<PAGE>
RULE NO. 424(b)(3)
REGISTRATION NO. 33-49947
PRELIMINARY AND SUBJECT TO COMPLETION AND AMENDMENT
ISSUE DATE: JANUARY 14, 1994
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED AUGUST 27, 1993)
[LOGO OF MERRILL LYNCH & CO., INC. APPEARS HERE]
MERRILL LYNCH & CO., INC.
1,000,000 CONSTANT MATURITY U.S. TREASURY YIELD INCREASE WARRANTS, EXPIRING
AUGUST 25, 1995
Each Constant Maturity U.S. Treasury Yield Increase Warrant ("Warrant") will
entitle the Holder thereof to receive from Merrill Lynch & Co., Inc. (the
"Company") a payment, if any, (the "Cash Settlement Value") on August 25, 1995
(the "Expiration Date"), or on such earlier date as described herein, based
upon the increase in the CMT Yield. The CMT Yield is the yield to maturity on
U.S. Treasury securities with a constant maturity of five years as more fully
described herein. The Cash Settlement Value will equal the greater of (i) U.S.
$100 x 4 x (Spot Yield - Strike Yield) and (ii) zero. The "Strike Yield" will
equal the CMT Yield on the date the Warrants are priced by the Company for
initial offering to the public. The "Spot Yield" will equal the CMT Yield, as
determined by the Calculation Agent on the Exercise Date. The Warrants will be
automatically exercised on the earlier of the fifth New York Business Day
immediately preceding August 25, 1995 or the New York Business Day immediately
preceding the date of their earlier expiration upon delisting from, or
permanent suspension from trading on, the American Stock Exchange unless the
Warrants are simultaneously accepted for trading pursuant to the rules of
another Self-Regulatory Organization (as defined herein). The Warrants are not
exercisable at the option of the Holder. See "Description of the Warrants".
THE WARRANTS INVOLVE A HIGH DEGREE OF RISK, INCLUDING THE RISK OF EXPIRING
WORTHLESS UNLESS THE CMT YIELD INCREASES. INVESTORS THEREFORE SHOULD BE
PREPARED TO SUSTAIN A TOTAL LOSS OF THE PURCHASE PRICE OF THEIR WARRANTS, AND
ARE ADVISED TO CAREFULLY CONSIDER THE INFORMATION UNDER "RISK FACTORS RELATING
TO THE WARRANTS", "DESCRIPTION OF THE WARRANTS", "DESCRIPTION OF THE WARRANTS--
DELISTING OF THE WARRANTS" AND "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
CONCERNING THE WARRANTS".
Prior to issuance, the Warrants will have been approved for listing by the
American Stock Exchange, subject to official notice of issuance.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNTS THE COMPANY(1)
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<S> <C> <C> <C>
Per Warrant.............................. $ $ $
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- -
Total.................................... $ $ $
</TABLE>
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(1) Before deducting expenses payable by the Company.
----------------
The Warrants are offered by the Underwriter, subject to prior sale, when, as
and if delivered to and accepted by the Underwriter, subject to certain other
conditions. The Underwriter reserves the right to reject orders in whole or in
part. It is expected that delivery of the Warrants will be made on or about
, 1994.
This Prospectus Supplement and related Prospectus may be used by the
Underwriter in connection with offers and sales related to market-making
transactions in the Warrants. The Underwriter may act as principal or agent in
such transactions. Such sales will be made at prices related to prevailing
market prices at the time of sale.
----------------
MERRILL LYNCH & CO.
----------------
The date of this Prospectus Supplement is , 1994.
<PAGE>
IN CONNECTION WITH THE OFFERING OF THE WARRANTS, THE UNDERWRITER MAY OVER-
ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF
THE WARRANTS AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
----------------
THE COMMISSIONER OF INSURANCE OF THE STATE OF NORTH CAROLINA HAS NOT APPROVED
OR DISAPPROVED THIS OFFERING NOR HAS THE COMMISSIONER PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR PROSPECTUS.
S-2
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
The information below is qualified in its entirety by the detailed
information appearing elsewhere in this Prospectus Supplement and in the
Prospectus.
THE OFFERING
Securities Offered........ 1,000,000 Constant Maturity U.S. Treasury Yield
Increase Warrants, Expiring August 25, 1995 (the
"Warrants").
Cash Settlement Value....... Each Warrant will entitle the Holder thereof to
receive from the Company a cash payment (the
"Cash Settlement Value") based upon the increase
in the CMT Yield. The Cash Settlement Value of a
Warrant will be determined on the Exercise Date
as the amount which is the greater of:
(i) $100 x 4 x (Spot Yield - Strike Yield),
and
(ii) $0.
See "Description of the Warrants--Cash Settlement
Value."
Spot Yield.................. The CMT Yield as determined by the Calculation
Agent on the Exercise Date.
Strike Yield................ The CMT Yield on the date the Warrants are priced
by the Company for initial offering to the
public.
CMT Yield................... U.S. Treasury securities, including those used to
calculate the CMT Yield, are direct obligations
of the United States government and carry the
full faith and credit of the United States of
America. The Warrants, however, are solely the
obligation of the Company and are not backed by
the full faith and credit of the United States.
If the CMT Yield is determined using yields
reported on Telerate Page 7052, in H.15(519) or
as reported by the Federal Reserve Bank of New
York as described in "Description of the
Warrants--Cash Settlement Value", the CMT Yield
will be a one-week average yield on 5-year
United States Treasury securities at "constant
maturity" (the "Weekly CMT Yield"). Yields on
Treasury securities at "constant maturity" used
to calculate the Weekly CMT Yield are
interpolated from the daily yield curve. This
curve, which relates the yield on a security to
its time to maturity, is based upon the market
yields on actively traded Treasury securities in
the over-the-counter market. The constant
maturity yield values are derived from the yield
curve at fixed maturities. This method permits
estimation of the yield for a five year
maturity, even if no outstanding security has
exactly five years remaining to maturity. If the
Weekly CMT Yield cannot be calculated, the CMT
Yield will be determined based on the yield to
maturity of certain Treasury securities on the
Exercise Date based on secondary market offer
prices of certain dealers as more fully
described in "Description of the Warrants--Cash
Settlement Value".
S-3
<PAGE>
Automatic Exercise of
Warrants.................... The Warrants will be automatically exercised on
the fifth New York Business Day, as hereinafter
defined, immediately preceding August 25, 1995
or, if the Warrants are subject to automatic
exercise in the event they cease to be traded
pursuant to the rules of a Self-Regulatory
Organization, the New York Business Day
immediately preceding the Early Expiration Date.
The Warrants will be automatically exercised on
the Exercise Date and are not exercisable at the
option of the Holder. See "Description of the
Warrants--Exercise of Warrants" and "Description
of the Warrants--Delisting of Warrants".
Form........................ The Warrants will be in book-entry form and,
accordingly, no Holder will be entitled to
receive a certificate representing such
Warrants. See "Description of the Warrants--
Book-Entry Procedures and Settlement".
Listing..................... Prior to issuance, the Warrants will have been
approved for listing by the American Stock
Exchange, subject to official notice of
issuance.
AMEX Symbol................. YIW.WS
Certain Risk Factors........ The Warrants involve a high degree of risk,
including the risk of expiring worthless. If the
Spot Yield is equal to or less than the Strike
Yield, the Warrant will expire worthless.
INVESTORS THEREFORE SHOULD BE PREPARED TO
SUSTAIN A TOTAL LOSS OF THE PURCHASE PRICE OF
THEIR WARRANTS.
The Warrants are not exercisable at the option of
the Holder.
It is not possible to predict the price at which
the Warrants will trade in the secondary market
or whether such market will be liquid or
illiquid. The trading value of a Warrant is
expected to be dependent upon a number of
complex interrelated factors, including the CMT
Yield, the volatility of the CMT Yield and the
time remaining to the expiration of the
Warrants.
In the event that the Warrants are delisted from,
or permanently suspended from trading on, the
American Stock Exchange and the Warrants are not
simultaneously accepted for trading pursuant to
the rules of another self-regulatory
organization whose rules are filed with the
Securities and Exchange Commission (a "Self-
Regulatory Organization") under the Securities
Act of 1934, as amended, the Warrants will be
automatically exercised on the New York Business
Day immediately preceding the date such
delisting or trading suspension becomes
effective. At the time of such automatic
exercise, the Warrants may be out-of-the-money
such that the Cash Settlement Value will equal
zero.
The initial public offering price of the Warrants
is expected to be in excess of the price a
commercial purchaser might pay in the market for
a comparable option involving significantly
larger amounts.
S-4
<PAGE>
The CMT Yield is based upon the value of United
States Treasury securities. The value of any
debt, including U.S. government debt, may be
affected by complex political and economic
factors, including the rate of inflation, growth
of gross national product and balance of
payments for the United States.
Prospective investors in the Warrants should be
aware that the proper characterization of the
Warrants for United States Federal income tax
purposes is uncertain and that the ultimate
United States Federal income tax treatment of
the Warrants could differ significantly
depending upon how the Warrants are
characterized for United States Federal income
tax purposes. Accordingly, prospective investors
in the Warrants are urged to consult their own
tax advisors as to the proper characterization
of the Warrants for United States Federal income
tax purposes.
Investors are advised to carefully consider the
foregoing risk factors, and the risks and other
matters discussed under "Risk Factors Relating
to the Warrants", "Description of the Warrants"
and "Certain Federal Income Tax Considerations
Concerning the Warrants", prior to purchasing
the Warrants.
Investors in Warrants....... The AMEX requires that Warrants be sold only to
investors with options approved accounts and
requires that its members and member
organizations and registered employees thereof
make certain suitability determinations before
recommending transactions in Warrants. It is
suggested that investors considering purchasing
the Warrants be experienced with respect to
options on securities and option transactions
and reach an investment decision only after
carefully considering the suitability of the
Warrants in light of their particular
circumstances. The Warrants are not suitable for
persons solely dependent upon a fixed income,
for retirement plan accounts or for accounts
under the Uniform Gift to Minors Act. INVESTORS
SHOULD BE PREPARED TO SUSTAIN A TOTAL LOSS OF
THE PURCHASE PRICE OF THEIR WARRANTS.
S-5
<PAGE>
CERTAIN IMPORTANT INFORMATION CONCERNING THE WARRANTS
A Holder will receive a cash payment on the Expiration Date only if the
Warrants have a Cash Settlement Value in excess of zero on the Exercise Date.
The Spot Yield determined on the Exercise Date will establish whether the
Warrants have a positive Cash Settlement Value on the Expiration Date. The
Warrants may be "out-of-the-money" (i.e., their Cash Settlement Value will be
zero) when initially sold and the Warrants will be "in-the-money" (i.e., their
Cash Settlement Value will exceed zero) only if the Spot Yield is greater than
the Strike Yield. If the Spot Yield is equal to or less than the Strike Yield,
the Warrant will expire worthless and the Holder will have sustained a total
loss of the purchase price of such Warrant. Investors therefore should be
prepared to sustain a total loss of the purchase price of their Warrants.
On January 10, 1994 the CMT Yield quoted by the Federal Reserve Bank for the
week ended January 7, 1994 was 5.21%.
RISK FACTORS RELATING TO THE WARRANTS
THE WARRANTS INVOLVE A HIGH DEGREE OF RISK, INCLUDING THE RISK OF EXPIRING
WORTHLESS. INVESTORS THEREFORE SHOULD BE PREPARED TO SUSTAIN A TOTAL LOSS OF
THE PURCHASE PRICE OF THEIR WARRANTS. IT IS SUGGESTED THAT INVESTORS
CONSIDERING PURCHASING THE WARRANTS BE EXPERIENCED WITH RESPECT TO OPTIONS ON
SECURITIES AND OPTION TRANSACTIONS AND REACH AN INVESTMENT DECISION ONLY AFTER
CAREFULLY CONSIDERING ALL THE RISK FACTORS SET FORTH IN THIS SECTION OF THIS
PROSPECTUS SUPPLEMENT, THE SUITABILITY OF THE WARRANTS IN LIGHT OF THEIR
PARTICULAR CIRCUMSTANCES AND ALL THE OTHER INFORMATION SET FORTH IN THIS
PROSPECTUS SUPPLEMENT AND IN THE ACCOMPANYING PROSPECTUS.
Exercise of the Warrants. The Warrants will be automatically exercised on the
Exercise Date and are not exercisable at the option of the Holder.
Automatic Exercise of the Warrants upon Delisting. In the event that the
Warrants are delisted from, or permanently suspended from trading on, the
American Stock Exchange and the Warrants are not simultaneously accepted for
trading pursuant to the rules of another self-regulatory organization (a "Self-
Regulatory Organization") that are filed with the Securities and Exchange
Commission under the Securities Act of 1934, as amended, the Warrants will
expire on the date such delisting or trading suspension becomes effective and
will be automatically exercised on the New York Business Day immediately
preceding the date of such early expiration. At the time of such automatic
exercise, the Warrants may be out-of-the-money such that the Cash Settlement
Value will equal zero.
Offering Price of the Warrants. The initial public offering price of the
Warrants is expected to be in excess of the price a commercial purchaser of or
dealer in options on the CMT Yield might pay for a comparable option involving
significantly larger amounts.
Certain Factors Affecting the Value of the Warrants. Each Warrant may have a
Cash Settlement Value of zero at issuance. The Cash Settlement Value of the
Warrants at any time prior to expiration is typically expected to be less than
the Warrants' trading value at that time. The difference between the trading
value and the Cash Settlement Value will reflect a number of factors, including
a "time value" for the Warrants. The "time value" of the Warrants will depend
upon the length of the period remaining to expiration, among other factors. The
expiration date of the Warrants will be accelerated should the Warrants be
delisted or should their trading on the American Stock Exchange be suspended
permanently unless the Warrants simultaneously are accepted for trading
pursuant to the rules of another Self-Regulatory Organization. Any such
acceleration would result in the total loss of any otherwise remaining "time
value" and could occur when the Warrants are out-of-the-money, thus resulting
in total loss of the purchase price of the Warrants. See "Description of the
Warrants--Delisting of the Warrants". Before exercising or selling Warrants,
Holders should carefully consider the trading value of the Warrants, the value
of the CMT Yield and probable range of Cash Settlement Values and any related
transaction costs.
S-6
<PAGE>
There can be no assurance as to how the Warrants will trade in the secondary
market or whether such market will be liquid. The trading value of a Warrant is
expected to be dependent upon a number of complex interrelated factors,
including those listed below. The expected effect on the trading value of a
Warrant of each of the factors listed below, assuming in each case that all
other factors are held constant, is as follows:
(1) The CMT Yield. If the CMT Yield increases relative to the Strike
Yield, the trading value of a Warrant is expected to increase. If the CMT
Yield decreases relative to the Strike Yield, the trading value of a
Warrant is expected to decrease.
(2) The volatility of the CMT Yield. If the volatility of the CMT Yield
increases, the trading value of a Warrant is expected to increase. If such
volatility decreases, the trading value of a Warrant is expected to
decrease.
(3) The general level of interest rates in the United States. If the
general level of interest rates in the United States increases, the trading
value of a Warrant is expected to increase. If the general level of
interest rates in the United States decreases, the trading value of a
Warrant is expected to decrease.
(4) The time remaining to the expiration date of the Warrants. As the
time remaining to the expiration date of the Warrants decreases, the
trading value of a Warrant is expected to decrease.
As noted above, these hypothetical scenarios are based on the assumption that
all other factors are held constant. In reality, it is unlikely that only one
factor would change in isolation, since changes in one factor usually cause, or
result from, changes in others. Some of the factors referred to above are, in
turn, influenced by the political and economic factors discussed below.
Warrants Not Standardized Options Issued by the Options Clearing
Corporation. Each Warrant constitutes an option having a value based upon one
or more United States Treasury securities, as calculated in the CMT Yield.
However, the Warrants are not standardized options of the type issued by the
Options Clearing Corporation (the "OCC"), a clearing agency regulated by the
Securities and Exchange Commission. For example, unlike purchasers of OCC
standardized options who have the credit benefits of guarantees and margin and
collateral deposits by OCC clearing members to protect the OCC from a clearing
member's failure, purchasers of Warrants must look solely to the Company for
performance of its obligations to pay the Cash Settlement Value on the exercise
of Warrants. Further, the market for the Warrants is not expected to be
generally as liquid as the market for some OCC standardized options.
The Warrants are unsecured contractual obligations of the Company and will
rank on a parity with the Company's other unsecured contractual obligations and
with the Company's unsecured and unsubordinated debt. However, since the
Company is a holding company, the right of the Company, and hence the right of
creditors of the Company (including Holders of the Warrants), to participate in
any distribution of the assets of any subsidiary upon its liquidation or
reorganization or otherwise is necessarily subject to the prior claims of
creditors of the subsidiary, except to the extent that claims of the Company
itself as a creditor of the subsidiary may be recognized. In addition,
dividends, loans and advances from certain subsidiaries, including Merrill
Lynch, Pierce, Fenner & Smith Incorporated, to the Company are restricted by
net capital requirements under the Securities Exchange Act of 1934, as amended,
and under rules of certain exchanges and other regulatory bodies.
General Risk Considerations. Options and warrants provide opportunities for
investment and pose risks to investors as a result of fluctuations in the value
of the underlying investment. In general, certain of the risks associated with
the Warrants are similar to those generally applicable to other options or
warrants of private corporate issuers.
The purchaser of a Warrant may lose his entire investment. This risk reflects
the nature of a Warrant as an asset which tends to decline in value over time
and which may, depending on the CMT Yield as compared to the Strike Yield,
become worthless when it expires. Assuming all other factors are held constant,
the more a Warrant is out-of-the-money and the shorter its remaining term to
expiration, the greater the risk that a
S-7
<PAGE>
purchaser of the Warrant will lose all of his investment. This means that the
purchaser of a Warrant who does not sell it in the secondary market will
necessarily lose his entire investment in the Warrant if it expires when the
Spot Yield is less than or equal to the Strike Yield.
If the CMT Yield does not increase relative to the Strike Yield to an extent
sufficient to cover an investor's cost of the Warrant (i.e., the purchase price
plus transaction costs, if any) before the Warrant expires, the investor will
lose all or a part of his investment in the Warrant upon expiration.
The CMT Yield is derived from United States Treasury securities. The value of
any debt security, including Treasury securities, may be affected by complex
political and economic factors, including the rate of inflation, growth of
gross national product and balance of payments for the United States.
Prospective investors in the Warrants should be aware that the proper
characterization of the Warrants for United Stated Federal income tax purposes
is uncertain and that the ultimate United States Federal income tax treatment
of the Warrants could differ significantly depending upon how the Warrants are
characterized for United States Federal income tax purposes. Accordingly,
prospective investors in the Warrants are urged to consult their own tax
advisors as to the proper characterization of the Warrants for United States
Federal income tax purposes.
The AMEX requires that Warrants be sold only to investors with options
approved accounts and requires that its members and member organizations and
registered employees thereof make certain suitability determinations before
recommending transactions in Warrants. It is suggested that investors
considering purchasing the Warrants be experienced with respect to options on
securities and option transactions and understand the risks of transactions
such as the Warrants and reach an investment decision only after carefully
considering the suitability of the Warrants in light of their particular
circumstances. The Warrants are not suitable for persons solely dependant upon
a fixed income, for retirement plan accounts or for accounts under the Uniform
Gift to Minors Act. INVESTORS SHOULD BE PREPARED TO SUSTAIN A TOTAL LOSS OF THE
PURCHASE PRICE OF THEIR WARRANTS.
S-8
<PAGE>
RECENT DEVELOPMENTS
The following summary of certain consolidated financial information
concerning the Company for the nine months ended September 25, 1992 and
September 24, 1993 was derived from, and is qualified in its entirety by
reference to, the condensed consolidated financial statements and data
contained in the Company's Quarterly Report on Form 10-Q for the quarter ended
September 24, 1993 and other documents incorporated by reference herein. See
"Incorporation of Certain Documents by Reference" in the accompanying
Prospectus. Such condensed consolidated financial statements are unaudited;
however, in the opinion of management of the Company, all adjustments
(consisting only of normal recurring accruals and a non-recurring pretax charge
of $103.0 million ($59.7 million after income taxes) related to the Company's
decision not to occupy certain floors at its World Financial Center
Headquarters facility) necessary for a fair statement of the results of
operations have been included.
The Company conducts its business in highly volatile markets. Consequently,
the Company's results can be affected by many factors, including general market
conditions, the liquidity of secondary markets, the level and volatility of
interest rates and currency values, the valuation of securities positions,
competitive conditions, and the size, number and timing of transactions. In
periods of unfavorable market activity, profitability can be adversely affected
because certain expenses remain relatively fixed. As a result, net earnings and
revenues can vary significantly from period to period. Thus, interim results
may not necessarily be representative of the full year results of operations.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------
SEPT. 25, SEPT. 24,
1992 1993
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(IN THOUSANDS, EXCEPT
RATIOS)
<S> <C> <C>
Revenues............................................. $ 10,160,808 $ 12,078,667
Net Revenues(1)...................................... $ 6,512,337 $ 7,816,859
Earnings before income taxes and cumulative effect
of changes in accounting principles................. $ 1,260,284 $ 1,827,528
Net earnings......................................... $ 672,384 $ 1,047,120
Ratio of earnings to fixed charges(2)................ 1.3 1.4
Total assets......................................... $111,896,715 $147,611,339
Long-term borrowings(3).............................. $ 10,818,478 $ 13,027,015
Stockholders' equity................................. $ 4,439,352 $ 5,608,656
</TABLE>
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(1) Net revenues are revenues net of interest expense.
(2) For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" consists of earnings from continuing operations before income
taxes and fixed charges. "Fixed charges" consists of interest costs and
that portion of rentals estimated to be representative of the interest
factor.
(3) To finance its diverse activities, the Company and certain of its
subsidiaries borrow substantial amounts of short-term funds on a regular
basis. Although the amount of short-term borrowings significantly varies
with the level of general business activity, on September 24, 1993,
$336,151,000 of bank loans and $12,916,972,000 of commercial paper were
outstanding. In addition, certain of the Company's subsidiaries lend
securities and enter into repurchase agreements to obtain financing. At
September 24, 1993, cash deposits for securities loaned and securities sold
under agreements to repurchase amounted to $3,267,169,000 and
$52,771,145,000, respectively. From September 25, 1993 to January 7, 1994,
long-term borrowings, net of repayments and repurchases, increased in the
amount of approximately $368,470,000.
NINE MONTHS ENDED SEPTEMBER 24, 1993
Net earnings for the first nine months of 1993 were a record $1,047.1 million
and surpassed full year 1992 results. Nine month 1993 net earnings increased
$374.7 million (56%) above the $672.4 million reported
S-9
<PAGE>
in the corresponding 1992 period. Results for the first nine months of 1993
include a previously announced (1993 first quarter) non-recurring pretax lease
charge totaling $103.0 million ($59.7 million after income taxes) related to
the Company's decision not to occupy certain space at its World Financial
Center Headquarters facility. Net earnings in 1992 were restated to reflect the
previously reported $58.6 million cumulative effect charge related to the early
adoption of Statement of Financial Accounting Standards ("SFAS") No. 106,
"Employers' Accounting for Postretirement Benefits Other than Pensions" and
SFAS No. 109, "Accounting for Income Taxes." Earnings before cumulative effect
of changes in accounting principles increased 43% above the $731.0 million
reported in the corresponding 1992 period.
Revenues after interest expense ("net revenues") advanced 20% in the first
nine months of 1993 to $7,817 million. The increase was broad based with total
revenues up 19% from the comparable 1992 period to $12,079 million.
Commission revenues increased 14% during the first nine months of 1993 to
$2,071 million on the continued strength of listed securities transactions and
higher mutual fund commission volume. Commissions on listed securities
benefited from higher trading volume and increases in average market prices.
Demand for mutual funds remained strong as investors continued to diversify
their assets to achieve potentially higher returns. Contributing to the
increase in mutual fund commissions was the growth in sales of front-end funds
and a higher level of distribution fees earned on deferred charge funds.
Interest and dividend revenues for the first nine months of 1993 advanced 17%
to $5,056 million, while interest expense, which includes dividend expense,
increased 17% to $4,262 million. As a result, net interest and dividend profit
rose 16% to $794 million. The increase in interest and dividend profit is
attributable to increased collateralized lending activities, higher interest
earning assets, reduced financing costs due to lower interest rates, and a
growing equity base.
Principal transactions revenues for the 1993 nine-month period rose 28% to
$2,222 million. Fixed-income and foreign exchange trading, in the aggregate,
benefited from higher revenues in swaps and derivatives, corporate bonds,
municipal securities and money market instruments. Equity trading revenues
increased due primarily to higher volume in over-the-counter and foreign
equities.
Investment banking revenues rose 17% during the first nine months of 1993 to
$1,311 million. Contributing to this strong performance were higher
underwriting revenues from equity securities, corporate bonds, private
placements and high-yield debt. Strategic services revenues, which includes
merger and acquisition and advisory services, advanced during the 1993 third
quarter, but on a year-to-date basis, revenues from strategic services were
slightly below last year's levels. Asset management and custodial fees rose 12%
during the 1993 nine-month period to $727 million, due primarily to increases
in stock and bond fund assets under management. Other revenues increased 38%
from a year ago to $692 million. Contributing to the advance were higher fee
revenues from the Merrill Lynch Consults(Registered Trademark) investor
portfolio management service, decreases in net investment losses attributable to
merchant banking and insurance activities, and increased revenues from mortgage
related transactions.
Non-interest expenses increased 14% over the corresponding 1992 period to
$5,989 million. Compensation and benefits expense, which represented
approximately 64.1% of total non-interest expenses, increased 16% due primarily
to increases in incentive and production related compensation tied directly to
the Company's performance. Nevertheless, compensation and benefits expense as a
percentage of net revenues declined to 49.1% from 50.6% in the year-ago period.
Facilities-related costs, including occupancy, communications and equipment
rental expenses, and depreciation and amortization, increased 15% as a result
of the non-recurring pretax lease charge of $103.0 million. Excluding the lease
charge, facilities-related costs rose 2%. Brokerage, clearing and exchange fees
were up 6% due to increased business volume. Advertising and market development
expenses increased 18% as a result of higher sales promotion costs and
recognition programs for Financial Consultants tied to the higher level of
business activity and discretionary increases in local advertising.
Professional fees were up 3%, partially as a result of higher system consulting
S-10
<PAGE>
and employment service fees, while other expenses increased 2% due in part to
the write-off of certain fixed assets.
Income tax expense totaled $780 million representing a 42.7% effective tax
rate. This compared with a 42.0% effective tax rate in the corresponding 1992
period. The increase in the effective tax rate is due primarily to legislation
raising corporate income tax rates retroactive to the beginning of the year.
Subsequent to quarter-end, the Company's Board of Directors declared a two-
for-one common stock split, effected in the form of a 100% stock dividend, paid
November 24, 1993 to stockholders of record on October 22, 1993. All amounts
included in the prospectus are presented on a pre-split basis.
The Company believes that its equity base is adequate relative to the level
and composition of its assets and the mix of its businesses.
In the normal course of its investment banking, trading and insurance
activities, the Company underwrites, purchases, sells and makes markets in
high-yield securities and other non-investment grade securities. Additionally,
the Company provides financing and advisory services to corporations entering
into leveraged transactions. These activities are subject to risks related to
the creditworthiness of the issuers and the liquidity of the market for such
securities, in addition to the usual risks associated with investing, extending
credit, underwriting and trading in investment grade instruments.
At September 24, 1993, the carrying value of extensions of credit provided to
corporations entering into leveraged transactions aggregated $496 million
(excluding unutilized revolving lines of credit and other lending commitments
of $72 million), consisting primarily of senior term and subordinated financing
to 44 medium-sized corporations. At September 24, 1993, the Company had one
bridge loan outstanding, totaling $70 million, which has since been repaid.
Loans to highly leveraged corporations are carried at unpaid principal balance
less a reserve for estimated losses. The allowance for loan losses is estimated
based on a review of each loan, and considerations of economic, market and
credit conditions. Direct equity investments made in conjunction with the
Company's investment and merchant banking activities, which are generally
recorded at the lower of cost or estimated net realizable value, aggregated
$306 million at September 24, 1993, representing investments in 85 enterprises.
At September 24, 1993, the Company held interests in partnerships, totaling $85
million (recorded on the cost basis), that invest in highly leveraged
transactions and non-investment grade securities. The Company has a co-
investment arrangement to enter into direct equity investments. At September
24, 1993, the additional co-investment commitments were $81 million. The
Company also has committed to invest an additional $14 million in partnerships
that invest in leveraged transactions.
As a market-maker, the Company holds trading positions in non-investment
grade securities. At September 24, 1993, the fair value of long and short non-
investment grade trading positions amounted to $2,065 million and $236 million,
respectively, and in aggregate (i.e., the sum of long and short trading
positions), represented 3.6% of aggregate consolidated trading positions.
Investments of the Company's insurance subsidiaries, which are carried at
amortized cost, include non-investment grade securities. At September 24, 1993,
$492 million or 6.0% of the aggregate carrying value of such investments were
non-investment grade.
As of September 24, 1993, the largest non-investment grade holdings related
to a single issuer totaled $158 million. No one industry sector represented
more than 16% of total non-investment grade positions. At September 24, 1993,
the Company held an aggregate carrying value of $294 million in securities of
issuers who were in various stages of bankruptcy proceedings or in default.
Approximately 46% of this amount resulted from the Company's market-making
activities in such securities.
S-11
<PAGE>
DESCRIPTION OF THE WARRANTS
GENERAL
An aggregate of 1,000,000 Warrants will be issued. The Warrants will be
issued under a Warrant Agreement (the "Warrant Agreement"), to be dated as of
, 1994, between the Company and Citibank, N.A., as Warrant Agent
(the "Warrant Agent"). The following statements with respect to the Warrants
are summaries of the detailed provisions of the Warrant Agreement, the form of
which is filed as an exhibit to the Registration Statement. Wherever particular
provisions of the Warrant Agreement or terms defined therein are referred to,
such provisions or definitions are incorporated by reference as a part of the
statements made, and the statements are qualified in their entirety by such
reference.
A Warrant will not require, or entitle, a Holder to sell or purchase a U.S.
Treasury security to or from the Company. The Company will make only a cash
settlement, if any, with respect to the Warrants.
The Warrants will expire on August 25, 1995 (the "Expiration Date") or on
such earlier date as described under "Exercise of Warrants" and "Delisting of
Warrants". The Warrants will be automatically exercised on the Exercise Date,
as set forth under "Exercise of Warrants", and are not exercisable at the
option of the Holder. The term "New York Business Day", as used herein, means
any day other than a Saturday or a Sunday or a day on which commercial banks in
The City of New York are required or authorized by law or executive order to be
closed.
The Warrants will be unsecured contractual obligations of the Company and
will rank on a parity with the Company's other unsecured contractual
obligations and with the Company's unsecured and unsubordinated debt. However,
since the Company is a holding company, the right of the Company, and hence the
right of creditors of the Company (including Holders of the Warrants), to
participate in any distribution of the assets of any subsidiary upon its
liquidation or reorganization or otherwise is necessarily subject to the prior
claims of creditors of the subsidiary, except to the extent that claims of the
Company itself as a creditor of the subsidiary may be recognized. In addition,
dividends, loans and advances from certain subsidiaries, including Merrill
Lynch, Pierce, Fenner & Smith Incorporated, to the Company are restricted by
net capital requirements under the Securities Exchange Act of 1934, as amended,
and under rules of certain exchanges and other regulatory bodies.
CASH SETTLEMENT VALUE
The Cash Settlement Value of a Warrant will be determined on the Exercise
Date as the amount which is the greater of:
(i) $100 x 4 x (Spot Yield - Strike Yield), and
(ii) $0
The "Strike Yield" will equal the CMT Yield on the date the Warrants are
priced by the Company for initial offering to the public. The "Spot Yield" will
be determined on the Exercise Date by Merrill Lynch, Pierce, Fenner & Smith
Incorporated (the "Calculation Agent"), an affiliate of the Company. The "Spot
Yield will be determined as follows:
(i) The Spot Yield will equal the rate which appears on Telerate Page
7052, "WEEKLY AVG YIELDS ON TREASURY CONSTANT MATURITIES ", under the
column entitled "5 YR", which appears as of 2:30 P.M., New York time, on
the Exercise Date. "Telerate Page 7052" means the display designated as
page 7052 on the Dow Jones Telerate Service (or such page as may replace
page 7052 on that service). The rate which appears on Telerate Page 7052
under the column entitled "5 YR" is the rate described in paragraph (ii)
below published in the most recent H.15(519) (as defined below).
(ii) If the Spot Yield as described in clause (i) is not available by
2:30 P.M., New York City time, on the Exercise Date, the Spot Yield will
equal the one-week average yield on 5-year United States Treasury
securities at "constant maturity", as published in the most recent
H.15(519) available on the Exercise Date, in the column "Week Ending" for
the most recent date opposite the heading "Treasury constant maturities, 5-
Year." "H.15(519)" means the weekly statistical release designated as such,
published by the Board of Governors of the Federal Reserve System.
S-12
<PAGE>
(iii) If the most recent H.15(519) available on the Exercise Date as
described in clause (ii) above was published more than fourteen calendar
days prior to the Exercise Date, the Spot Yield will equal the one-week
average yield on 5-year United States Treasury securities at "constant
maturity" as otherwise announced by the Federal Reserve Bank of New York on
the Exercise Date for the preceding week.
(iv) If the Spot Yield as described in clause (iii) is not announced by
3:00 p.m., New York City time, on the Exercise Date, the Spot Yield will be
calculated by the Calculation Agent and will be a yield to maturity
(expressed as a bond equivalent and as a decimal rounded, if necessary, to
the nearest one hundred-thousandth of a percentage point with five one-
millionths of a percentage point rounded up, on the basis of a year of 365
days, applied on a daily basis) based on the arithmetic mean of the
secondary market offer prices as of approximately 3:30 p.m., New York City
time, on the Exercise Date of three leading primary United States
government securities dealers in The City of New York selected by the
Calculation Agent (from five such dealers and eliminating the highest
quotation (or, in the event of equality, one of the highest) and the lowest
quotation (or, in the event of equality, one of the lowest)) for Treasury
Notes with an original maturity of approximately five years, a remaining
term to maturity of not less than four years and in an amount of
$100,000,000. If three or four (and not five) of such dealers are quoting
as described in this clause (iv), then the Spot Yield will be based on the
arithmetic mean of the bid prices obtained and neither the highest nor
lowest of such quotations will be eliminated.
(v) If fewer than three dealers selected by the Calculation Agent are
quoting as described in clause (iv), the Spot Yield will be calculated by
the Calculation Agent and will be a yield to maturity (expressed as a bond
equivalent and as a decimal rounded, if necessary, to the nearest one
hundred-thousandth of a percentage point with five one-millionths of a
percentage point rounded up, on the basis of a year of 365 days, and
applied on a daily basis) based on the arithmetic mean of the secondary
market offer prices as of approximately 3:30 p.m., New York City time, on
the Exercise Date of three leading primary United States government
securities dealers in The City of New York selected by the Calculation
Agent (from five such dealers and eliminating the highest quotation (or, in
the event of equality, one of the highest) and the lowest quotation (or, in
the event of equality, one of the lowest)), for Treasury Notes with an
original maturity of approximately ten years, a remaining term to maturity
closest to five years and in an amount of $100,000,000. If three or four
(and not five) of such dealers are quoting as described in this clause,
then the Spot Yield will be based on the arithmetic mean of the bid prices
obtained and neither the highest nor lowest of such quotes will be
eliminated. If two Treasury Notes with an original maturity of
approximately ten years have remaining terms to maturity equally close to
five years, the quotes for the Treasury Note with the shorter remaining
term to maturity will be used.
The Cash Settlement Value will be rounded, if necessary, to the nearest cent
(with one-half cent being rounded upwards).
Set forth below is an illustration of the Cash Settlement Values of Warrants
on the Exercise Date based on the Strike Yield equal to 5.00% and various
hypothetical Spot Rates. The actual Cash Settlement Value of a Warrant will
depend entirely on the actual Strike Yield and the actual Spot Yield on the
Exercise Date. The illustrative Cash Settlement Values in the table do not
reflect any "time value" for a Warrant, which may be reflected in trading
value, and are not necessarily indicative of potential profit or loss, which
are also affected by purchase price and transaction costs.
<TABLE>
<CAPTION>
HYPOTHETICAL CASH SETTLEMENT
CMT SPOT YIELD VALUE OF A WARRANT
-------------- ------------------
<S> <C>
4.00%................................................. $0.00
4.50%................................................. $0.00
5.00%................................................. $0.00
5.50%................................................. $2.00
6.00%................................................. $4.00
6.50%................................................. $6.00
7.00%................................................. $8.00
</TABLE>
S-13
<PAGE>
BOOK-ENTRY PROCEDURES AND SETTLEMENT
Upon issuance, all Warrants will be represented by one registered global
currency Warrant (the "Global Warrant"). The Global Warrant will be deposited
with, or on behalf of, The Depository Trust Company, as Securities Depository,
and registered in the name of the Securities Depository or a nominee thereof.
Unless and until it is exchanged in whole or in part for Warrants in definitive
form in the limited circumstances described below, the Global Warrant may not
be transferred except as a whole by the Securities Depository to a nominee of
such Securities Depository or by a nominee of such Securities Depository to
such Securities Depository or another nominee of such Securities Depository or
by such Securities Depository or any such nominee to a successor of such
Securities Depository or a nominee of such successor.
The Securities Depository has advised the Company as follows: The Securities
Depository is a limited-purpose trust company organized under the Banking Law
of the State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provision of Section 17A of the
Securities Exchange Act of 1934, as amended. The Securities Depository was
created to hold securities of its participants and to facilitate the clearance
and settlement of securities transactions among its participants in such
securities through electronic book-entry changes in accounts of the
participants, thereby eliminating the need for physical movement of securities
certificates. The Securities Depository's participants include securities
brokers and dealers (including the Underwriter), banks, trust companies,
clearing corporations, and certain other organizations, some of whom (and/or
their representatives) own the Securities Depository. Access to the Securities
Depository book-entry system is also available to others, such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly. Persons who are
not participants may beneficially own securities held by the Securities
Depository only through participants.
Ownership of beneficial interests in the Warrants will be limited to persons
that have accounts with the Securities Depository ("Agent Members") or persons
that may hold interests through Agent Members. The Securities Depository has
advised the Company that upon the issuance of the Global Warrant representing
the Warrants, the Securities Depository will credit, on its book-entry
registration and transfer system, the Agent Members' accounts with the
respective principal amounts of the Warrants represented by the Global Warrant.
Ownership of beneficial interests in the Global Warrant will be shown on, and
the transfer of such ownership interests will be effected only through, records
maintained by the Securities Depository (with respect to interests of Agent
Members) and on the records of Agent Members (with respect to interests of
persons held through Agent Members). The laws of some states may require that
certain purchasers of securities take physical delivery of such securities in
definitive form. Such limits and such laws may impair the ability to own,
transfer or pledge beneficial interests in the Global Warrant.
So long as the Securities Depository, or its nominee, is the registered owner
of the Global Warrant, the Securities Depository or its nominee, as the case
may be, will be considered the sole owner or Holder of the Warrants represented
by the Global Warrant for all purposes under the Warrant Agreement. Except as
provided below, owners of beneficial interests in the Global Warrant will not
be entitled to have the Warrants represented by the Global Warrant registered
in their names, will not receive or be entitled to receive physical delivery of
the Warrants in definitive form and will not be considered the owners or
Holders thereof under the Warrant Agreement. Accordingly, each person owning a
beneficial interest in the Global Warrant must rely on the procedures of the
Securities Depository and, if such person is not an Agent Member, on the
procedures of the Agent Member through which such person owns its interest, to
exercise any rights of a Holder under the Warrant Agreement. 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 Warrant desires to give or take any action which a
Holder is entitled to give or take under the Warrant Agreement, the Securities
Depository would authorize the Agent Members holding the relevant beneficial
interests to give or take such action, and such Agent Members would authorize
beneficial owners owning through such Agent Members to give or take such action
or would otherwise act upon the instructions of beneficial owners through them.
S-14
<PAGE>
The Cash Settlement Value in exercise of Warrants registered in the name of
the Securities Depository or its nominee will be paid by the Warrant Agent to
the Agent Members or, in the case of delisting, to the Securities Depository.
None of the Company, the Warrant Agent or any other agent of the Company or
agent of the Warrant Agent will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests or for supervising or reviewing any records relating to
such beneficial ownership interests. The Company expects that the Warrant
Agent, upon the receipt of payment of the Cash Settlement Value in respect of
the Global Warrant, will pay the relevant Agent Member in an amount
proportionate to its beneficial interest in the Global Warrant and that such
Agent Member will credit the accounts of the beneficial owners of such
Warrants. The Company expects that the Securities Depository, in the case of
delisting, upon receipt of payment of the Cash Settlement Value in respect of
the Global Warrant, will credit the accounts of the Agent Members with payment
in amounts proportionate to their respective beneficial interests in the Global
Warrant so delisted, as shown on the records of the Securities Depository. The
Company also expects that payments by Agent Members to owners of beneficial
interests in the Global Warrant will be governed by standing customer
instructions and customary practices, as is now the case with securities held
for the accounts of customers in bearer form or registered in "street name",
and will be the responsibility of such Agent Members. It is suggested that
purchasers of Warrants with accounts at more than one brokerage firm effect
transactions in the Warrants, only through the brokerage firm or firms which
hold that purchaser's Warrants.
If the Securities Depository is at any time unwilling or unable to continue
as depository and a successor Securities Depository is not appointed by the
Company within 90 days or if the Company is subject to certain events in
bankruptcy, insolvency or reorganization, the Company will issue Warrants in
definitive form in exchange for the Global Warrant. In addition, the Company
may at any time determine not to have the Warrants represented by the Global
Warrant and, in such event, will issue Warrants in definitive form in exchange
for the Global Warrant. In any such instance, an owner of a beneficial interest
in the Global Warrant will be entitled to have a number of Warrants equivalent
to such beneficial interest registered in its name and will be entitled to
physical delivery of such Warrants in definitive form.
EXERCISE OF WARRANTS
The Warrants are not exercisable at the option of the Holder. The Warrants
will be automatically exercised on the fifth New York Business Day immediately
preceding the Expiration Date or, if an Early Expiration Date occurs, the New
York Business Day immediately preceding the Early Expiration Date (the
"Exercise Date").
The Warrant Agent will obtain the Spot Yield on the Exercise Date from
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Calculation Agent"),
an affiliate of the Company, and determine the Cash Settlement Value of the
Warrants. The Warrant Agent will pay the Cash Settlement Value of a Warrant to
the Securities Depository by check on the Expiration Date and, if August 25,
1995 is not a New York Business Day, on the next succeeding New York Business
Day. If an Early Expiration Date occurs, as described below under "Automatic
Exercise Prior to the Expiration Date", the Warrant Agent will pay the Cash
Settlement Value of a Warrant to the Securities Depository by check on the
fifth New York Business Day following the Early Expiration Date (as defined
below). See "Description of the Warrants--Book-Entry Procedures and
Settlement".
LISTING OF THE WARRANTS
Prior to issuance, the Warrants will have been approved for listing by the
American Stock Exchange, subject to official notice of issuance. The American
Stock Exchange will expect to cease trading the Warrants on such Exchange as of
the close of business on the Expiration Date.
S-15
<PAGE>
AUTOMATIC EXERCISE PRIOR TO THE EXPIRATION DATE
In the event that the Warrants are delisted from, or permanently suspended
from trading on, the American Stock Exchange and the Warrants are not
simultaneously accepted for trading pursuant to the rules of another self-
regulatory organization whose rules are filed with the Securities and Exchange
Commission (a "Self-Regulatory Organization") under the Securities Act of 1934,
as amended, the Warrants will expire on the date such delisting or trading
suspension becomes effective (an "Early Expiration Date") and the Warrants will
be automatically exercised on the New York Business Day immediately preceding
such Early Expiration Date, and the Cash Settlement Value, if any (determined
as provided under "Exercise of Warrants"), of such automatically exercised
Warrants will be paid on the fifth New York Business Day following such Early
Expiration Date. Settlement shall otherwise occur as described under "Book-
Entry Procedures and Settlement". The Company will notify Holders as soon as
practicable of such delisting or trading suspension. The Company has agreed in
the Warrant Agreement that it will not seek delisting of the Warrants or
suspension of their trading on the American Stock Exchange.
The Warrants may also expire on the date of occurrence of certain events in
bankruptcy, insolvency or reorganization involving the Company (any such date
also being an "Early Expiration Date") and the Warrants will be automatically
exercised as of the New York Business Day immediately preceding such Early
Expiration Date. The Cash Settlement Value, if any (determined as provided
under "Exercise of Warrants"), of such automatically exercised Warrants will be
due and payable on the fifth New York Business Day following such Early
Expiration Date. Settlement will otherwise occur as described under "Book-Entry
Procedures and Settlement".
MODIFICATION
The Warrant Agreement and the terms of the Warrants may be amended by the
Company and the Warrant Agent, without the consent of the Holders of any
Warrants, for the purpose of curing any ambiguity, or of curing, correcting or
supplementing any defective or inconsistent provision contained therein, or in
any other manner which the Company may deem necessary or desirable and which
will not materially and adversely affect the interests of the Holders of the
Warrants.
The Company and the Warrant Agent also may modify or amend the Warrant
Agreement and the terms of the Warrants, with the consent of the Holders of not
less than a majority in number of the then outstanding Warrants affected,
provided that no such modification or amendment that changes the Spot Yield so
as to adversely affect the Holder, shortens the period of time remaining to the
Expiration Date or otherwise materially and adversely affects the exercise
rights of the Holders of the Warrants or reduces the percentage of the number
of outstanding Warrants, the consent of whose Holders is required for
modification or amendment of a Warrant Agreement or the terms of Warrants may
be made without the consent of the Holders of Warrants affected thereby.
MERGER AND CONSOLIDATION
The Company may consolidate or merge with or into any other corporation, and
the Company may sell, lease or convey all or substantially all of its assets to
any corporation, provided that the corporation (if other than the Company)
formed by or resulting from any such consolidation or merger or which shall
have received such assets shall be a corporation organized and existing under
the laws of the United States of America or a state thereof and shall assume
payment of the Cash Settlement Value with respect to all unexercised Warrants,
according to their tenor, and the due and punctual performance and observance
of all of the covenants and conditions of the Warrant Agreement and of the
Global Warrant to be performed by the Company.
CMT YIELD
GENERAL
U.S. Treasury securities, including those used to calculate the CMT Yield,
are direct obligations of the United States government and carry the full faith
and credit of the United States of America. The Warrants,
S-16
<PAGE>
however, are solely the obligation of the Company and are not backed by the
full faith and credit of the United States. If the CMT Yield is determined
using yields reported on Telerate Page 7052, in H.15(519) or as reported by the
Federal Reserve Bank of New York as described in "Description of the Warrants--
Cash Settlement Value", the CMT Yield will be a one-week average yield on 5-
year United States Treasury securities at "constant maturity" (the "Weekly CMT
Yield"). Yields on Treasury securities at "constant maturity" used to calculate
the Weekly CMT Yield are interpolated from the daily yield curve. This curve,
which relates the yield on a security to its time to maturity, is based upon
the market yields on actively traded Treasury securities in the over-the-
counter market. The constant maturity yield values are derived from the yield
curve at fixed maturities. This method permits estimation of the yield for a
five year maturity, even if no outstanding security has exactly five years
remaining to maturity. If the Weekly CMT Yield cannot be calculated, the CMT
Yield will be determined based on the yield to maturity of certain Treasury
securities on the Exercise Date based on secondary market offer prices of
certain dealers as more fully described in "Description of the Warrants--Cash
Settlement Value". The value of the CMT Yield during the term of the Warrants
will likely not be calculated based on one specific Treasury security.
HISTORICAL INFORMATION ON THE CMT YIELD
The following table sets forth the monthly averages of the daily CMT Yield
from 1989 to the present. The CMT Yield used to calculate the Cash Settlement
Value will be the one-week average yield on 5-year United States Treasury
securities at "constant maturity" for the calendar week preceding the Exercise
Date, or if such yield is not available as described under "Description of the
Warrants--Cash Settlement Value", the yield to maturity on specified United
States Treasury securities on the Exercise Date. The historical experience of
the CMT Yield should not be taken as an indication of future performance and no
assurance can be given that the value of the CMT Yield will not decline and
thereby cause the Cash Settlement Value with respect to the Warrants to equal
zero.
<TABLE>
<CAPTION>
CMT YIELD
---------
<S> <C>
1989: January........................................................ 9.15
February....................................................... 9.27
March.......................................................... 9.51
April.......................................................... 9.30
May............................................................ 8.91
June........................................................... 8.29
July........................................................... 7.83
August......................................................... 8.09
September...................................................... 8.17
October........................................................ 7.97
November....................................................... 7.81
December....................................................... 7.75
1990: January........................................................ 8.12
February....................................................... 8.42
March.......................................................... 8.60
April.......................................................... 8.77
May............................................................ 8.74
June........................................................... 8.43
July........................................................... 8.33
August......................................................... 8.44
September...................................................... 8.51
October........................................................ 8.33
November....................................................... 8.02
December....................................................... 7.73
</TABLE>
S-17
<PAGE>
<TABLE>
<CAPTION>
CMT YIELD
---------
<S> <C>
1991: January........................................................ 7.70
February....................................................... 7.47
March.......................................................... 7.77
April.......................................................... 7.70
May............................................................ 7.70
June........................................................... 7.94
July........................................................... 7.91
August......................................................... 7.43
September...................................................... 7.14
October........................................................ 6.87
November....................................................... 6.62
December....................................................... 6.19
1992: January........................................................ 6.24
February....................................................... 6.58
March.......................................................... 6.95
April.......................................................... 6.78
May............................................................ 6.69
June........................................................... 6.48
July........................................................... 5.84
August......................................................... 5.60
September...................................................... 5.38
October........................................................ 5.60
November....................................................... 6.04
December....................................................... 6.08
1993: January........................................................ 5.83
February....................................................... 5.43
March.......................................................... 5.19
April.......................................................... 5.13
May............................................................ 5.20
June........................................................... 5.22
July........................................................... 5.09
August......................................................... 5.03
September...................................................... 4.73
October........................................................ 4.71
November....................................................... 5.06
December....................................................... 5.15
1994: January (week ending January 7, 1994).......................... 5.21
</TABLE>
- --------
Source: Federal Reserve Board Statistical Release H.15(519) under "Selected
Interest Rates".
S-18
<PAGE>
The following graph sets forth the historical performance of the monthly
averages of the daily CMT Yield from January 1989 through December 1993. PAST
MOVEMENTS OF THE CMT YIELD ARE NOT NECESSARILY INDICATIVE OF THE FUTURE CMT
YIELD. The actual CMT Yield could materially differ from those set forth below.
The CMT Yield for the week ending January 7, 1994 was 5.21%.
[GRAPHIC #1 APPEARS HERE]
Source: Federal Reserve statistical release
The information presented in this Prospectus Supplement relating to the CMT
Yield is furnished as a matter of information only. The fluctuations in the CMT
Yield that have occurred in the past are not necessarily indicative of
fluctuations in that rate which may occur over the term of the Warrants.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
CONCERNING THE WARRANTS
Set forth in full below is the opinion of Brown & Wood, counsel to the
Company, as to certain United States Federal income tax consequences of the
purchase, ownership and disposition of a Warrant. Such opinion is based upon
laws, regulations, rulings and decisions now in effect, all of which are
subject to change (possibly with retroactive effect) or possible differing
interpretations. The following discussion of certain United States Federal
income tax consequences to Holders of the Warrants applies only to a person who
holds a Warrant as a capital asset and does not purport to address the United
States Federal income tax consequences to special classes of investors
including persons who are securities or options dealers, or persons who may
hold the Warrants as part of an integrated transaction (e.g., as part of a
hedge or straddle for tax purposes). Prospective purchasers of Warrants are
urged to consult their own tax advisors as to 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 Warrants arising
under the laws of any other taxing jurisdiction.
S-19
<PAGE>
As used herein, the term "U.S. Holder" means a beneficial owner of a Warrant
that is for United States Federal income tax purposes (i) a citizen or resident
of the United States, (ii) a corporation, partnership or other entity created
or organized in or under the laws of the United States or of any political
subdivision thereof, (iii) an estate or trust the income of which is subject to
United States Federal income taxation regardless of its source or (iv) any
other person whose income or gain in respect of a Warrant is effectively
connected with the conduct of a United States trade or business. As used
herein, the term "non-U.S. Holder" means a Holder of a Warrant that is not a
U.S. Holder.
GENERAL
The United States Federal income tax treatment of the Warrants will depend
upon how the Warrants are characterized for United States Federal income tax
purposes and the United States Federal income tax consequences of the purchase,
ownership and disposition of the Warrants could differ significantly depending
upon whether the Warrants are characterized as "options" or as some financial
instrument other than an option. Prospective investors in the Warrants should
be aware that there are no statutes, regulations, published rulings or judicial
decisions involving the characterization, for United States Federal income tax
purposes, of securities with terms substantially the same as the Warrants.
Accordingly, it is unclear how the Warrants will be characterized for United
States Federal income tax purposes.
U.S. HOLDERS
If the Warrants are characterized as "options" for United States Federal
income tax purposes, then each Warrant should be treated as a "nonequity"
option for purposes of Section 1256 of the Internal Revenue Code of 1986, as
amended (the "Code"), which must be "marked-to-market". Accordingly, under such
circumstances, a U.S. Holder of a Warrant would be required to treat such
Warrant as if sold for its fair market value on the last business day of the
U.S. Holder's taxable year and would be required to recognize taxable gain or
loss for that taxable year in an amount equal to the difference between the
fair market value of the Warrant on the last business day of such taxable year
and the U.S. Holder's adjusted tax basis in the Warrant. A U.S. Holder's
adjusted tax basis in a Warrant would equal such U.S. Holder's initial
investment in the Warrant, increased or decreased by any net gain or loss
recognized by the U.S. Holder in respect of the Warrant in prior taxable years.
In addition, upon the sale, exchange, exercise or expiration of a Warrant, a
U.S. Holder would be required to recognize taxable gain or loss in an amount
equal to the difference between the amount realized upon such sale, exchange,
exercise or expiration and the U.S. Holder's adjusted tax basis in the Warrant.
Any gain or loss recognized by a U.S. Holder of a Warrant in accordance with
the preceding rules would generally be treated as 60 percent long-term capital
gain or loss and 40 percent short-term capital gain or loss.
If the Warrants are not characterized as "options" for United States Federal
income tax purposes, then the United States Federal income tax treatment of the
purchase, ownership and disposition of the Warrants could differ from the
treatment discussed above with the result that the timing and character of
income, gain or loss recognized by a U.S. Holder with respect to a Warrant
could differ from the timing and character of income, gain or loss recognized
with respect to a Warrant had the Warrants been treated as "options" for United
States Federal income tax purposes. For instance, the Warrants could possibly
be characterized as notional principal contracts for United States Federal
income tax purposes. If the Warrants were characterized as notional principal
contracts for United States Federal income tax purposes, then a U.S. Holder of
a Warrant will be required to recognize taxable gain or loss with respect to a
Warrant only upon the sale, exchange, exercise or expiration of the Warrant.
The amount of gain or loss required to be recognized by a U.S. Holder with
respect to a Warrant under such circumstances would be equal to the difference
between the amount realized upon such sale, exchange, exercise or expiration
and the amount of the U.S. Holder's initial investment in the Warrant. Such
gain or loss would generally be treated as long-term capital gain or loss if
the Warrant was held by the U.S. Holder for more than one year. Alternatively,
it is also possible that the Warrants could be characterized, for United States
Federal income tax purposes, as either contingent payment debt instruments or
some other type of commercial or financial contract. In light of the
uncertainty concerning the proper United States Federal income tax
characterization of the Warrants,
S-20
<PAGE>
prospective investors are urged to consult their own tax advisors as to the
proper characterization of the Warrants for United States Federal income tax
purposes.
The Company, where required, currently intends to report any gross proceeds
received upon the sale, exchange or exercise of a Warrant on an IRS Form 1099B.
NON-U.S. HOLDERS
Gains realized on the sale, exchange or exercise of a Warrant by a non-U.S.
Holder will not be subject to United States Federal income or withholding tax
in respect of such amounts, assuming the income is not effectively connected
with a United States trade or business of the non-U.S. Holder. Certain other
exceptions may be applicable, and a non-U.S. Holder should consult its own tax
advisor in this regard.
Under current law, the fair market value of a Warrant may be includible in
the estate of an individual non-U.S. Holder for United States Federal estate
tax purposes, unless an applicable estate tax treaty provides otherwise.
Individual non-U.S. Holders should consult their own tax advisors concerning
the United States Federal estate tax consequences, if any, of investing in the
Warrants.
BACKUP WITHHOLDING
A Holder of a Warrant will be subject to backup withholding at the rate of 31
percent with respect to the gross proceeds upon a sale or exercise of a Warrant
if such Holder fails to supply an accurate taxpayer identification number and
does not establish, when required, that it is an exempt recipient or a non-U.S.
Holder. Any amount withheld under the backup withholding rules would be allowed
as a refund or a credit against the Holder's United States Federal income tax
provided the required information is furnished to the IRS.
USE OF PROCEEDS
A substantial portion of the proceeds from the sale of the Warrants may be
used to hedge market risks with respect to the payment at expiration of the
Warrants. The Company does not intend to confine its hedging activities to any
particular domestic or foreign exchanges.
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter") has
agreed, subject to the terms and conditions of the Underwriting Agreement and a
Terms Agreement, to purchase from the Company all of the Warrants offered
hereby. The Underwriting Agreement and Terms Agreement provide that the
Underwriter will purchase all the Warrants if any are purchased.
The Underwriter has advised the Company that it proposes initially to offer
all or part of the Warrants directly to the public at the offering price set
forth on the cover page of this Prospectus Supplement and to certain dealers at
such price less a concession not in excess of $ . After the initial public
offering, the public offering price and concession may be changed.
An affiliate of the Underwriter will receive a fee from the Company for
assisting the Company in arranging hedging of the Company's risks with respect
to the Warrants.
The underwriting of the Securities will conform to the requirements set forth
in the applicable sections of Schedule E to the By-Laws of the National
Association of Securities Dealers, Inc.
VALIDITY OF SECURITIES
The validity of the Securities will be passed upon for the Company and for
the Underwriter by Brown & Wood, New York, New York.
S-21
<PAGE>
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR BY THE UNDERWRITER. NEITHER THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER AND
THEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Supplement Summary............................................ S-3
Certain Important Information Concerning the Warrants.................... S-6
Risk Factors Relating to the Warrants.................................... S-6
Recent Developments...................................................... S-9
Description of the Warrants.............................................. S-12
CMT Yield................................................................ S-16
Certain United States Federal Income Tax Considerations Concerning the
Warrants................................................................ S-19
Use of Proceeds.......................................................... S-21
Underwriting............................................................. S-21
Validity of Securities................................................... S-21
PROSPECTUS
Available Information.................................................... 2
Incorporation of Certain Documents by Reference.......................... 2
Merrill Lynch & Co., Inc................................................. 3
Use of Proceeds.......................................................... 3
Summary Financial Information............................................ 4
Description of Debt Securities........................................... 7
Description of Debt Warrants............................................. 11
Description of Currency Warrants......................................... 12
Description of Index Warrants............................................ 13
Plan of Distribution..................................................... 18
Experts.................................................................. 18
</TABLE>
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[LOGO OF MERRILL LYNCH & CO., INC. APPEARS HERE]
MERRILL LYNCH & CO., INC.
1,000,000
CONSTANT MATURITY U.S. TREASURY YIELD
INCREASE WARRANTS,
EXPIRING AUGUST 25, 1995
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PROSPECTUS SUPPLEMENT
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MERRILL LYNCH & CO.
, 1994
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<PAGE>
GRAPHICS APPENDIX LIST
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Page Where
Graphic
Appears Description of Graphic or Cross-Reference
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Page S-19 The graph is entitled "CMT Yield--Historical
Performance" "Monthly Averages from January 1989
through December 1993".
The graph sets forth the monthly averages for
the CMT Yield. The vetical axis specifies the
values of the CMT Yield in a range from 4 to
10 percent in increments of 1; the horizontal
axis specifies the time period in increments
of three months beginning with January 1989 and
ending with December 1993.
