" with respect to a Reference Security means, for a
Calculation Day the following:
(a) If such Reference Security is listed on a national securities
exchange in the United States, is a NASDAQ NMS security or is included in
the OTC Bulletin Board Service ("OTC Bulletin Board") operated by the
National Association of Securities Dealers, Inc. (the "NASD"), Closing
Price means (i) the last reported sale price, regular way, on such day on
the principal United States securities exchange registered under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), on which
such Reference Security is listed or admitted to trading, or (ii) if not
listed or admitted to trading on any such securities exchange or if such
last reported sale price is not obtainable, the last reported sale price on
the over-the-counter market as reported on the NASDAQ NMS or OTC Bulletin
Board on such day, or (iii) if the last reported sale price is not
available pursuant to (i) and (ii) above, the mean of the last reported bid
and offer price on the over-the-counter market as reported on the NASDAQ
NMS or OTC Bulletin Board on such day as determined by the Calculation
Agent. The term "NASDAQ NMS security" shall include a security included in
any successor to such system and the term "OTC Bulletin Board" shall
include any successor service thereto.
(b) If such Reference Security is not listed on a national securities
exchange in the United States or is not a NASDAQ NMS security or included
in the OTC Bulletin Board operated by the NASD, Closing Price means the
last reported sale price on such day on the securities exchange on which
such Reference Security is listed or admitted to trading with the greatest
volume of trading for the calendar month preceding such day as determined
by the Calculation Agent, provided that if such last reported sale price is
for a transaction which occurred more than four hours prior to the close of
such exchange, then the Closing Price shall mean the average (mean) of the
last available bid and offer price on such exchange. If such Reference
Security is not listed or admitted to trading on any such securities
exchange or if such last reported sale price or bid and offer are not
obtainable, the Closing Price shall mean the last reported sale price for a
transaction which occurred more than four hours prior to when trading in
such over-the-counter market typically ends, then the Closing Price shall
mean the average (mean) of the last available bid and offer prices in such
market of the three dealers which have the highest volume of transactions
in such Reference Security in the immediately preceding calendar month as
determined by the Calculation Agent based on information that is reasonably
available to it. If such prices are quoted in a currency other than in U.S.
dollars, such prices will be translated into U.S. dollars for purposes of
calculating the Average Market Price using the Spot Rate on the same
calendar day as the date of any such price. The "Spot Rate" on any date
will be determined by the Calculation Agent and will equal the spot rate of
such currency per U.S. $1.00 on such date at approximately 3:00 p.m., New
York City time, as reported by a recognized reporting service for such spot
rate, provided that if the Calculation Agent shall determine that such
reported rate is not indicative of actual rates of exchange that may be
obtained in the currency exchange rate market, then the Spot Rate shall
equal the spot rate of such currency per U.S. $1.00 on such date at
approximately 3:00 p.m., New York City time at which the Calculation Agent
is able to convert such currency into U.S. dollars.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
that is not a day on which banking institutions in The City of New York are
authorized or obligated by law to close and that is a trading day on the NYSE
and the AMEX.
All determinations made by the Calculation Agent shall be at the sole
discretion of the Calculation Agent and, absent a determination by the
Calculation Agent of a manifest error, shall be conclusive for all purposes
and binding on the Company and beneficial owners of the ProGroS Securities.
EARLY CALL OF THE PROGROS SECURITIES AT THE OPTION OF THE COMPANY
During the Call Period (the month of June 2004), the Company, in its sole
discretion, may elect to call the ProGroS Securities offered hereby, in whole
but not in part, prior to the stated maturity date by giving notice to the
Trustee of the Company's election on any Business Day within the month of June
2004, at the Call Price ($20 per Unit).
If we elect to call your ProGroS Securities prior to the stated maturity
date, you will receive only the Call Price and you will not receive a
Supplemental Redemption Amount based on the value of the Reference Property.
If we do not call the ProGroS Securities prior to the stated maturity date,
the Principal Amount plus the Supplemental Redemption Amount, if any, that you
receive at the stated maturity may be greater than or less
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than the Call Price. The Company may elect to call the ProGroS Securities on
any Business Day during the Call Period by giving notice to the Trustee and
specifying the date on which the Call Price shall be paid. Such Payment Date
shall be no later than the 20th Business Day after such call election. The
Trustee will provide notice of such call election to the registered holders of
the ProGroS Securities, specifying the Payment Date, no less than 15, nor more
than 30, calendar days prior to such Payment Date. While the ProGroS
Securities are held at the Depositary, the registered holder will be the
Depositary, and the Depositary will receive the notice of the call. As more
fully described below under "Description of the ProGroS Securities--
Depositary", the Depositary will forward such notice to its participants which
will pass such notice on to the beneficial owners.
You should compare the features of the ProGroS Securities to other available
investments before deciding to purchase the ProGroS Securities. Due to the
uncertainty as to whether the ProGroS Securities will earn a Supplemental
Redemption Amount or be called prior to the stated maturity date, the return
on investment with respect to the ProGroS Securities may be higher or lower
than the return available on other securities issued by the Company or issued
by others and available through MLPF&S. It is suggested that you reach an
investment decision only after carefully considering the suitability of the
ProGroS Securities in light of your particular circumstances. See "Certain
United States Federal Income Tax Considerations".
HYPOTHETICAL RETURNS
The following table illustrates, for a range of hypothetical Ending Values,
(i) the percentage change over the Starting Value; (ii) the total amount
payable at the stated maturity date for each $10 Principal Amount of ProGroS
Securities; (iii) the total rate of return to beneficial owners of the ProGroS
Securities; (iv) the pretax annualized rate of return to beneficial owners of
ProGroS Securities and (v) the pretax annualized rate of return of the
Telebras Receipt. THIS TABLE ASSUMES THAT THE PROGROS SECURITIES ARE NOT
CALLED PRIOR TO THE STATED MATURITY DATE.
TOTAL AMOUNT PRETAX PRETAX RATE
PERCENTAGE CHANGE PAYABLE AT THE ANNUALIZED OF RETURN OF
HYPOTHETICAL OVER THE STATED MATURITY TOTAL RATE RATE OF THE TELEBRAS
ENDING VALUE STARTING VALUE DATE PER UNIT OF RETURN RETURN(1) RECEIPT(1)(2)
------------ ----------------- --------------- ---------- ---------- -------------
$ 46.18 -60.00% $10.00 0.00% 0.00% -10.94%
$ 57.72 -50.00% $10.00 0.00% 0.00% -7.96%
$ 69.26 -40.00% $10.00 0.00% 0.00% -5.48%
$ 80.81 -30.00% $10.00 0.00% 0.00% -3.35%
$ 92.35 -20.00% $10.00 0.00% 0.00% -1.48%
$103.89 -10.00% $10.00 0.00% 0.00% 0.18%
$115.44(3) 0.00% $10.00 0.00% 0.00% 1.69%
$126.98 10.00% $11.00 10.00% 1.37% 3.06%
$138.53 20.00% $12.00 20.00% 2.62% 4.33%
$150.07 30.00% $13.00 30.00% 3.78% 5.50%
$161.61 40.00% $14.00 40.00% 4.86% 6.60%
$173.16 50.00% $15.00 50.00% 5.87% 7.62%
$184.70 60.00% $16.00 60.00% 6.82% 8.58%
$196.24 70.00% $17.00 70.00% 7.72% 9.50%
$207.79 80.00% $18.00 80.00% 8.57% 10.36%
$219.33 90.00% $19.00 90.00% 9.38% 11.18%
$230.88 100.00% $20.00 100.00% 10.14% 11.96%
- --------
(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 (i) a constant dividend yield of 1.69% per
annum, paid quarterly from the date of initial delivery of ProGroS
Securities, applied to the value of the Telebras Receipt at the end of
each such quarter assuming such value increases or decreases linearly from
the Starting Value to the applicable hypothetical Ending Value; (ii) no
transaction fees or expenses; (iii) a term for the ProGroS Securities from
May 19, 1998 to May 19, 2005; and (iv) a final Telebras Receipt value
equal to the Ending Value. The dividend yield of the Telebras Receipt as
of May 13, 1998 was approximately 1.69%.
(3) The Starting Index Value on March 13, 1998 was $115.4375.
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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 Value determined by the Calculation Agent as provided herein.
Historical data regarding the Telebras Receipt is included in this Prospectus
Supplement under "The Telebras Receipt--Historical Data on the Telebras
Receipt".
DILUTION AND REORGANIZATION ADJUSTMENTS
The Reference Property is subject to adjustment if an issuer of any
Reference Security (or the custodian in the case of Reference Security that is
an ADR) shall: (i) pay a stock dividend or make a distribution with respect to
such Reference Security in Reference Securities; (ii) subdivide or split the
outstanding units of such Reference Security into a greater number of units;
(iii) combine the outstanding units of such Reference Security into a smaller
number of units; (iv) issue by reclassification of units of such Reference
Security any units of another security of such issuer; (v) issue rights or
warrants to all holders of such Reference Security entitling them to subscribe
for or purchase shares, in the aggregate, for more than 5% of the number of
such Reference Securities outstanding prior to the issuance of such rights or
warrants at a price per share less than the then current market price of such
Reference Security (other than rights to purchase such Reference Security
pursuant to a plan for the reinvestment of dividends or interest); or (vi) pay
a dividend or make a distribution to all holders of such Reference Security of
evidences of its indebtedness or other assets (excluding any stock dividends
or distributions referred to in clause (i) above or any cash dividends other
than any Extraordinary Cash Dividend (as defined below)) or issue to all
holders of such Reference Security rights or warrants to subscribe for or
purchase any of its securities (other than those referred to in clause (v)
above) (any of the foregoing assets are referred to as the "Distributed
Assets" and any of the foregoing events are referred to as the "Dilution
Events"). Notwithstanding provision (vi) in the foregoing sentence, if a
Reference Security is an ADR and the holder of such ADR would receive cash or
other property other than securities in the circumstances described in (vi)
above, but the holder of the securities underlying such ADR could receive
securities as a result of a Dilution Event (the "Distributed Securities") and
the Calculation Agent or its affiliates would be eligible to receive the
Distributed Securities, then the Company can elect for purposes of provision
(vi) to include the Distributed Securities in the Reference Property instead
of the cash or property distributed to holders of the ADR in an amount equal
to the amount of the Distributed Securities that would have been received had
the Reference Property consisted of the securities underlying the ADRs instead
of the ADRs. For purposes of provision (vi), if the holder of a Reference
Security can elect to receive securities in lieu of cash or property other
than securities, then for purposes of provision (vi) the holders of the
Reference Security shall be deemed to receive only the securities.
In the case of the Dilution Events referred to in clauses (i), (ii), (iii)
and (iv) above, the Reference Property shall be adjusted to include the number
of units of such Reference Security and/or security of such issuer which a
holder of units of such Reference Security would have owned or been entitled
to receive immediately following any such event had such holder held,
immediately prior to such event, the number of units of such Reference
Security constituting part of the Reference Property immediately prior to such
event. Each such adjustment shall become effective immediately after the
effective date for such subdivision, split, combination or reclassification,
as the case may be. Each such adjustment shall be made successively.
In the case of the Dilution Event referred to in clause (v) above where the
rights or warrants are for more than 5% of the number of shares outstanding
prior to the issuance of such rights or warrants, the Reference Property shall
be adjusted by multiplying the number of Reference Securities constituting
Reference Property immediately prior to the date of issuance of the rights or
warrants referred to in clause (v) above by a fraction, (1) the numerator of
which shall be the number of Reference Securities outstanding on the date
immediately prior to such issuance, plus the number of additional Reference
Securities offered for subscription or purchase pursuant to such rights or
warrants, and (2) the denominator of which shall be the number of Reference
Securities outstanding on the date immediately prior to such issuance, plus
the number of additional Reference Securities which the aggregate offering
price of the total number of Reference Securities so offered for subscription
or purchase pursuant to such rights or warrants would purchase at the current
market price (determined as the average Closing Price per Reference Security
for the 20 Trading Days immediately prior to the date of such
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rights or warrants are issued, subject to certain adjustments), which shall be
determined by multiplying such total number of Reference Securities by the
exercise price of such rights or warrants and dividing the product so obtained
by such current market price. To the extent that Reference Securities are not
delivered after the expiration of such rights or warrants, or if such rights
or warrants are not issued, the Reference Property shall be readjusted to the
Reference Property which would then be in effect had such adjustments for the
issuance of such rights or warrants been made upon the basis of delivery of
only the number of Reference Securities actually delivered.
In the case of the Dilution Event referred to in clause (vi) above, the
Reference Property shall be adjusted to include, from and after such dividend,
distribution or issuance, (x) in respect of that portion, if any, of the
Distributed Assets consisting of cash, the amount of such Distributed Assets
consisting of cash received for each unit of such Reference Security
multiplied by the number of units of such Reference Security constituting part
of the Reference Property on the date of such dividend, distribution or
issuance, immediately prior to such dividend, distribution or issuance, plus
(y) in respect of that portion, if any, of the Distributed Assets which are
other than cash, the number or amount of each type of Distributed Assets other
than cash received with respect to each unit of such Reference Security
multiplied by the number of units of such Reference Security constituting part
of the Reference Property on the date of such dividend, distribution or
issuance, immediately prior to such dividend, distribution or issuance.
For example, where a reorganization of Telebras results in the distribution
to holders of the Telebras Receipt of ADRs representing shares of common stock
in various companies formed to operate various spin-off businesses of
Telebras, then the Reference Property shall include such ADRs in amounts
specified pursuant to provision (vi) above. If in any such reorganization of
Telebras, holders of Telebras Receipts receive cash or property while holders
of the shares of common stock underlying the Telebras Receipts receive
Distributed Securities and the Calculation Agent or an affiliate can receive
and hold such Distributed Securities, then the Calculation Agent can elect to
have the Reference Property include such Distributed Securities instead of
such cash or property.
An "Extraordinary Cash Dividend" means, with respect to any consecutive 12-
month period, the amount, if any, by which the aggregate amount of all cash
dividends or any other distribution made by the issuer of a Reference Security
or made pursuant to an arrangement effecting a distribution of distributable
profits or reserves, whether in cash or in specie, on any Reference Security
occurring in such 12-month period (or, if such Reference Security was not
outstanding at the commencement of such 12-month period or was not then a part
of the Reference Property, occurring in such shorter period during which such
Reference Security was outstanding and was part of the Reference Property)
exceeds on a per share basis 10% of the average of the Closing Prices per
share of such Reference Security over such 12-month period (or such shorter
period during which such Reference Security was outstanding and was part of
the Reference Property); provided that, for purposes of the foregoing
definition, the amount of cash dividends paid on a per share basis will be
appropriately adjusted to reflect the occurrence during such period of any
stock dividend or distribution of shares of capital stock of the issuer of
such Reference Security or any subdivision, split, combination or
reclassification of shares of such Reference Security.
All adjustments will be calculated to the nearest 1/10,000th of a share of
the Reference Security (or if there is not a nearest 1/10,000th of a share to
the next lower 1/10,000th of a share). No adjustment shall be required unless
such adjustment would require an increase or decrease of at least one percent in
the Closing Price; "provided", "however", that any adjustments which by reason
of the foregoing are not required to be made shall be carried forward and taken
into account in any subsequent adjustment.
If any of the Distributed Assets are cash, property or Reference Securities
that will be distributed only to holders of the relevant Reference Property
who or which can certify as to a certain nationality or formation under the
laws of a certain jurisdiction, as the case may be, and a corporation formed
in the United States or an affiliate of such corporation formed elsewhere
cannot receive such distribution, the Reference Property will reflect only
those Distributed Assets available for distribution to such United States
corporation or its affiliates.
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In the event of (A) any consolidation or merger of an issuer of a Reference
Security, or any surviving entity or subsequent surviving entity of such
issuer (a "Successor Company"), with or into another entity (other than a
merger or consolidation in which such issuer is the continuing corporation and
in which the Reference Security outstanding immediately prior to the merger or
consolidation is not exchanged for cash, securities or other property of such
issuer or another corporation), (B) any sale, transfer, lease or conveyance to
another corporation of the property of an issuer of a Reference Security or
any Successor Company as an entirety or substantially as an entirety, (C) any
statutory exchange of securities of an issuer of a Reference Security or any
Successor Company with another corporation (other than in connection with a
merger or acquisition) or (D) any liquidation, dissolution, winding up or
bankruptcy of an issuer of a Reference Security or any Successor Company (any
such event described in clause (A), (B), (C) or (D), a "Reorganization
Event"), the Ending Value shall be calculated by including the Reorganization
Event Value. The "Reorganization Event Value" shall be determined by the
Calculation Agent and shall equal (i) the Transaction Value related to the
relevant Reorganization Event, plus (ii) interest on such Transaction Value
accruing from the date of the payment or delivery of the consideration, if
any, received in connection with such Reorganization Event until the stated
maturity date at a fixed interest rate determined on the date of such payment
or delivery equal to the interest rate that would be paid on a fixed rate
senior non-callable debt security of the Company with a term equal to the
remaining term of the ProGroS Securities. The "Transaction Value" means (i)
for any cash received in any such Reorganization Event, the U.S. Dollar
Equivalent of cash received per unit of Reference Security, (ii) for any
property other than cash or securities received in any such Reorganization
Event, an amount equal to the U.S. Dollar Equivalent of the market value of
such property per unit of Reference Security on the date that such property is
received by holders of such Reference Security as determined by the
Calculation Agent, and (iii) for any securities received in any such
Reorganization Event, an amount equal to the Closing Price per unit of such
securities on the date such securities are received by holders of such
Reference Security multiplied by the number of such securities received for
each unit of such Reference Security (subject to adjustment on a basis
consistent with the adjustment provisions described above).
The foregoing adjustments shall be made by MLPF&S, as Calculation Agent, and
all such adjustments shall be final.
No adjustments will be made for certain other events, such as offerings of
Deposit Reference Shares by Telebras for cash or in connection with
acquisitions.
The Company will, within ten Business Days following the occurrence of an
event that requires an adjustment (or if the Company is not aware of such
occurrence, as soon as practicable after becoming so aware), provide written
notice to the Trustee, which shall provide notice to the Holders of the
ProGroS Securities of the occurrence of such event and, if applicable, a
statement in reasonable detail setting forth the adjusted Closing Price to be
used in determining the Ending Value.
EVENTS OF DEFAULT AND ACCELERATION
In case an Event of Default with respect to any ProGroS Securities shall
have occurred and be continuing, the amount payable to a beneficial owner of a
ProGroS Security upon any acceleration permitted by the ProGroS Securities,
with respect to each $10 principal amount thereof, will be equal to the
Principal Amount and the Supplemental Redemption Amount, if any, calculated as
though the date of early repayment were the stated maturity date of the
ProGroS Securities. See "Description of the ProGroS 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
ProGroS Security may be limited, under Section 502(b)(2) of Title 11 of the
United States Code, to the Principal Amount of the ProGroS Security plus an
additional amount of contingent interest calculated as though the date of the
commencement of the proceeding were the stated maturity date of the ProGroS
Securities.
In case of default in payment of the ProGroS Securities (whether at the Call
Date, at the stated maturity date, or upon acceleration), from and after the
stated maturity date the ProGroS Securities shall bear interest,
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payable upon demand of the beneficial owners thereof, at the rate of 6.25% 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 ProGroS Securities to the date payment of such amount
has been made or duly provided for.
DEPOSITARY
Upon issuance, all ProGroS 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"; DTC, together with any successor thereto, being a "Depositary"), as
Depositary, registered in the name of Cede & Co. (DTC's partnership nominee).
Unless and until it is exchanged in whole or in part for ProGroS Securities in
definitive form, no Global Security may be transferred except as a whole by
the Depositary to a nominee of such Depositary or by a nominee of such
Depositary to such Depositary or another nominee of such Depositary or by such
Depositary or any such nominee to a successor of such Depositary 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
ProGroS Securities represented by a Global Security (the "Beneficial Owner")
will not be entitled to have the ProGroS Securities represented by such Global
Securities registered in their names, will not receive or be entitled to
receive physical delivery of the ProGroS Securities in definitive form and
will not be considered the owners or Holders thereof under the 1983 Indenture,
including for purposes of receiving any reports delivered by the Company or
the Trustee pursuant to the 1983 Indenture. Accordingly, each person owning a
beneficial interest in a Global Security must rely on the procedures of DTC
and, if such person is not a participant 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 Depositary is at any time unwilling or unable to continue as
Depositary and a successor depositary 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 ProGroS
Securities, the Global Securities will be exchangeable for ProGroS Securities
in definitive form of like tenor and of an equal aggregate principal amount,
in denominations of $10 and integral multiples thereof. Such definitive
ProGroS Securities shall be registered in such name or names as the Depositary
shall instruct the Trustee. It is expected that such instructions may be based
upon directions received by the Depositary 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 depositary for the ProGroS Securities. The
ProGroS 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 Securities will be issued for the ProGroS Securities in the
aggregate principal amount of such issue, and will be deposited with DTC.
S-19
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 Exchange Act. 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 NASD. Access to the DTC's
system is also available to 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 SEC.
Purchases of ProGroS Securities under the DTC's system must be made by or
through Direct Participants, which will receive a credit for the ProGroS
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 ProGroS 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 ProGroS Securities, except in the
event that use of the book-entry system for the ProGroS Securities is
discontinued.
To facilitate subsequent transfers, all ProGroS Securities deposited with
DTC are registered in the name of DTC's partnership nominee, Cede & Co. The
deposit of ProGroS 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 ProGroS Securities; DTC's records reflect
only the identity of the Direct Participants to whose accounts such ProGroS
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 ProGroS
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 ProGroS 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 ProGroS
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 Depositary'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
S-20
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 depositary with
respect to the ProGroS Securities at any time by giving reasonable notice to
the Company or the Trustee. Under such circumstances, in the event that a
successor securities depositary is not obtained, ProGroS 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 depositary). 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.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the ProGroS Securities will be made by the underwriter in
immediately available funds. All payments of principal and the Supplemental
Redemption Amount, and Call Price if any, and will be made by the Company in
immediately available funds so long as the ProGroS Securities are maintained
in book-entry form.
S-21
THE TELEBRAS RECEIPT
TELECOMUNICACOES BRASILEIRAS S.A.-TELEBRAS
Telecomunicacoes Brasileiras S.A.-Telebras is the primary supplier of public
telecommunications services in Brazil. Telebras owns and operates all of the
inter-state and international telephone transmission facilities in Brazil, is
the primary provider of intra-state service and provides telephone-related
services such as data transmission, cellular mobile telephone service, and
sound, image, videotext and telex transmission.
Telebras is currently controlled by the federal government of Brazil, which
has announced its intention to privatize Telebras. In connection with such
privatization, the federal government of Brazil has indicated that it intends
to reorganize Telebras by creating 12 separate corporations as a result of
spin-offs from Telebras of various businesses of Telebras which may result in
the distribution to holders of a Telebras Receipt of cash, securities and/or
other property, including common stock and/or warrants or rights to purchase
common stock in the new corporations. An investor in the ProGroS Securities
should carefully review the adjustments to be made in the case of certain
reorganization events contained in "Description of the ProGroS Securities--
Dilution and Reorganization Adjustments".
Telebras is subject to the informational requirements of the Exchange Act.
Accordingly, Telebras files reports, proxy and other information statements
and other information with the SEC. Information provided to or filed with the
SEC by Telebras is available at the offices of the SEC specified under
"Available Information" in the accompanying Prospectus. The Company makes no
representation or warranty as to the accuracy or completeness of such reports.
There can be no assurance that Telebras will continue to be subject to the
reporting requirements of the Exchange Act and distribute reports and other
information required thereby to its shareholders. In the event that Telebras
ceases to be subject to such reporting requirements or otherwise fails to
distribute such information during the term of the ProGroS Securities, pricing
information for the ProGroS Securities may be more difficult to obtain and the
value and liquidity of the ProGroS Securities may be adversely affected.
THE COMPANY IS NOT AFFILIATED WITH TELEBRAS AND TELEBRAS HAS NO OBLIGATIONS
WITH RESPECT TO THE PROGROS SECURITIES. THIS PROSPECTUS SUPPLEMENT RELATES
ONLY TO THE PROGROS SECURITIES OFFERED HEREBY AND DOES NOT RELATE TO THE
TELEBRAS RECEIPT OR OTHER SECURITIES OF TELEBRAS. THE INFORMATION CONTAINED IN
THIS PROSPECTUS SUPPLEMENT REGARDING TELEBRAS HAS BEEN DERIVED FROM THE
PUBLICLY AVAILABLE DOCUMENTS DESCRIBED IN THE PRECEDING PARAGRAPH. THE COMPANY
HAS NOT PARTICIPATED IN THE PREPARATION OF SUCH DOCUMENTS OR MADE ANY DUE
DILIGENCE INQUIRIES WITH RESPECT TO TELEBRAS IN CONNECTION WITH THE OFFERING
OF THE PROGROS SECURITIES. THE COMPANY MAKES NO REPRESENTATION THAT SUCH
PUBLICLY AVAILABLE DOCUMENTS OR ANY OTHER PUBLICLY AVAILABLE INFORMATION
REGARDING TELEBRAS ARE ACCURATE OR COMPLETE. FURTHERMORE, THERE CAN BE NO
ASSURANCE THAT ALL EVENTS OCCURRING PRIOR TO THE DATE HEREOF (INCLUDING EVENTS
THAT WOULD AFFECT THE ACCURACY OR COMPLETENESS OF THE PUBLICLY AVAILABLE
DOCUMENTS DESCRIBED IN THE PRECEDING PARAGRAPH) THAT WOULD AFFECT THE TRADING
PRICE OF THE TELEBRAS RECEIPT (AND THEREFORE THE TRADING PRICE OF THE PROGROS
SECURITIES) HAVE BEEN PUBLICLY DISCLOSED. SUBSEQUENT DISCLOSURE OF ANY SUCH
EVENTS OR THE DISCLOSURE OF OR FAILURE TO DISCLOSE MATERIAL FUTURE EVENTS
CONCERNING TELEBRAS COULD AFFECT THE SUPPLEMENTAL REDEMPTION AMOUNT TO BE
RECEIVED AT THE STATED MATURITY DATE AND THEREFORE THE TRADING VALUE OF THE
PROGROS SECURITIES.
From time to time, in the ordinary course of business, affiliates of the
Company have engaged in certain investment banking activities on behalf of the
Telebras as well as served as counterparty in certain other transactions.
S-22
HISTORICAL DATA ON THE TELEBRAS RECEIPT
The Telebras Receipt is traded on the NYSE under the symbol "TBR". The
following table sets forth for the periods indicated, the split-adjusted high
and low sales prices per share of the Telebras Receipt, as reported on the
NYSE, for each quarter, since January 1, 1994 and dividends paid in U.S.
dollars. These historical data on the Telebras Receipt are not necessarily
indicative of the future performance of the Telebras Receipt or what the value
of the ProGroS Securities may be. Any historical upward or downward trend in
the level of the Telebras Receipt during any period set forth below is not any
indication that the Telebras Receipt is more or less likely to increase or
decrease at any time during the term of the ProGroS Securities.
PERIOD LOW HIGH DIVIDENDS PAID
- ------ ------- ------- --------------
SPLIT-
ADJUSTED(1)
1994
First Quarter.................................. $ 33.30 $ 52.75
Second Quarter................................. $ 27.98 $ 44.02
Third Quarter.................................. $ 37.50 $ 62.82 $0.09
Fourth Quarter................................. $ 41.79 $ 62.82
1995
First Quarter.................................. $ 19.75 $ 44.75
Second Quarter................................. $ 26.04 $ 39.66
Third Quarter.................................. $ 32.96 $ 48.56 $0.32
Fourth Quarter................................. $ 37.00 $ 49.38
1996
First Quarter.................................. $ 47.00 $ 57.50
Second Quarter................................. $ 48.63 $ 72.50
Third Quarter.................................. $ 68.50 $ 84.00 $1.61
Fourth Quarter................................. $ 70.00 $ 81.50
1997
First Quarter.................................. $ 74.63 $109.25
Second Quarter................................. $102.00 $159.75
Third Quarter.................................. $116.38 $169.25 $1.81
Fourth Quarter................................. $ 83.06 $147.69
1998
First Quarter.................................. $ 93.50 $135.00
Second Quarter (through May 13, 1998) ......... $113.25 $131.00
- --------
(1) The sales prices presented above have been adjusted for stock splits that
have occurred through May 13, 1998.
On May 13, 1998, the closing price of the Telebras Receipt on the NYSE was
$115.4375 per share.
S-23
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 ProGroS 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
ProGroS 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 ProGroS Securities in a tax-
deferred or tax-advantaged account, or persons holding ProGroS 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 ProGroS Securities, as determined for United States Federal
income tax purposes, equals the principal amount thereof. Persons considering
the purchase of the ProGroS Securities should consult their own tax advisors
concerning the application of the United States Federal income tax laws to
their particular situations as well as any consequences of the purchase,
ownership and disposition of the ProGroS Securities arising under the laws of
any other taxing jurisdiction.
As used herein, the term "U.S. Holder" means a beneficial owner of a ProGroS
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 persons have the authority to control all
substantial decisions of the trust, or (e) any other person whose income or
gain in respect of a ProGroS 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 ProGroS 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 ProGroS Securities or securities
with terms substantially the same as the ProGroS Securities. However, although
the matter is not free from doubt, under current law, each ProGroS 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
ProGroS 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 ProGroS Securities.
Prospective investors in the ProGroS Securities should be aware, however, that
the IRS is not bound by the Company's characterization of the ProGroS
Securities as indebtedness and the IRS could possibly take a different
position as to the proper characterization of the ProGroS 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 ProGroS Securities is based upon the
assumption that each ProGroS Security will be treated as a debt instrument of
the Company for United States Federal income tax purposes. If the ProGroS
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 ProGroS
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 ProGroS Security could differ from the timing and character of income, gain
or loss recognized in respect of a ProGroS Security had the
S-24
ProGroS Securities in fact been treated as debt instruments of the Company for
United States Federal income tax purposes.
U.S. HOLDERS
On June 11, 1996, the Treasury Department issued final regulations (the
"Final Regulations") concerning the proper United States Federal income tax
treatment of contingent payment debt instruments such as the ProGroS
Securities, which apply to debt instruments issued on or after August 13, 1996
and, accordingly, will apply to the ProGroS 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
ProGroS Securities, the Company has determined that the projected payment
schedule for the ProGroS Securities will consist of payment on the maturity
date of the principal amount thereof and a projected Supplemental Redemption
Amount equal to $5.3888 per Unit (the "Projected Supplemental Redemption
Amount"). This represents an estimated yield on the ProGroS Securities equal
to 6.25% per annum (compounded semiannually). Accordingly, during the term of
the ProGroS Securities, a U.S. Holder of a ProGroS 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 ProGroS 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 ProGroS 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 ProGroS Securities are
outstanding) will equal the product of this estimated yield (properly adjusted
for the length of the accrual period) and the ProGroS 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 ProGroS
Security's adjusted issue price will equal the ProGroS Security's issue price
(i.e., $10), increased by the interest previously accrued on the ProGroS
Security. At maturity of a ProGroS Security, in the event that the actual
Supplemental Redemption Amount, if any, exceeds $5.3888 per Unit (i.e., the
Projected Supplemental Redemption Amount), a U.S. Holder will be required to
include the excess of the actual Supplemental Redemption Amount over $5.3888
per Unit (i.e., the Projected Supplemental Redemption Amount) in income as
ordinary interest on the stated maturity date. Alternatively, in the event
that the actual Supplemental Redemption Amount, if any, is less than $5.3888
per Unit (i.e., the Projected Supplemental Redemption Amount), the amount by
which the Projected Supplemental Redemption Amount (i.e., $5.3888 per Unit)
exceeds the actual Supplemental Redemption Amount will be treated first as an
offset to any interest otherwise includible in income by the U.S. Holder with
respect to the ProGroS Security for the taxable year in which the stated
maturity date occurs to the extent of the amount of such includible interest.
Further, a U.S. Holder will be permitted to recognize and deduct, as an
ordinary loss that is not subject to the limitations applicable to
miscellaneous itemized deductions, any remaining portion of the Projected
Supplemental Redemption Amount (i.e., $5.3888 per Unit) in excess of the
actual Supplemental Redemption Amount that is not treated as an interest
offset pursuant to the foregoing rules. U.S. Holders purchasing a ProGroS
Security at a price that differs from the adjusted issue price of the ProGroS
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, exchange or redemption of a ProGroS Security prior to the
stated maturity date, a U.S. Holder will be required to recognize taxable gain
or loss in an amount equal to the difference, if any, between
S-25
the amount realized by the U.S. Holder upon such sale, exchange or redemption
and the U.S. Holder's adjusted tax basis in the ProGroS Security as of the
date of disposition. A U.S. Holder's adjusted tax basis in a ProGroS Security
generally will equal such U.S. Holder's initial investment in the ProGroS
Security increased by any interest previously included in income with respect
to the ProGroS Security 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
ProGroS 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 ProGroS 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 ProGroS Securities should consult their own
tax advisors concerning the application of the Final Regulations to their
investment in the ProGroS Securities. Investors in the ProGroS Securities may
also obtain the projected payment schedule, as determined by the Company for
purposes of the application of the Final Regulations to the ProGroS
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 Supplemental
Redemption Amount and the estimated yield on the ProGroS Securities) has been
determined solely for United States Federal income tax purposes (i.e., for
purposes of applying the Final Regulations to the ProGroS Securities), and is
neither a prediction nor a guarantee of what the actual Supplemental
Redemption Amount will be, or that the actual Supplemental Redemption Amount
will even exceed zero.
The following table sets forth the amount of interest that will be deemed to
have accrued with respect to each Unit of the ProGroS Securities during each
accrual period over a term of seven years for the ProGroS Securities based
upon the projected payment schedule for the ProGroS Securities as determined
by the Company for purposes of applying the Final Regulations to the ProGroS
Securities:
TOTAL INTEREST
DEEMED TO HAVE
ACCRUED ON
INTEREST DEEMED TO PROGROS SECURITIES
ACCRUE DURING AS OF END
ACCRUAL PERIOD ACCRUAL PERIOD OF ACCRUAL PERIOD
-------------- ------------------ -------------------
(PER UNIT) (PER UNIT)
May 19, 1998 through No-
vember 19, 1998........ $0.3151 $0.3151
November 20, 1998
through May 19, 1999... $0.3224 $0.6375
May 20, 1999 through No-
vember 19, 1999........ $0.3324 $0.9699
November 20, 1999
through May 19, 2000... $0.3428 $1.3127
May 20, 2000 through No-
vember 19, 2000........ $0.3535 $1.6662
November 20, 2000
through May 19, 2001... $0.3646 $2.0308
May 20, 2001 through No-
vember 19, 2001........ $0.3759 $2.4067
November 20, 2001
through May 19, 2002... $0.3877 $2.7944
May 20, 2002 through No-
vember 19, 2002........ $0.3999 $3.1943
November 20, 2002
through May 19, 2003... $0.4123 $3.6066
May 20, 2003 through No-
vember 19, 2003........ $0.4252 $4.0318
November 20, 2003
through May 19, 2004... $0.4385 $4.4703
May 20, 2004 through No-
vember 19, 2004........ $0.4522 $4.9225
November 20, 2004
through May 19, 2005... $0.4663 $5.3888
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Projected Supplemental Redemption Amount = $5.3888 per Unit.
NON-U.S. HOLDERS
A non-U.S. Holder will not be subject to United States Federal income taxes
on payments of principal, premium (if any) or interest (including original
issue discount, if any) on a ProGroS Security, unless such non-U.S. Holder is
a direct or indirect 10% or greater shareholder of the Company, a controlled
foreign corporation
S-26
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 ProGroS 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 ProGroS 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 ProGroS 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 ProGroS 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 ProGroS 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 ProGroS 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 ProGroS 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 that the required
information is furnished to the IRS.
NEW WITHHOLDING REGULATIONS
On October 6, 1997, the Treasury Department issued new regulations (the "New
Regulations") which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New
Regulations attempt to unify certification requirements and modify reliance
standards. The New Regulations will generally be effective for payments made
after December 31, 1999, subject to certain transition rules. Prospective
investors are urged to consult their own tax advisors regarding the New
Regulations.
S-27
USE OF PROCEEDS
The net proceeds from the sale of the ProGroS 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 Call
Price or the Principal Amount and the Supplemental Redemption Amount, as the
case may be.
UNDERWRITING
MLPF&S (the "Underwriter") has agreed, subject to the terms and conditions
of the Underwriting Agreement and a Terms Agreement, to purchase from the
Company $14,500,000 aggregate Principal Amount of ProGroS 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 ProGroS Securities if any are purchased.
The Underwriter has advised the Company that it proposes initially to offer
all or part of the ProGroS 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 ProGroS 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 ProGroS Securities will conform to the requirements
set forth in the applicable sections of Rule 2720 of the Conduct Rules of the
NASD.
The Underwriter is permitted to engage in certain transactions that
stabilize the price of the ProGroS Securities. Such transactions consist of
bids or purchases for the purpose of pegging, fixing or maintaining the price
of the ProGroS Securities.
If the Underwriter creates a short position in the ProGroS Securities in
connection with the offering, i.e., if they sell more Units of the ProGroS
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
ProGroS 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 ProGroS 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
ProGroS 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 THE PROGROS SECURITIES
The validity of the ProGroS Securities will be passed upon for the Company
and for the Underwriter by Brown & Wood llp, New York, New York.
S-28
INDEX OF DEFINED TERMS
PAGE
----
ADR........................................................................ S-1
AMEX....................................................................... S-1
Beneficial Owner........................................................... S-19
Business Day............................................................... S-14
Calculation Agent.......................................................... S-6
Calculation Day............................................................ S-13
Calculation Period......................................................... S-13
Call Period................................................................ S-5
Call Price................................................................. S-5
Closing Price.............................................................. S-14
Company.................................................................... S-4
Depositary................................................................. S-19
Dilution Events............................................................ S-16
Direct Participants........................................................ S-20
Distributed Assets......................................................... S-16
Distributed Securities..................................................... S-16
DTC........................................................................ S-4
Ending Value............................................................... S-4
Exchange Act............................................................... S-14
Extraordinary Cash Dividend................................................ S-17
Final Regulations.......................................................... S-25
Global Securities.......................................................... S-19
Indirect Participants...................................................... S-20
IRS........................................................................ S-24
Market Disruption Event.................................................... S-13
MLPF&S..................................................................... S-2
NASD....................................................................... S-14
NASDAQ NMS................................................................. S-13
NASDAQ NMS security........................................................ S-14
New Regulations............................................................ S-27
1983 Indenture............................................................. S-12
Non-U.S. Holder............................................................ S-24
Non-U.S. Issuer............................................................ S-10
NYSE....................................................................... S-1
OTC Bulletin Board......................................................... S-14
Participant................................................................ S-19
Payment Date............................................................... S-5
Pricing Date............................................................... S-4
Principal Amount........................................................... S-4
ProGroS SM Securities...................................................... S-1
Projected Supplemental Redemption Amount................................... S-25
Reference Property......................................................... S-4
Reference Securities....................................................... S-4
Reorganization Event....................................................... S-18
Reorganization Event Value................................................. S-18
SEC........................................................................ S-2
Spot Rate.................................................................. S-14
Starting Value............................................................. S-4
Successor Company.......................................................... S-18
S-29
PAGE
----
Supplemental Redemption Amount............................................. S-4
Telebras................................................................... S-1
Telebras Receipt........................................................... S-4
Trading Day................................................................ S-13
Transaction Value.......................................................... S-18
Underwriter................................................................ S-28
Unit....................................................................... S-4
U.S. Dollar Equivalent..................................................... S-13
U.S. Holder................................................................ S-24
Withholding Agent.......................................................... S-27
S-30
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LOGO
1,450,000 UNITS
MERRILL LYNCH & CO., INC.
TELEBRAS INDEXED CALLABLE
PROTECTED GROWTH/SM/ SECURITIES
DUE MAY 19, 2005
("PROGROS/SM/ SECURITIES")
-------------------------------
PROSPECTUS SUPPLEMENT
-------------------------------
MERRILL LYNCH & CO.
MAY 13, 1998
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