<PAGE>
File No. 33-61559
Rule 424(B)(5)
PRELIMINARY AND SUBJECT TO COMPLETION
ISSUE DATE: OCTOBER 13, 1995
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 1, 1995)
[LOGO]
MERRILL LYNCH & CO., INC.
2,000,000 RUSSELL 2000 (Registered Trademark) INDEX* CALL WARRANTS
EXPIRING OCTOBER , 1998
--------------
Each Russell 2000 Index Call Warrant, Expiring October , 1998 (the
"Warrants") will entitle the beneficial owner thereof to receive from Merrill
Lynch & Co., Inc. (the "Company") upon exercise (including automatic exercise)
an amount in U.S. dollars computed by reference to increases in the Russell
2000 Index (the "Index"). Such amount (the "Cash Settlement Value") will equal
the product, if positive, of $15 multiplied by the Percentage Change in the
Index. The "Percentage Change" will equal (i) the Index Spot Price minus the
Index Strike Price, divided by (ii) the Index Strike Price. The Cash Settlement
Value cannot be less than zero. The Index Strike Price will equal the closing
value of the Index on the date the Warrants are priced for initial offering to
the public and the Index Spot Price will be determined upon exercise as more
fully described herein.
The Warrants will be exercisable at the option of the beneficial owner from
the date of the initial delivery of the Warrants until 1:00 p.m., New York City
time, on the second New York Business Day (as defined herein) immediately
preceding the earlier of their expiration on October , 1998 (the "Expiration
Date"), cancellation, or the date of their earlier expiration upon delisting
from, or permanent suspension of trading on, the American Stock Exchange (the
"AMEX") unless the Warrants are simultaneously accepted for trading pursuant to
the rules of another Self-Regulatory Organization (as defined herein). Any
Warrant not exercised at or before 1:00 p.m., New York City time, on the second
New York Business Day immediately preceding the Expiration Date or the date of
their earlier expiration will be deemed automatically exercised on the first
New York Business Day preceding the Expiration Date or, in the case of early
expiration, on the New York Business Day immediately preceding the Early
Expiration Date (as defined herein). A beneficial owner may exercise no fewer
than 100 Warrants at any one time, except in the case of automatic exercise.
The valuation of and payment for any exercised Warrant (including automatic
exercise) may be postponed as a result of the occurrence of certain events. See
"Description of the Warrants". The Warrants will be in book-entry form and,
accordingly, no beneficial owner of Warrants will be entitled to receive a
certificate representing such 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, AND ARE ADVISED TO CAREFULLY CONSIDER THE
INFORMATION UNDER "RISK FACTORS" ON PAGES S-9 TO S-13, "DESCRIPTION OF THE
WARRANTS", "DESCRIPTION OF THE WARRANTS--DELISTING OF THE WARRANTS", "THE
INDEX" AND "CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS CONCERNING
THE WARRANTS".
Prior to issuance, the Warrants will have been approved for listing on the
AMEX under the symbol "RIM.WS", subject to official notice of issuance.
--------------
THESE WARRANTS 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(1) DISCOUNT(1) THE COMPANY(2)
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<S> <C> <C> <C>
Per Warrant............................ $ $ $
- --------------------------------------------------------------------------------
Total Warrants......................... $ $ $
</TABLE>
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(1) The "Price to Public" and "Underwriting Discount" for any single
transaction to purchase 150,000 Warrants or more will be $ per
Warrant and $ , respectively.
(2) 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
October , 1995.
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 October , 1995.
*The use of, and reference to, the term "Russell 2000 Index" herein has been
consented to by Frank Russell Company.
<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
Warrants Offered.............. 2,000,000 Russell 2000 Index Call Warrants,
Expiring October , 1998 (the "Warrants").
Cash Settlement Value......... Each Warrant will entitle the beneficial owner
thereof to receive from the Company the cash
value ("Cash Settlement Value") in U.S. dollars
of the following amount, if positive:
Percentage Change x $15
Percentage Change............. The Percentage Change will equal the following
amount:
Index Spot Price-Index Strike Price
-----------------------------------
Index Strike Price
Closing Index Value........... For any Index Calculation Day, the closing
value in New York of the Index on such date.
Index Spot Price.............. The Closing Index Value on the Valuation Date
relating to an Exercise Date.
Index Strike Price............ The Closing Index Value on the date the
Warrants are priced by the Company for initial
offering to the public.
Index......................... The Russell 2000 Index (the "Index") is a
market capitalization-weighted stock index
designed, calculated, published and presently
disseminated by Frank Russell Company ("FRC").
The Index is designed to track the performance
of the small capitalization segment of the U.S.
equity market. FRC commenced publication of the
Index on January 1, 1987.
The Index is being used by the Company with the
consent of FRC. The Index measures the
aggregate market value of 2000 selected stocks
of corporations domiciled in the U.S. and its
territories and trading on the NYSE, AMEX or
the over-the-counter market.
As of May 31, 1995, the total capitalization of
each of the component stocks of the Index
ranged from approximately U.S. $746.4 million
to U.S. $103.9 million, with the median being
U.S. $231.9 million.
Stocks that constitute the Index may be changed
or substituted by FRC based on certain
criteria. See "The Index" herein. FRC is under
no obligation to continue the calculation and
the dissemination of the Index. If FRC or any
third party discontinues publication of the
Index or any Successor Index, Merrill Lynch,
Pierce, Fenner & Smith Incorporated
S-3
<PAGE>
("MLPF&S"), as Calculation Agent, shall
determine for the remaining term of the
Warrants the applicable Cash Settlement Value
based on the formula and method used in
calculating the Index in effect on the date the
Index or any Successor Index was last
published. See "Risk Factors" herein.
Index Symbol on reporting
services operated by
Bloomberg, L.P...............
RTY
Warrant Agent................. Citibank, N.A.
Calculation Agent............. Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Exercise of Warrants.......... Warrants will be exercisable at the option of
the beneficial owner from the date of the
initial delivery of the Warrants until 1:00
p.m., New York City time, on the second New
York Business Day, as hereinafter defined,
immediately preceding their expiration (whether
on October , 1998 or on the date of earlier
expiration). See "Description of the Warrants--
Exercise and Settlement of Warrants". The
Warrants are also subject to automatic exercise
in the event they cease to be traded pursuant
to the rules of a Self-Regulatory Organization,
as described under "Description of the
Warrants--Automatic Exercise" and cancellation
if the Calculation Agent determines that an
Extraordinary Event has occurred and is
continuing as described under "Description of
the Warrants--Extraordinary Events and Market
Disruption Events". Any Warrant not exercised
at or before 1:00 p.m., New York City time, on
the second New York Business Day immediately
preceding the Expiration Date or the date of
their earlier expiration will be deemed
automatically exercised on the first New York
Business Day immediately preceding the
Expiration Date or, in the case of early
expiration, on the New York Business Day
immediately preceding the Early Expiration
Date.
A beneficial owner may exercise no fewer than
100 Warrants at any one time, except in the
case of automatic exercise. See "Description of
the Warrants--Minimum Exercise Amount". All
exercises of Warrants (other than on the
Expiration Date or an Early Expiration Date)
are subject, at the Company's option, to the
limitation that not more than 20% of the
Warrants originally issued may be exercised on
any Exercise Date and not more than 10% of the
Warrants originally issued may be exercised by
or on behalf of any beneficial owner, either
individually or in concert with any other
beneficial owner, on any Exercise Date, other
than automatic exercise. See "Description of
the Warrants--Maximum Exercise Amount" herein.
Form.......................... The Warrants will be in book-entry form and,
accordingly, no beneficial owner of Warrants
will be entitled to receive a certificate
representing such Warrants. See "Description of
the Warrants--Book-Entry Procedures and
Settlement".
S-4
<PAGE>
Determination of Cash
Settlement Value of
Warrants.....................
The Cash Settlement Value of a Warrant will be
determined on the Valuation Date relating to
the Exercise Date for such Warrant. Except in
the case of automatic exercise, the "Exercise
Date" will be (i) the New York Business Day on
which the Warrant Agent receives irrevocable
notice of exercise and delivery of the Warrants
in book-entry form if such notice and Warrants
are received by 1:00 p.m., New York City time,
or (ii) the first New York Business Day
following the day such notice is received and
Warrants are delivered if such notice and
Warrants are received after 1:00 p.m., New York
City time. In the case of automatic exercise,
the "Exercise Date" will be the first New York
Business Day immediately preceding the
Expiration Date, or, in the case of automatic
exercise upon early expiration, the New York
Business Day immediately preceding the Early
Expiration Date. The "Valuation Date" with
respect to the exercise of a Warrant will be
the relevant Exercise Date, subject to
postponement upon the occurrence of a Market
Disruption Event or an Extraordinary Event. As
used herein, "Index Calculation Day" means any
day on which the New York Stock Exchange (the
"NYSE") is open for trading and the Index or a
Successor Index, if any, is calculated and
published. See "Description of the Warrants--
Exercise and Settlement of Warrants". If the
Company determines that an Extraordinary Event
has occurred and is continuing, and if the
Extraordinary Event is expected by the Company
to continue, the Company may immediately cancel
the Warrants and each Warrant shall be
exercised on the date of such cancellation, and
the Holder of each such Warrant will receive,
in lieu of the Cash Settlement Value of such
Warrant, the Alternative Settlement Amount
determined by the Calculation Agent. See
"Description of the Warrants--Extraordinary
Events and Market Disruption Events".
Listing....................... Prior to issuance, the Warrants will have been
approved for listing on the American Stock
Exchange under the symbol "RIM.WS", subject to
official notice of issuance.
Certain Risk Factors.......... The Warrants involve a high degree of risk,
including the risk of expiring worthless. If a
Warrant is not exercised, and at expiration the
Index Spot Price is less than the Index Strike
Price, the Warrant will expire worthless.
INVESTORS THEREFORE SHOULD BE PREPARED TO
SUSTAIN A TOTAL LOSS OF THE PURCHASE PRICE OF
THEIR WARRANTS.
In general, the stocks comprising the Index
have smaller market capitalizations, less
trading liquidity and greater price volatility
than stocks in other larger capitalization
indexes which are designed to measure the broad
movement of the U.S. stock market. These
factors may adversely affect the value of the
Index and the Warrants.
S-5
<PAGE>
The stocks underlying the Index are traded on
the NYSE, AMEX and in the over-the-counter
market. Certain of these markets have adopted
measures intended to prevent extreme short-term
price fluctuations resulting from order
imbalances. As a result, variations in the
Index may be limited by price limitations on,
or by suspension of trading in, individual
stocks which comprise the Index which may, in
turn, adversely affect the value of the
Warrants or result in a Market Disruption
Event. See "Description of the Warrants--
Extraordinary Events and Market Disruption
Events".
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. To the extent Warrants are exercised,
the number of Warrants outstanding will
decrease, which may result in a decrease in the
liquidity of the Warrants. The trading value of
a Warrant is expected to be dependent upon a
number of complex interrelated factors,
including the value of the Index, the
volatility of the Index, the time remaining to
the expiration of the Warrants, the dividend
rates on the stocks underlying the Index and
interest rates in the United States.
All exercises of Warrants (other than on
automatic exercise) are subject, at the
Company's option, to the limitation that not
more than 20% of the Warrants originally issued
may be exercised on any Exercise Date and not
more than 10% of the Warrants originally issued
may be exercised by or on behalf of any
beneficial owner, either individually or in
concert with any other beneficial owner, on any
Exercise Date. Thus, beneficial owners of
Warrants may under certain circumstances be
prevented from exercising all of their Warrants
on a single Exercise Date. See "Description of
the Warrants--Maximum Exercise Amount". As a
result of any such postponed exercise,
beneficial owners will receive a Cash
Settlement Value determined as of a date later
than the otherwise applicable Valuation Date.
In any such case, as a result of any such
postponement, the Cash Settlement Value
actually received by beneficial owners may be
lower than the otherwise applicable Cash
Settlement Value if the Valuation Date of the
Warrants had not been postponed.
Except for cases of automatic exercise, a
beneficial owner must tender at least 100
Warrants at any one time in order to exercise
Warrants. Thus, except in such cases,
beneficial owners with fewer than 100 Warrants
will need either to sell their Warrants or to
purchase additional Warrants, incurring
transaction costs in either case, in order to
realize proceeds from their investment. At any
time that a beneficial owner must purchase
additional Warrants in order to have the
minimum number of Warrants necessary to elect
to exercise, such beneficial owner will be
subject to the secondary market for Warrants at
the time
S-6
<PAGE>
of any such purchase, including the risk that
there may be a limited number of Warrants
available in such market at such time and the
other factors affecting the secondary market
discussed above. Furthermore, such beneficial
owners incur the risk that there may be
differences between the trading value of the
Warrants and the Cash Settlement Value of the
Warrants.
In the event that the Warrants are delisted
from, or permanently suspended from trading on,
the American Stock Exchange (the "AMEX") and
the Warrants are not simultaneously accepted
for trading pursuant to the rules of another
Self-Regulatory Organization that are filed
with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as
amended, such Warrants not previously exercised
will expire on the date such delisting or
trading suspension becomes effective (the
"Early Expiration Date") and will be deemed
automatically exercised on the New York
Business Day immediately preceding the Early
Expiration Date. At the time of such automatic
exercise, the Warrants may be out-of-the-money
so that the Cash Settlement Value will equal
zero.
There will be a time lag between the time a
beneficial owner gives instructions to exercise
and the time the Index Spot Price relating to
such exercise is determined. The delay will, at
a minimum, amount to several hours and could be
much longer (e.g., an exercise notice received
by the Warrant Agent after 1:00 p.m. on Friday
would generally result in the Index Spot Price
being determined the following Monday). See
"Risk Factors" on page S-11.
The initial public offering price of the
Warrants is in excess of the price a commercial
user of options on the Index might pay for
comparable options involving significantly
greater notional amounts (i.e., the dollar
amounts used to calculate amounts payable on
options).
The Warrants are not standardized stock index
options of the type issued by the Options
Clearing Corporation (the "OCC"), a clearing
agency regulated by the Securities and Exchange
Commission. Purchasers of Warrants must look
solely to the Company for performance of its
obligations to pay the Cash Settlement Value or
Alternative Settlement Amount (as defined
below) upon the exercise of Warrants. Further,
the market for the Warrants is not expected to
be generally as liquid as the market for OCC
standardized options. The OCC does issue
standardized stock index options in which
payments, if any, are determined based on
changes in the Index.
The Calculation Agent is an affiliate of the
Company, and, under certain circumstances,
conflicts of interest may arise. See
"Description of the Warrants--Cash Settlement
Value".
S-7
<PAGE>
Investors are advised to carefully consider the
foregoing risk factors, and the risks,
potential conflicts of interest and other
matters discussed under "Risk Factors",
"Description of the Warrants", "The Index" and
"Certain United States 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
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 Warrants be
experienced with respect to options and option
transactions and understand the risks of stock
index transactions and reach an investment
decision only after carefully considering the
suitability of the Warrants in light of their
particular circumstances and the information
set forth in this Prospectus Supplement and the
accompanying Prospectus. Warrants are not
suitable for persons solely dependent upon a
fixed income, for individual 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>
CERTAIN IMPORTANT INFORMATION CONCERNING THE WARRANTS
A beneficial owner will receive a cash payment upon exercise only if the
Warrants have a Cash Settlement Value in excess of zero on the relevant
Valuation Date. At pricing, the Cash Settlement Value of the Warrants will
equal zero. The Warrants will be "in-the-money" (i.e., their Cash Settlement
Value will exceed zero) on the relevant Valuation Date only if, as of such
date, the value of the Index increases from the date of this Prospectus
Supplement so that the Index Spot Price is above the Index Strike Price. An
increase in the level of the Index from the date of this Prospectus Supplement
will result in a greater Cash Settlement Value for the Warrants, and a decrease
in the level of the Index from the date of this Prospectus Supplement will
result in a lesser or zero Cash Settlement Value for the Warrants. If a Warrant
is not exercised prior to its expiration and, on the Valuation Date with
respect to its expiration, the value of the Index is less than or equal to the
Index Strike Price, the Warrant will expire worthless and the beneficial owner
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.
RISK FACTORS
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 AND
OPTION TRANSACTIONS AND UNDERSTAND THE RISKS OF STOCK INDEX TRANSACTIONS AND
REACH AN INVESTMENT DECISION ONLY AFTER CAREFULLY CONSIDERING ALL OF 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.
Underlying Stocks. The underlying stocks that constitute the Index (the
"Underlying Stocks") have been issued by corporations domiciled in the U.S. and
its territories and traded on the NYSE, AMEX or in the over-the-counter market.
If a Successor Index is substituted for the Index, such Successor Index would
also be based upon stocks issued by corporations domiciled in the U.S. and its
territories and traded on the NYSE, AMEX or in the over-the-counter market.
Investments in securities indexed to the value of small capitalization
companies involve certain risks. In general, the stocks comprising the Index
have smaller market capitalizations, less trading liquidity and greater price
volatility than stocks in other larger capitalization indexes which are
designed to measure the broad movement of the U.S. stock market. These factors
may adversely affect the value of the Index and the Warrants.
The Underlying Stocks are traded on the NYSE, AMEX and in the over-the-
counter market. Certain of these markets have adopted measures intended to
prevent extreme short-term price fluctuations resulting from order imbalances.
Investors should also be aware that certain of these markets may suspend the
trading of individual stocks in certain limited and extraordinary circumstances
including, for example, unusual trading activity in that stock. As a result,
variations in the Index may be limited by price limitations on, or by
suspension of trading in, individual stocks which comprise the Index which may,
in turn, adversely affect the value of the Warrants or result in a Market
Disruption Event. See "Description of the Warrants--Extraordinary Events and
Market Disruption Events".
Offering Price of Warrants. The initial public offering price of the Warrants
is in excess of the price a commercial user of, or dealer in, options on the
Index might pay for comparable options involving significantly larger amounts.
Exercise of Warrants. A beneficial owner may incur transaction costs in
connection with any exercise of Warrants. To the extent Warrants are exercised,
including Warrants exercised by the Underwriter or any of its affiliates, the
number of Warrants outstanding will decrease, which may result in a decrease in
the liquidity of the Warrants.
S-9
<PAGE>
Certain Factors Affecting the Value of the Warrants. 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 AMEX be
suspended permanently unless the Warrants simultaneously are accepted for
trading pursuant to the rules of another self-regulatory organization (a "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, beneficial owners should carefully consider the
trading value of the Warrants, the value of the Index at the time, the time
remaining to expiration and the probable range of Cash Settlement Values and
any related transaction costs.
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 theoretical 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 Index. If the value of the Index increases, the trading value of
a Warrant is expected to increase. If the value of the Index decreases, the
trading value of a Warrant is expected to decrease. It is possible that the
trading value of a Warrant may decline even if there is an increase in the
value of the Index.
(2) The volatility of the Index. If the volatility of the Index
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 time remaining to the Expiration Date of the Warrants. An index
warrant is a "wasting asset", meaning that as the time remaining to the
Expiration Date decreases, the trading value of a Warrant is expected to
decrease.
(4) Interest rates in the United States. In general, if U.S. interest
rates increase, the trading value of the Warrants is expected to increase.
If U.S. interest rates decrease, the trading value of the Warrants is
expected to decrease.
(5) Dividend rates. If dividend rates on the common stocks underlying the
Index increase, the trading value of a Warrant is expected to decrease. If
dividend rates on the common stocks underlying the Index decrease, the
trading value of a Warrant is expected to increase. Changes in the dividend
rates on the common stocks underlying the Index may affect the value of the
Index and therefore the value of the Warrants as described above.
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, because changes in one factor usually cause,
or result from, changes in others.
Minimum Exercise Amount. Except for cases of automatic exercise, a beneficial
owner must tender at least 100 Warrants at any one time in order to exercise
Warrants. Thus, except in cases of automatic exercise, beneficial owners with
fewer than 100 Warrants will need either to sell their Warrants or to purchase
additional Warrants, incurring transaction costs in either case, in order to
realize proceeds from their investment. At any time that a beneficial owner
must purchase additional Warrants in order to have the minimum number of
Warrants necessary to elect to exercise, such beneficial owner will be subject
to the secondary market for Warrants at the time of any such purchase,
including the risk that there may be a limited number of Warrants available in
such market at such time and the other factors affecting the secondary market
discussed above. Furthermore, such beneficial owners incur the risk that there
may be differences between the trading value of the Warrants and the Cash
Settlement Value of such Warrants.
S-10
<PAGE>
Maximum Exercise Amount. All exercises of Warrants (other than on automatic
exercise) are subject, at the Company's option, to the limitation that not more
than 20% of the Warrants originally issued may be exercised on any Exercise
Date and not more than 10% of the Warrants originally issued may be exercised
by or on behalf of any beneficial owner, either individually or in concert with
any other beneficial owner, on any Exercise Date. If any New York Business Day
would otherwise, under the terms of the Warrant Agreement, be the Exercise Date
in respect to more than 20% of the Warrants originally issued, then at the
Company's election 20% of the Warrants originally issued (provided, however,
that no more than 10% of the Warrants originally issued shall be exercised for
the account of any beneficial owner) shall be exercised on such Exercise Date
(selected by the Warrant Agent on a pro rata basis, but if, as a result of such
pro rata selection, any beneficial owner of Warrants would be deemed to have
exercised less than 100 Warrants, as the case may be, the Warrant Agent shall
first select an additional amount of such beneficial owner's Warrants so that
no beneficial owner shall be deemed to have exercised fewer than 100 Warrants),
and the remainder of such Warrants (the "Remaining Warrants") shall be deemed
exercised on the following New York Business Day subject to successive
applications of this provision; provided that any Remaining Warrants which were
exercised on a prior Exercise Date shall be deemed exercised before any other
Warrants exercised on a subsequent Exercise Date. As a result of any such
postponed exercise, beneficial owners will receive a Cash Settlement Value
determined as of a date later than the otherwise applicable Valuation Date. In
any such case, as a result of any such postponement, the Cash Settlement Value
actually received by beneficial owners may be lower than the otherwise
applicable Cash Settlement Value if the Valuation Date of the Warrants had not
been postponed.
Time Lag After Exercise Instructions Given. In the case of any exercise of
Warrants, there will be a time lag between the time a beneficial owner gives
instructions to exercise and the time the Index Spot Price relating to such
exercise is determined. Therefore, a beneficial owner will not be able to
determine, at the time of exercise of a Warrant, the Index Spot Price that will
be used in calculating the Cash Settlement Value of such Warrant (and will thus
be unable to determine such Cash Settlement Value). The delay will, at a
minimum, amount to several hours and could be much longer (e.g., an exercise
notice received by the Warrant Agent after 1:00 p.m. Friday would generally
result in the Index Spot Price being determined the following Monday). Any
downward movement in the level of the Index between the time a beneficial owner
of a Warrant exercises a Warrant and the time the Index Spot Price for such
exercise is determined will result in such beneficial owner receiving a Cash
Settlement Value that is less than the Cash Settlement Value anticipated by
such beneficial owner based on the closing level of the Index most recently
reported prior to exercise. A beneficial owner that has not exercised a Warrant
prior to the second New York Business Day preceding the Expiration Date will,
pursuant to the provision for automatic exercise, have the Index Spot Price
with respect to such Warrant determined on the Index Calculation Day following
the deemed exercise day. The value of the Index may change significantly during
any such period, and such movements could adversely affect the Cash Settlement
Value of the Warrants being exercised.
Further delay may occur if a Market Disruption Event or Extraordinary Event
has occurred, in which case the Cash Settlement Value in respect of exercised
Warrants will be calculated as of the next succeeding Index Calculation Day on
which there is no Market Disruption Event or Extraordinary Event. If the
Calculation Agent determines that on a Valuation Date a Market Disruption Event
or Extraordinary Event has occurred, the Valuation Date shall be postponed to
the first succeeding Index Calculation Day on which no Market Disruption Event
or Extraordinary Event occurs; provided that, if the Valuation Date has not
occurred on or prior to the fifth Index Business Day following an Exercise Date
because of Market Disruption Events, such fifth Index Business Day shall be the
Valuation Date regardless of whether a Market Disruption Event has occurred on
such day; provided further, however, that if an Extraordinary Event has
occurred and is continuing, and if the Extraordinary Event is expected by the
Company to continue, the Company may immediately cancel the Warrants as
described below under "Description of the Warrants--Extraordinary Events and
Market Disruption Events". During any period of delay due to a Market
Disruption Event or Extraordinary Event, the value of the Index may change
significantly, and such change may adversely affect the amount paid on any
Warrants exercised during such period.
S-11
<PAGE>
Automatic Exercise of the Warrants upon Delisting. In the event that the
Warrants are delisted from, or permanently suspended from trading on, the AMEX
and the Warrants are not simultaneously accepted for trading pursuant to the
rules of another Self-Regulatory Organization that are filed with the
Securities and Exchange Commission under the Securities Exchange Act of 1934,
as amended, such Warrants not previously exercised will expire on the date such
delisting or trading suspension becomes effective and will be deemed
automatically exercised on the New York Business Day immediately preceding the
date of such early expiration. At the applicable Valuation Date with respect to
such automatic exercise, the Warrants may be out-of-the-money so that the Cash
Settlement Value would equal zero.
Warrants Not Standardized Options Issued by the Options Clearing Corporation.
The Warrants are not standardized stock index 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 or Alternative
Settlement Amount on the exercise of Warrants. Further, the market for the
Warrants is not expected to be generally as liquid as the market for OCC
standardized options. The OCC does issue standardized stock index options in
which payments, if any, are determined based on changes in the Index.
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, given that the
Company is a holding company, the right of the Company, and hence the right of
creditors of the Company (including beneficial owners 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.
Relationship to the Index. 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. However, unlike options or warrants on
equities or debt securities, which are traded primarily on the basis of the
value of a single underlying security, the trading value of a Warrant is likely
to reflect primarily the extent of the appreciation, if any, of the Index.
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 relative value of the Index, be 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 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 or exercise it prior to expiration will necessarily lose his entire
investment in the Warrant if it expires when the Index Spot Price is less than
or equal to the Index Strike Price.
The fact that Warrants may become valueless upon expiration means that, in
order to recover and realize a return upon his investment, a purchaser of a
Warrant must generally be correct about the direction, timing and magnitude of
anticipated changes in the value of the Index. If the value of the Index does
not increase to an extent sufficient to cover an investor's cost of a 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.
S-12
<PAGE>
Suitability. The AMEX requires that Warrants be sold only to investors with
options-approved accounts and 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 Warrants be experienced with respect to options and
option transactions and understand the risks of stock index transactions and
reach an investment decision only after carefully considering, with their
advisers, the suitability of the Warrants in light of their particular
circumstances. Warrants are not suitable for persons solely dependent upon a
fixed income, for individual 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.
Successor Index. In the event that the Index is not published by Frank
Russell Company ("FRC") but is published by another party acceptable to the
Calculation Agent, then the Index Spot Price for any date thereafter will be
determined based on the closing level of the Index as published by such third
party. If FRC or any third party discontinues publication of the Index and
publishes a successor or substitute index that the Calculation Agent
determines, in its sole discretion, to be comparable to the Index (any such
index being a "Successor Index"), then the Index Spot Price for any date
thereafter will be determined by the Calculation Agent on behalf of the Company
based on the closing level of the Successor Index on such date. If FRC or any
third party makes a material change in the formula for, or the method of
calculating, the Index or any Successor Index, the Calculation Agent shall make
such calculations as may be required to determine the applicable Cash
Settlement Value using the formula and method of calculating the Index or any
Successor Index as in effect prior to such change or modification. If FRC
and/or any third party discontinues publication of the Index and/or any
Successor Index, the Calculation Agent will determine the applicable Cash
Settlement Value based on the formula and method used in calculating the Index
or any Successor Index as in effect on the date the Index or such Successor
Index was last published.
The Company and Its Affiliates. The Underwriter and its affiliates may from
time to time engage in transactions involving the Underlying Stocks for their
proprietary accounts and for other accounts under their management, which may
influence the value of such Underlying Stocks and therefore the value of the
Warrants. The Underwriter and its affiliates will also be the writers of the
hedge of the Company's obligations under the Warrants and will be obligated to
pay to the Company upon exercise of Warrants an amount equal to the value of
the exercised Warrants. See "Use of Proceeds" in the Prospectus and herein.
Accordingly, under certain circumstances, conflicts of interest may arise
between the Underwriter's responsibilities as Calculation Agent with respect to
the Warrants and its obligations under its hedge and its status as a subsidiary
of the Company. Under certain circumstances, the duties of the Underwriter as
Calculation Agent in determining the existence of Extraordinary Events and
Market Disruption Events could conflict with the interests of the Underwriter
as an affiliate of the issuer of the Warrants, Merrill Lynch & Co., Inc., and
with the interests of the beneficial owners of the Warrants.
S-13
<PAGE>
RECENT DEVELOPMENTS
The following summary of consolidated financial information was derived
from, and is qualified in its entirety by reference to, the financial
statements, condensed financial statements, and other information and data
contained in the Company's Annual Report on Form 10-K for the year ended
December 30, 1994, and Quarterly Report on Form 10-Q for the period ended June
30, 1995 (the "Quarterly Report"). See "Incorporation of Certain Documents by
Reference" in the accompanying Prospectus. The condensed consolidated
financial statements contained in the Quarterly Report are unaudited; however,
in the opinion of management of the Company, all adjustments (consisting only
of normal recurring accruals) necessary for a fair statement of the results of
operations have been included.
The 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>
SIX MONTHS ENDED
----------------------
JULY 1, JUNE 30,
INCOME STATEMENT INFORMATION 1994 1995
- ---------------------------- ---------- -----------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C>
Revenues................................................ $9,219,111 $10,788,871
Net revenues(1)......................................... $5,229,547 $ 4,969,677
Earnings before income taxes............................ $1,084,870 $ 843,092
Net earnings............................................ $ 623,568 $ 510,071
Ratio of earnings to fixed charges(2)................... 1.3 1.1
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 30, AT JUNE 30,
BALANCE SHEET INFORMATION 1994 1995
- ------------------------- --------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Total assets...................................... $163,749,327 $174,852,533
Long-term borrowings(3)........................... $ 14,863,383 $ 15,703,594
Stockholders' equity.............................. $ 5,817,545 $ 5,883,238
</TABLE>
- --------
(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,
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.
(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 June 30, 1995,
$753,051,000 of bank loans and $14,975,863,000 of commercial paper were
outstanding. In addition, certain of the Company's subsidiaries lend
securities and enter into repurchase agreements to obtain financing. At
June 30, 1995, cash deposits for securities loaned and securities sold
under agreements to repurchase amounted to $3,614,152,000 and
$52,491,110,000, respectively. From July 1, 1995 to October 6, 1995, long-
term borrowings, net of repayments and repurchases, increased by
approximately $237,374,000.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1995
Financial markets, which were particularly weak during the last half of
1994, improved during the first six months of 1995 as a result of a steadying
U.S. economy, declining interest rates, and heightened investor activity. Net
earnings were $227 million in the first quarter of 1995 and $283 million in
the second quarter,
S-14
<PAGE>
or $510 million for the 1995 first-half. Six-month 1995 net earnings, however,
were down 18% from the $624 million reported in the comparable 1994 period,
which included record first quarter net earnings of $372 million. Total
revenues for the first six months of 1995 were $10,789 million, up 17% over the
1994 first-half. Net revenues in the first six months of 1995 were $4,970
million, down 5% from the comparable 1994 period due primarily to lower
investment banking and commission revenues. Non-interest expenses were $4,127
million, virtually unchanged from the comparable 1994 period.
Commission revenues were $1,450 million for the first half of 1995, down 7%
from the 1994 first-half, primarily as a result of lower mutual fund revenues.
Mutual fund commissions were affected by lower volumes after the 1994 first
quarter as most stock and bond mutual funds declined in value. Sales of mutual
funds, however, increased during the 1995 second quarter as investors were more
active due to strong performances in both stock and bond markets.
Interest and dividend revenues were $6,325 million for the first half of
1995, up 40% from the comparable 1994 period. Interest expense, which includes
dividend expense, increased 46% from the first half of 1994 to $5,819 million.
Net interest profit declined 4% to $506 million primarily due to a more
significant increase in interest-bearing liabilities relative to the increase
in interest-earning assets during the period, as well as the continued
flattening of the yield curve.
Principal transactions revenues increased 5% from the first half of 1994 to
$1,289 million. Taxable fixed-income trading revenues increased due, in part,
to higher revenues from corporate bonds and preferred stock, high-yield bonds,
and non-U.S. government and agencies securities. Trading results in mortgage-
backed products were negatively affected by reduced market liquidity after the
1994 first quarter and fluctuations in interest rates, leading to a loss. Net
trading results from mortgage-backed products were positive, however, when
combined with related net interest income. Trading revenues in U.S. Government
and agencies securities were down from record 1994 levels as lower interest
rates in the current period reduced volatility. Revenues from interest rate and
currency swaps increased due to slightly higher volumes in non-U.S. dollar and
U.S. dollar denominated transactions. Municipal securities revenues were down
from record 1994 levels as declining interest rates and discussions of possible
tax law changes decreased investor demand. Equities and equity derivatives
trading revenues were virtually unchanged, while foreign exchange and
commodities trading revenues decreased due primarily to lower commodity trading
volume.
Investment banking revenues were $584 million, down 24% from the first half
of 1994, as domestic and global industrywide underwriting volume declined 24%
and 22%, respectively, compared to volumes in the 1994 first-half. Although
down for the 1995 six-month period, second quarter 1995 industrywide domestic
underwriting volume increased 30% from the 1995 first quarter and 16% from the
1994 second quarter as a result of declining interest rates and stronger stock
and bond markets. Lower underwriting revenues were reported in equities and
high-yield securities, partially offset by higher revenues from corporate debt
and preferred stock issuances, particularly in the 1995 second quarter.
Strategic services revenues, which include merger and acquisition fees and
advisory fees, benefited from increased merger and acquisition advisory
assignments in various industries.
Asset management and portfolio service fees rose 4% from the 1994 first-half
to $913 million, principally as a result of increased fees earned from mutual
fund investor services and asset management activities. Other revenues
decreased 17% from the 1994 first-half to $228 million, due primarily to
realized investment gains in the 1994 period, compared with break-even results
on sales of investments in the 1995 six-month period.
Non-interest expenses were $4,127 million, virtually unchanged from the 1994
first-half. Compensation and benefits expense, which represented approximately
62% of non-interest expenses, decreased 3% from the 1994 first-half due
primarily to lower levels of variable incentive and production-related
compensation. Compensation and benefits expense as a percentage of net revenues
was 51.9% in the first half of 1995, compared with 50.6% in the year-ago
period.
S-15
<PAGE>
Occupancy costs were virtually unchanged from the 1994 first-half. Other
facilities-related costs, which include communications and equipment rental
expense and depreciation and amortization expense, rose 10% primarily due to
increased usage of market information services, as well as higher depreciation
expense from the purchase of technology-related assets over the past year.
Advertising and market development expenses decreased 8% from the 1994 first-
half primarily due to lower travel and recognition program costs. Professional
fees increased 13% from the year-ago period as higher legal fees were partially
offset by lower systems consulting fees. Brokerage, clearing, and exchange fees
increased 2% from the 1994 first-half as a result of higher volumes,
particularly in international markets. Other expenses increased 1% from the
1994 first-half and included a $26 million charge for the write-off of assets
related to a technology contract in the 1995 first quarter.
Income tax expense totaled $333 million for the first half of 1995. The
effective tax rate for the first six months of 1995 was 39.5%, compared with
42.5% in the year-ago period. The decrease in the effective tax rate was
primarily attributable to lower state income taxes, higher tax-exempt interest,
increased deductions for dividends received, and expanded international
business activities.
The Company substantially completed the acquisition of Smith New Court PLC, a
U.K.-based global securities firm, during the 1995 third quarter.
CERTAIN BALANCE SHEET INFORMATION AS OF JUNE 30, 1995
The Company believes that its equity base is adequate relative to the level
and composition of its assets and the mix of its business.
In the normal course of business, the Company underwrites, trades, and holds
non-investment grade securities in connection with its investment banking,
market-making, and derivative structuring activities. These activities are
subject to risks related to the creditworthiness of the issuers of, and the
liquidity of the market for, such securities, in addition to the usual risks
associated with investing in, financing, underwriting, and trading in
investment grade instruments.
At June 30, 1995, the fair value of long and short non-investment grade
trading inventories amounted to $4,036 million and $455 million, respectively,
and in the aggregate (i.e. the sum of long and short trading inventories),
represented 4.8% of aggregate consolidated trading inventories.
At June 30, 1995, the carrying value of extensions of credit provided to
corporations entering into leveraged transactions aggregated $246 million
(excluding unutilized revolving lines of credit and other lending commitments
of $96 million), consisting primarily of senior term and subordinated
financings to 37 medium-sized corporations. At June 30, 1995, the Company had
no bridge loans outstanding. Loans to highly leveraged corporations are carried
at unpaid principal balances less a reserve for estimated losses. The allowance
for loan losses is estimated based on a review of each loan, and consideration
of economic, market, and credit conditions. Direct equity investments made in
conjunction with the Company's investment and merchant banking activities
aggregated $238 million at June 30, 1995, representing investments in 72
enterprises. Equity investments in privately-held companies for which sale is
restricted by government or contractual requirements are carried at the lower
of cost or estimated net realizable value. At June 30, 1995, the Company held
interests in partnerships, totaling $102 million (recorded on the cost basis),
that invest in highly leveraged transactions and non-investment grade
securities. At June 30, 1995, the Company also committed to invest an
additional $87 million in partnerships that invest in leveraged transactions.
S-16
<PAGE>
The Company's insurance subsidiaries hold non-investment grade securities. As
a percentage of total insurance investments, non-investment grade securities
were 4.8% at June 30, 1995. Non-investment grade securities of insurance
subsidiaries are classified as available-for-sale and are carried at fair
value.
At June 30, 1995, the largest non-investment grade concentration consisted of
government and corporate obligations of a Latin American sovereign totaling
$267 million, of which $47 million represented on-balance-sheet hedges for off-
balance-sheet financial instruments. No one industry sector accounted for more
than 19% of total non-investment grade positions. At June 30, 1995, the Company
held an aggregate carrying value of $344 million in debt and equity securities
of issuers in various stages of bankruptcy proceedings or in default, of which
88% of this amount resulted from the Company's market-making activities in such
securities.
DESCRIPTION OF THE WARRANTS
GENERAL
An aggregate of 2,000,000 Russell 2000 Index Call Warrants, Expiring October
, 1998 (the "Warrants") will be issued. The Warrants will be issued under a
Warrant Agreement (the "Warrant Agreement"), to be dated as of October ,
1995, 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 relating to the Warrants. 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 beneficial owner to sell or
purchase any shares of any stock underlying the Index or any Successor Index or
any other securities to or from the Company. The Company will make only a U.S.
dollar cash settlement, if any, upon exercise of a Warrant. A beneficial owner
will not receive any interest on any Cash Settlement Value or Alternative
Settlement Amount and the Warrants will not entitle the beneficial owners
thereof to any of the rights of holders of any underlying stock or other
securities.
"Holder" means the person in whose name a certificate representing a Warrant
is registered in the records of the Warrant Agent, which, so long as the
Warrants are held in book-entry form, will be CEDE & Co.
The Warrants will be exercisable commencing on the date of initial delivery
of the Warrants, as set forth under "Exercise of Warrants". The Warrants will
expire on October , 1998 (the "Expiration Date") or may expire on an earlier
date as described under "Automatic Exercise". Warrants not exercised at or
prior to 1:00 p.m., New York City time, on the second New York Business Day
immediately preceding the Expiration Date or earlier expiration will be deemed
automatically exercised on the first New York Business Day preceding the
Expiration Date or, in the case of early expiration, on the New York Business
Day immediately preceding the Early Expiration Date. Warrants cancelled upon
the occurrence and continuation of an Extraordinary Event shall be exercised as
described below under "Extraordinary Events and Market Disruption Events". 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, and "Index
Business Day" means any day on which the NYSE is open for trading.
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,
given that the Company is a holding company, the right of the Company, and
hence the right of creditors of the Company (including beneficial owners of the
Warrants), to participate
S-17
<PAGE>
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 ("MLPF&S"), 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 an exercised Warrant is an amount stated in U.S.
dollars that results from the following formula:
Percentage Change x $15
The "Percentage Change" will equal the following amount:
Index Spot Price-Index Strike Price
-----------------------------------
Index Strike Price
The "Index Spot Price" relating to any Exercise Date will be determined by
MLPF&S (the "Calculation Agent") and will equal the Closing Index Value on the
Valuation Date relating to such Exercise Date.
The "Index Strike Price" will equal the Closing Index Value on the date the
Warrants are priced by the Company for initial offering to the public.
The "Index" means the Russell 2000 Index, as presently calculated and
disseminated by FRC, except as otherwise provided herein. See "Description of
the Warrants--The Index".
The Cash Settlement Value will be rounded, if necessary, to the nearest cent
(with one-half cent being rounded upwards).
S-18
<PAGE>
Set forth below are illustrations of the Cash Settlement Values for Warrants
at exercise based upon various hypothetical percentage changes in the value of
the Index. The Index Percentage Change on Valuation Date column indicates the
percentage increase or decrease in the value of the Index Spot Price as
compared to the Index Strike Price at the time of exercise. The actual Cash
Settlement Value of a Warrant will depend entirely on the actual Index
Percentage Change on the applicable Valuation Date relating to 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>
CALL WARRANT
CASH SETTLEMENT
INDEX PERCENTAGE CHANGE ON VALUATION DATE VALUE
----------------------------------------- ---------------
<S> <C>
50% increase.............................................. $7.50
45% increase.............................................. 6.75
40% increase.............................................. 6.00
35% increase.............................................. 5.25
30% increase.............................................. 4.50
25% increase.............................................. 3.75
20% increase.............................................. 3.00
15% increase.............................................. 2.25
10% increase.............................................. 1.50
5% increase............................................... 0.75
No change................................................. 0.00
5% decrease............................................... 0.00
10% decrease.............................................. 0.00
15% decrease.............................................. 0.00
20% decrease.............................................. 0.00
25% decrease.............................................. 0.00
30% decrease.............................................. 0.00
35% decrease.............................................. 0.00
40% decrease.............................................. 0.00
45% decrease.............................................. 0.00
50% decrease.............................................. 0.00
</TABLE>
BOOK-ENTRY PROCEDURES AND SETTLEMENT
Upon issuance, all Warrants held will be represented by one registered global
Warrant (a "Global Warrant"). The Global Warrant will be deposited with, or on
behalf of, The Depository Trust Company, as Securities Depository (the
"Securities Depository" or "DTC"), and registered in the name of the Securities
Depository or a nominee thereof. Unless and until the Global Warrant is
exchanged in whole or in part for Warrants in definitive form in the limited
circumstances described below, such 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. Morgan Guaranty Trust Company of New
York, Brussels office, as operator for the Euroclear System ("Euroclear") and
Cedel Bank, societe anonyme ("Cedel") will hold interests in the Global Warrant
on behalf of their participants through the facilities of DTC.
The Securities Depository has advised the Company as follows: The Securities
Depository is a limited-purpose trust company organized under the Banking Laws
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,
S-19
<PAGE>
and a "clearing agency" registered pursuant to the provisions of Section 17A of
the Securities Exchange Act of 1934, as amended. The Securities Depository was
created to hold securities of its participants 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 number of Warrants represented by such 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 such Global Warrant registered
in their names, will not receive or be entitled to receive physical delivery of
such 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 beneficial owner 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 the Global Warrant desires to give or take any action which a
beneficial owner 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.
The Cash Settlement Value payable upon 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 automatic exercise, 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 any payment of the Cash Settlement
Value in respect of any portion of the Global Warrant, will pay the relevant
Agent Member in an amount proportionate to its beneficial interest in such
Global Warrant being exercised 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 automatic exercise, upon receipt of
any payment of the Cash Settlement Value in respect of all or any portion of
the Global
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Warrant, will credit the accounts of the Agent Members with payment in amounts
proportionate to their respective beneficial interests in the portion of such
Global Warrant so exercised, 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, including exercises, 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.
Cedel and Euroclear. Beneficial owners may hold their interests in Warrants
through Cedel or Euroclear if they are participants of such systems, or
indirectly through organizations which are participants in such systems. Cedel
and Euroclear will hold omnibus positions on behalf of their participants
through the facilities of DTC. All securities in Cedel or Euroclear are held on
a fungible basis without attribution of specific certificates to specific
securities clearance accounts.
Exercises of Warrants by persons holding through Cedel or Euroclear
participants will be effected through DTC, in accordance with DTC rules, on
behalf of the relevant European international clearing system by its
depositary; however, such transactions will require delivery of exercise
instructions to the relevant European international clearing system by the
participant in such system in accordance with its rules and procedures and
within its established deadlines (European time). The relevant European
international clearing system will, if the exercise meets its requirements,
deliver instructions to its depositary to take action to effect its exercise of
the Warrants on its behalf by delivering Warrants through DTC and receiving
payment in accordance with its normal procedures for next-day funds settlement.
Payments with respect to the Warrants held through Cedel or Euroclear will be
credited to the cash accounts of Cedel participants or Euroclear participants
in accordance with the relevant system's rules and procedures, to the extent
received by its depositary. See "Exercise and Settlement of Warrants" herein.
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its participating organizations and
facilitates the clearance and settlement of securities transactions between
Cedel participants through electronic book-entry changes in accounts of Cedel
participants, thereby eliminating the need for physical movement of
certificates. Transactions may be settled in Cedel in any of 28 currencies,
including U.S. dollars. Cedel provides to its participants, among other things,
services for safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing. Cedel
interfaces with domestic markets in several countries. As a professional
depository, Cedel is subject to regulation by the Luxembourg Monetary
Institute. Cedel participants are recognized financial institutions around the
world, including underwriters, securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations and include an
affiliate of the Underwriter. Indirect access to Cedel is also available to
others, such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Cedel participant, either directly
or indirectly.
The Euroclear System was created in 1968 to hold securities for participants
in the Euroclear System and to clear and settle transactions between Euroclear
participants through simultaneous electronic book-entry delivery against
payment, thereby eliminating the need for physical movement of certificates and
any
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risk from lack of simultaneous transfers of securities and cash. Transactions
may now be settled in any of 27 currencies, including U.S. dollars. The
Euroclear System includes various other services, including securities lending
and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements of cross-market transfers with DTC
described above. The Euroclear System is operated by the Brussels, Belgium
office of Morgan Guaranty Trust Company of New York (the "Euroclear Operator")
under contract with Euroclear Clearance System S.C., a Belgium cooperative
corporation (the "Cooperative"). Morgan Guaranty Trust Company of New York
("Morgan") is a member bank of the United States Federal Reserve System. All
operations are conducted by the Euroclear Operator, and all Euroclear
securities clearance accounts and Euroclear cash accounts are accounts with the
Euroclear Operator, not the Cooperative. The Cooperative establishes policy for
the Euroclear System on behalf of Euroclear participants. Euroclear
participants include banks (including central banks), securities brokers and
dealers and other professional financial intermediaries and include an
affiliate of the Underwriter. Indirect access to the Euroclear System is also
available to other firms that clear through or maintain a custodial
relationship with a Euroclear participant, either directly or indirectly.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System, and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawal of
securities and cash from the Euroclear System, and receipt of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts. The Euroclear Operator
acts under the Terms and Conditions only on behalf of Euroclear participants
and has no record of or relationship with persons holding through Euroclear
participants.
All information herein on Cedel and Euroclear is derived from Cedel or
Euroclear, as the case may be, and reflects the policies of such organizations;
such policies are subject to change without notice.
EXERCISE AND SETTLEMENT OF WARRANTS
The Warrants will be exercisable commencing on the date of the initial
delivery of the Warrants, subject to postponement upon the occurrence of an
Extraordinary Event or a Market Disruption Event as described under
"Extraordinary Events and Market Disruption Events" herein, and will expire on
October , 1998 (the "Expiration Date"). Warrants not exercised (including by
reason of any such postponed exercise) at or before 1:00 p.m., New York City
time, on the earlier of (i) the second New York Business Day immediately
preceding the Expiration Date and (ii) the Early Expiration Date, will be
automatically exercised as described under "Automatic Exercise" below, subject
to earlier cancellation as described below under "Extraordinary Events and
Market Disruption Events". See "Minimum Exercise Amount" and "Maximum Exercise
Amount" below.
A beneficial owner may exercise the Warrants on any New York Business Day
during the period from the date of the initial delivery of the Warrants until
1:00 p.m., New York City time, on the earlier of (i) the second New York
Business Day immediately preceding the Expiration Date and (ii) the Early
Expiration Date, by causing (x) such Warrants to be transferred free to the
Warrant Agent on the records of DTC and (y) a duly completed and executed
Exercise Notice to be delivered by an Agent Member on behalf of the beneficial
owner to the Warrant Agent. Forms of Exercise Notice may be obtained from the
Warrant Agent at the Warrant Agent's Office. The Warrant Agent's telephone
number and facsimile transmission number for this purpose are (201) 262-5444
and (201) 262-7521, respectively.
In the case of Warrants held through the facilities of Cedel or Euroclear, a
beneficial owner may exercise such Warrants on any New York Business Day during
the period from the date of initial delivery of the Warrants until 1:00 p.m.,
New York City time, on the earlier of (i) the second New York Business Day
immediately preceding the Expiration Date and (ii) the Early Expiration Date by
causing (x) such Warrants
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to be transferred to the Warrant Agent, by giving appropriate instructions to
the participant holding such Warrants in either the Cedel or Euroclear system,
as the case may be, and (y) a duly completed and executed Exercise Notice to be
delivered on behalf of the beneficial owner by Cedel, in the case of Warrants
held through Cedel, or such participant, in the case of Warrants held through
Euroclear, to the Warrant Agent. Forms of Exercise Notice for Warrants held
through the facilities of either Cedel or Euroclear may be obtained from the
Warrant Agent at the Warrant Agent's Office or from Cedel or Euroclear.
Except for Warrants subject to automatic exercise or held through the
facilities of Cedel or Euroclear, the "Exercise Date" for a Warrant will be (i)
the New York Business Day on which the Warrant Agent receives the Warrant and
Exercise Notice in proper form with respect to such Warrant, if received at or
prior to 1:00 p.m., New York City time, on such day, or (ii) if the Warrant
Agent receives such Warrant and Exercise Notice after 1:00 p.m., New York City
time, on a New York Business Day, then the first New York Business Day
following such New York Business Day.
In the case of Warrants held through the facilities of Cedel or Euroclear,
except for Warrants subject to automatic exercise, the "Exercise Date" for a
Warrant will be (i) the New York Business Day on which the Warrant Agent
receives the Exercise Notice in proper form with respect to such Warrant if
such Exercise Notice is received at or prior to 1:00 p.m., New York City time,
on such day, provided that the Warrant is received by the Warrant Agent by 1:00
p.m., New York City time, on the Valuation Date, or (ii) if the Warrant Agent
receives such Exercise Notice after 1:00 p.m., New York City time, on a New
York Business Day, then the first New York Business Day following such New York
Business Day, provided that the Warrant is received by 1:00 p.m., New York City
time, on the Valuation Date relating to exercises of Warrants on such
succeeding New York Business Day. In the event that the Warrant is received
after 1:00 p.m., New York City time, on the Valuation Date, then the Exercise
Date for such Warrants will be the first New York Business Day following the
day on which such Warrants are received. If a beneficial owner of Warrants held
through the facilities of Cedel or Euroclear has exercised Warrants by
delivering an Exercise Notice in proper form with respect to such Warrants and
the Valuation Date is expected not to be a New York Business Day, such
beneficial owner should make arrangements so that the Warrants are delivered
prior to such Valuation Date in order to ensure that the Exercise Date for such
Warrants is not postponed as described above. In the case of Warrants held
through the facilities of Cedel or Euroclear, in order to ensure proper
exercise on a given New York Business Day, participants in Cedel or Euroclear
must submit exercise instructions to Cedel or Euroclear, as the case may be, by
10:00 a.m., Luxembourg time, in the case of Cedel and by 10:00 a.m., Brussels
time (by telex), or 11:00 a.m., Brussels time (by EUCLID), in the case of
Euroclear. In addition, in the case of book-entry exercises by means of the
Euroclear System, (i) participants must also transmit, by facsimile (facsimile
number (201) 262-7521), to the Warrant Agent a copy of the Exercise Notice
submitted to Euroclear by 1:00 p.m., New York City time, on the desired
Exercise Date and (ii) Euroclear must confirm by telex to the Warrant Agent by
9:00 a.m., New York City time, on the Valuation Date, that the Warrants will be
received by the Warrant Agent on such date; provided, that if such telex
communication is received after 9:00 a.m., New York City time, on the Valuation
Date, the Company will be entitled to direct the Warrant Agent to reject the
related Exercise Notice or waive the requirement for timely delivery of such
telex communication.
To ensure that an Exercise Notice and the related Warrants will be delivered
to the Warrant Agent before 1:00 p.m., New York City time, on a given New York
Business Day, a beneficial owner may need to give exercise instructions to his
broker or other intermediary substantially earlier than 1:00 p.m., New York
City time, on such day or even on the prior New York Business Day. Different
brokerage firms may have different cut-off times for accepting and implementing
exercise instructions from their customers. Therefore, beneficial owners should
consult with their brokers and other intermediaries, if applicable, as to
applicable cut-off times and other exercise mechanics.
Except in the case of Warrants subject to automatic exercise and for Warrants
that upon exercise will entitle the Holder thereof to receive an Alternative
Settlement Amount in lieu of the Cash Settlement
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Amount, if on any Valuation Date the Cash Settlement Amount for any Warrants
would be zero, then the attempted exercise of any such Warrants will be void
and of no effect. Such Warrants will be transferred back to the Agent Member
that submitted them free on the records of DTC and, in any such case, such
beneficial owner will be permitted to re-exercise such Warrants prior to the
Expiration Date or the Early Expiration Date, as the case may be.
The "Valuation Date" for a Warrant will be the applicable Exercise Date,
subject to postponement upon the occurrence of an Extraordinary Event or a
Market Disruption Event as described below under "Extraordinary Events and
Market Disruption Events" or as a result of the exercise of a number of
Warrants exceeding the limits on exercise described below under "Maximum
Exercise Amount". "Index Calculation Day" means any day on which the NYSE is
open for trading and the Index or a Successor Index, if any, is calculated and
published. The following is an illustration of the timing of an Exercise Date
and the ensuing Valuation Date, assuming (i) that all relevant dates are New
York Business Days and Index Calculation Days, (ii) the absence of any
intervening Extraordinary Event or Market Disruption Event and (iii) the number
of exercised Warrants does not exceed the maximum permissible amount. If the
Warrant Agent receives a beneficial owner's Warrants and Exercise Notice in
proper form at or prior to 1:00 p.m., New York City time, on Wednesday, October
25, 1995, the Exercise Date for such Warrants will be Wednesday, October 25th
and the Valuation Date for such Warrants will be Wednesday, October 25th
(except that in the case of Warrants held through the facilities of Cedel or
Euroclear, the Warrants must be received by 1:00 p.m., New York City time, on
the Valuation Date; if such Warrants are received after such time, then the
Exercise Date for such Warrants will be the day on which such Warrants are
received or, if such day is not a New York Business Day, the next succeeding
New York Business Day, and the Valuation Date for such Warrants will be the
first Index Calculation Day following such Exercise Date).
Following receipt of Warrants and the related Exercise Notice in proper form,
the Warrant Agent will, not later than 10:00 a.m., New York City time, on the
New York Business Day following the applicable Valuation Date (i) obtain the
Index Spot Price from the Calculation Agent (which will be the Closing Index
Value on such Valuation Date), (ii) determine the Cash Settlement Value of such
Warrants and (iii) advise the Company of the aggregate Cash Settlement Value of
the exercised Warrants. The Company will be required to make available to the
Warrant Agent, no later than 3:00 p.m., New York City time, on the fourth New
York Business Day following the Valuation Date, funds in an amount sufficient
to pay such aggregate Cash Settlement Value. If the Company has made such funds
available by such time, the Warrant Agent will thereafter be responsible for
making funds available to each appropriate Agent Member (including Citibank,
N.A. and Morgan as custodians for Cedel and Euroclear, respectively, who, in
turn, will disburse payments to Cedel and Euroclear, as the case may be, who
will be responsible for disbursing such payments to each of their respective
participants, who, in turn, will be responsible for disbursing payments to the
beneficial owner it represents), and such participant will be responsible for
disbursing such payments to the beneficial owner it represents and to each
brokerage firm for which it acts as agent. Each such brokerage firm will be
responsible for disbursing funds to the beneficial owners it represents.
The "Closing Index Value" for any Valuation Date will equal the closing value
in New York of the Index on such date.
"Calculation Agent" means MLPF&S or, in lieu thereof, another firm selected
by the Company to perform the functions of the Calculation Agent in connection
with the Warrants. The Calculation Agent is obligated to carry out its duties
and functions as Calculation Agent in good faith and using its reasonable
judgment. However, MLPF&S, in its capacity as Calculation Agent, will have no
obligation to take the interests of the Company or the beneficial owners into
consideration in the event it determines, composes or calculates the Cash
Settlement Value or Alternative Settlement Amount. The Calculation Agent and
its affiliates may from time to time engage in transactions involving the
Underlying Stocks for their proprietary
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accounts and for other accounts under their management, which may influence the
value of such Underlying Stocks. The Calculation Agent and its affiliates will
also be the writers of the hedge of the Company's obligations under the
Warrants and will be obligated to pay to the Company upon exercise of the
Warrants an amount equal to the value of the Warrants. Accordingly, under
certain circumstances, conflicts of interest may arise between the Calculation
Agent's responsibilities as Calculation Agent with respect to the Warrants and
its obligations under its hedge and its status as a subsidiary of the Company.
In addition, because the Calculation Agent is an affiliate of the Company,
certain conflicts of interest may arise in connection with the Calculation
Agent performing its role as Calculation Agent. The Calculation Agent, as a
registered broker-dealer, is required to maintain policies and procedures
regarding the handling and use of confidential proprietary information, and
such policies and procedures will be in effect throughout the term of the
Warrants to restrict the use of information relating to any calculation of the
Cash Settlement Value prior to its dissemination.
AUTOMATIC EXERCISE
All Warrants for which the Warrant Agent has not received a valid Exercise
Notice at or prior to 1:00 p.m., New York City time, or for which the Warrant
Agent has received a valid Exercise Notice but with respect to which timely
delivery of the relevant Warrant has not been made, together with any Warrants
the Valuation Date for which has at such time been postponed as described under
"Extraordinary Events and Market Disruption Events" below, on (i) the second
New York Business Day immediately preceding the Expiration Date, or (ii) the
close of business on the New York Business Day on which the Warrants are
delisted from, or permanently suspended from trading on, the AMEX and the
Warrants are not simultaneously accepted for trading pursuant to the rules of
another Self-Regulatory Organization (the "Early Expiration Date") will be
deemed automatically exercised on the New York Business Day immediately
preceding such Expiration Date or Early Expiration Date, as the case may be
(such New York Business Day will be deemed the Exercise Date), and the Cash
Settlement Value, if any (determined as provided under "Exercise and Settlement
of Warrants"), of such automatically exercised Warrants will be paid and
settlement shall otherwise occur as described under "Book-Entry Procedures and
Settlement" and "Exercise and Settlement of Warrants". The Company will notify
Holders as soon as practicable of such delisting or trading suspension. The
Company will agree in the Warrant Agreement that it will not seek delisting of
the Warrants or suspension of their trading on the AMEX.
In the event the Warrants are canceled by the Company because of the
continuance of an Extraordinary Event as described under "Extraordinary Events
and Market Disruption Events" below, Warrants not previously exercised shall be
automatically exercised on the basis that the Valuation Date for such Warrants
shall be the Cancellation Date, and the Alternative Settlement Amount of such
automatically exercised Warrants will be paid on the fourth New York Business
Day following such Valuation Date. Settlement shall otherwise occur as
described under "Book-Entry Procedures and Settlement" and "Exercise and
Settlement of Warrants".
MINIMUM EXERCISE AMOUNT
No fewer than 100 Warrants may be exercised by or on behalf of a beneficial
owner at any one time, except in the case of automatic exercise or exercise
upon cancellation of the Warrants as described under "Extraordinary Events and
Market Disruption Events" below. Accordingly, except in the case of automatic
exercise of the Warrants or upon cancellation of the Warrants, beneficial
owners with fewer than 100 Warrants, as the case may be, will need either to
sell their Warrants or to purchase additional Warrants, thereby incurring
transaction costs, in order to realize proceeds from their investment. Warrants
held through one Agent Member (including participants in Cedel or Euroclear)
may not be combined with Warrants held through another Agent Member in order to
satisfy the minimum exercise requirement.
MAXIMUM EXERCISE AMOUNT
All exercises of Warrants (other than on automatic exercise) are subject, at
the Company's option, to the limitation that not more than 20% of the Warrants
originally issued (provided, however, that no more
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than 10% of the Warrants originally issued shall be exercised for the account
of any beneficial owner) may be exercised on any Exercise Date and not more
than 10% of the Warrants originally issued may be exercised by or on behalf of
any beneficial owner, either individually or in concert with any other
beneficial owner, on any Exercise Date. If any New York Business Day would
otherwise, under the terms of the Warrant Agreement, be the Exercise Date in
respect to more than 20% of the Warrants originally issued, then at the
Company's election, 20% of the Warrants originally issued (provided, however,
that no more than 10% of the Call Warrants or the Warrants originally issued
shall be exercised for the account of any beneficial owner) shall be deemed
exercised on such Exercise Date (selected by the Warrant Agent on a pro rata
basis, but if, as a result of such pro rata selection, any beneficial owner of
Warrants would be deemed to have exercised fewer than 100 Warrants, then the
Warrant Agent shall first select an additional amount of such beneficial
owner's Warrants so that no beneficial owner shall be deemed to have exercised
fewer than 100 Warrants), and the remainder of such warrants (the "Remaining
Warrants") shall be deemed exercised on the following New York Business Day
(subject to successive applications of this provision); provided that any
Remaining Warrants for which an Exercise Notice was delivered on a given
Exercise Date shall be deemed exercised before any other Warrants for which an
Exercise Notice was delivered on a later Exercise Date. If any beneficial owner
attempts to exercise more than 10% of the Warrants originally issued on any New
York Business Day, then, at the Company's election, 10% of such Warrants shall
be deemed exercised on such New York Business Day and the remainder shall be
deemed exercised on the following New York Business Day (subject to successive
applications of this provision). As a result of any postponed exercise as
described above, such beneficial owners will receive a Cash Settlement Value
determined as of a date later than the otherwise applicable Valuation Date. In
any such case, as a result of any such postponement, the Cash Settlement Value
actually received by such beneficial owners may be lower than the otherwise
applicable Cash Settlement Value if the Valuation Date of the Warrants had not
been postponed.
SUCCESSOR INDEX
If FRC discontinues publication of the Index and FRC or another entity
publishes a successor or substitute index that the Calculation Agent
determines, in its sole discretion, to be comparable to the Index (any such
index being referred to herein as a "Successor Index"), then, upon the
Calculation Agent's notification of such determination to the Warrant Agent and
the Company, the Calculation Agent will substitute the Successor Index as
calculated by FRC or such other entity for the Index and calculate the Cash
Settlement Value upon an exercise as described above. Upon any selection by the
Calculation Agent of a Successor Index, the Company shall promptly give notice
to the beneficial owners by publication in a United States newspaper with a
national circulation (currently expected to be The Wall Street Journal), within
three New York Business Days of such selection.
If FRC discontinues publication of the Index and a Successor Index is not
selected by the Calculation Agent or is no longer published on any Valuation
Date, the value to be substituted for the Index for any Valuation Date used to
calculate the Cash Settlement Value upon exercise will be a value computed by
the Calculation Agent on each Valuation Date in accordance with the procedures
last used to calculate the Index prior to such discontinuance.
If a Successor Index is selected or the Calculation Agent calculates a value
as a substitute for the Index, such Successor Index or value shall be
substituted for the Index for all purposes, including for purposes of
determining whether a Market Disruption Event or Extraordinary Event exists. If
the Calculation Agent calculates a value as a substitute for the Index, "Index
Calculation Day" shall mean any day on which the Calculation Agent is able to
calculate such value.
If at any time the method of calculating the Index or any Successor Index, as
the case may be, or the value thereof, is changed in a material respect, or if
the Index is in any other way modified so that such Index does not, in the
opinion of the Calculation Agent, fairly represent the value of the Index had
such changes or modifications not been made, then, from and after such time,
the Calculation Agent shall, at the
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close of business in New York, New York, on each Valuation Date, make such
adjustments as, in the good faith judgment of the Calculation Agent, may be
necessary in order to arrive at a calculation of a value of a stock index
comparable to the Index or any Successor Index, as the case may be, as if such
changes or modifications had not been made, and calculate such Closing Index
Value with reference to the Index or any Successor Index, as the case may be,
as adjusted. Accordingly, if the method of calculating the Index or any
Successor Index, as the case may be, is modified so that the value of such
Index or such Successor Index is a fraction or a multiple of what it would have
been if it had not been modified (e.g., due to a split in the Index), the
Calculation Agent shall adjust the Index in order to arrive at a value of the
Index or such Successor Index as if it had not been modified (e.g., as if such
split had not occurred).
EXTRAORDINARY EVENTS AND MARKET DISRUPTION EVENTS
Extraordinary Events. The Warrant Agreement will provide that if the
Calculation Agent determines that an Extraordinary Event has occurred and is
continuing on the Index Business Day with respect to which the Index Spot Price
on a Valuation Date is to be determined (the "Applicable Index Business Day"),
then the Cash Settlement Value in respect of an exercise shall be calculated on
the basis that the Valuation Date shall be the next Index Calculation Day
following an Applicable Index Business Day on which there is no Extraordinary
Event or Market Disruption Event; provided that if a Valuation Date has not
occurred on or prior to the Expiration Date or the Early Expiration Date, the
Holders will receive the Alternative Settlement Amount in lieu of the Cash
Settlement Value which shall be calculated as if the Warrants had been
cancelled on the Expiration Date or the Early Expiration Date, as the case may
be. The Company shall promptly give notice to the beneficial owners by
publication in a United States newspaper with a national circulation (currently
expected to be The Wall Street Journal), if an Extraordinary Event shall have
occurred.
"Extraordinary Event" means any of the following events:
(i) a suspension or absence of trading on the NYSE, AMEX or the over-the-
counter market of all the Underlying Stocks which then comprise the Index
or a Successor Index;
(ii) the enactment, publication, decree or other promulgation of any
statute, regulation, rule or order of any court or any other U.S. or non-
U.S. governmental authority that would make it unlawful for the Company to
perform any of its obligations under the Warrant Agreement or the Warrants;
or
(iii) any outbreak or escalation of hostilities or other national or
international calamity or crises (including, without limitation, natural
calamities that in the reasonable opinion of the Calculation Agent may
materially and adversely affect the economy of the United States or the
trading of securities generally on the NYSE, AMEX or the over-the-counter
market) that has or will have a material adverse effect on the ability of
the Company to perform its obligations under the Warrants or to modify the
hedge of its position with respect to the Index or the Underlying Stocks.
For the purposes of determining whether an Extraordinary Event has occurred:
(1) a limitation on the hours or number of days of trading on an exchange will
not constitute an Extraordinary Event if it results from an announced change in
the regular business hours of such exchange and (2) an "absence of trading" on
an exchange will not include any time when such exchange itself is closed for
trading under ordinary circumstances.
If the Calculation Agent determines that an Extraordinary Event has occurred
and is continuing, and if the Extraordinary Event is expected by the
Calculation Agent to continue, the Company may immediately cancel all
outstanding Warrants by notifying the Warrant Agent of such cancellation (the
date such notice is given being the "Cancellation Date"), and each beneficial
owner's rights under the Warrants and the Warrant Agreement shall thereupon
cease; provided that each Warrant shall be automatically exercised on the basis
that the Valuation Date for such Warrant shall be the Cancellation Date and the
beneficial owner of each such Warrant will receive, in lieu of the Cash
Settlement Value of such Warrant, an amount (the "Alternative Settlement
Amount"), determined by the Calculation Agent, which is the greater of (i) the
average of the last
S-27
<PAGE>
sale prices, as available, of the Warrants on the AMEX (or any successor
securities exchange on which the Warrants are listed) on the 30 trading days
preceding the date on which such Extraordinary Event was declared; provided
that, if the Warrants were not traded on the AMEX (or such successor securities
exchange) on at least 20 of such trading days, no effect will be given to this
clause (i) for the purpose of determining the Alternative Settlement Amount,
and (ii) the amount "X" calculated using the formula set forth below:
T A
X = I + [ - X - ]
2 B
where
I = The Cash Settlement Value of the Warrants determined as described under
"Cash Settlement Value" above, but subject to the following modifications:
(1) if the Cancellation Date for such Warrants is a date on which the
Index or a Successor Index is calculated and published, for the purpose of
determining such Cash Settlement Value, the Index Spot Price will be
determined as of such Cancellation Date except that, if the Index Spot
Price as of such day is less than 90% of the Index Spot Price as of the
immediately preceding Index Calculation Day, then the Index Spot Price will
be deemed to be 90% of the Index Spot Price on such preceding Index
Calculation Day; or
(2) if the Cancellation Date for such Warrants is a date on which the
Index or a Successor Index is not calculated or published, for the purpose
of determining such Cash Settlement Value, the Index Spot Price will be
deemed to be the lesser of (i) the Index Spot Price as of the first Index
Calculation Day immediately preceding the Cancellation Date except that, if
the Index Spot Price as of such day is less than 90% of the Index Spot
Price as of the second Index Calculation Day immediately preceding such
Cancellation Date, 90% of the Index Spot Price as of such second Index
Calculation Day and (ii) the arithmetic average of four amounts, being (a)
the Index Spot Price at each of the three successive Index Calculation Days
immediately preceding the Cancellation Date and (b) the Index Spot Price at
the next Index Calculation Day, provided that if an Extraordinary Event
continues for 30 consecutive days immediately following such Cancellation
Date, then the Calculation Agent shall calculate an amount which, in its
reasonable opinion, fairly reflects the value of the Underlying Stocks on
the Index Calculation Day immediately following such Cancellation Date
which, subject to approval by the Company (such approval not to be
unreasonably withheld), shall for purposes of calculating the amount under
this clause (2)(ii) be treated as the figure arrived at under clause
(2)(ii)(b) above;
T = U.S.$ , the initial offering price per Warrant;
A = the total number of days from but excluding the Cancellation Date for
such Warrants to and including the Expiration Date; and
B = the total number of days from but excluding the date the Warrants were
initially sold to and including the Expiration Date.
For the purposes of determining "I" in the above formula, in the event that
the Calculation Agent and the Company are required to have, but have not, after
good faith consultation with each other and within five days following the
first day upon which such Alternative Settlement Amount may be calculated in
accordance with the above formula, agreed upon a figure under clause (2)(ii)(b)
which fairly reflects the value of the Underlying Stocks on the Cancellation
Date, then the Calculation Agent shall promptly nominate a third party, subject
to approval by the Company (such approval not to be unreasonably withheld), to
determine such figure and calculate the Alternative Settlement Amount in
accordance with the above formula. Such party shall act as an independent
expert and not as an agent of the Company or the Calculation Agent, and its
calculation and determination of the Alternative Settlement Amount shall,
absent manifest error, be final and binding on the Company, the Warrant Agent,
the Calculation Agent and the Holders. Any such calculations will be made
available to Holders for inspection at the Warrant Agent's Office. Neither
S-28
<PAGE>
the Company nor such third party shall have any responsibility for good faith
errors or omissions in calculating the Alternative Settlement Amount. Under
certain circumstances, the duties of MLPF&S as Calculation Agent in determining
the existence of Extraordinary Events could conflict with the interests of
MLPF&S as an affiliate of the issuer of the Warrants, Merrill Lynch & Co., Inc.
Market Disruption Events. If the Calculation Agent determines that on a
Valuation Date a Market Disruption Event has occurred and is continuing, the
Valuation Date shall be postponed to the first succeeding Index Calculation Day
on which no Market Disruption Event occurs; provided that, if the Valuation
Date has not occurred on or prior to the fifth Index Business Day following an
Exercise Date because of Market Disruption Events, the Calculation Agent shall,
on such fifth Index Business Day, calculate an amount which, in its reasonable
opinion, fairly reflects the value of the Underlying Stocks on such day in
order to determine the Cash Settlement Value.
"Market Disruption Event" means with respect to any Index Business Day the
occurrence or existence during the one-half hour period that ends at the
determination of the Closing Index Value for such Index Business Day of:
(i) a suspension, material limitation or absence of trading on the NYSE,
AMEX or the over-the-counter market of 20% or more of the Underlying Stocks
which then comprise the Index or a Successor Index during the one-half hour
period preceding the close of trading on the applicable exchange; or
(ii) the suspension or material limitation on the Chicago Board Options
Exchange (the "CBOE"), Chicago Mercantile Exchange (the "CME") or any other
major futures or securities market of trading in futures or options
contracts related to the Index or a Successor Index during the one-half
hour period preceding the close of trading on the applicable exchange.
For the purposes of determining whether a Market Disruption Event has
occurred: (i) a limitation on the hours or number of days of trading will not
constitute a Market Disruption Event if it results from an announced change in
the regular business hours of the relevant exchange, (ii) a decision to
permanently discontinue trading in the relevant futures or options contract
will not constitute a Market Disruption Event, (iii) a suspension in trading in
a futures or options contract on the Index by a major securities market by
reason of (a) a price change violating limits set by such securities market,
(b) an imbalance of orders relating to such contracts or (c) a disparity in bid
and ask quotes relating to such contracts will constitute a suspension or
material limitation of trading in futures or options contracts related to the
Index, (iv) an absence of trading on an exchange will not include any time when
such exchange is closed for trading under ordinary circumstances, and (v) the
occurrence of an Extraordinary Event described in Clause (i) of Extraordinary
Event will not constitute, and will supersede the occurrence of, a Market
Disruption Event. Under certain circumstances, the duties of MLPF&S as
Calculation Agent in determining the existence of Market Disruption Events
could conflict with the interests of MLPF&S as an affiliate of the issuer of
the Warrants, Merrill Lynch & Co., Inc.
LISTING OF THE WARRANTS
Prior to issuance, the Warrants will have been approved for listing on the
AMEX, subject to official notice of issuance. The AMEX will expect to cease
trading the Warrants on such Exchange as of the close of business on the
Expiration Date.
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 beneficial owners 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 beneficial owners
of the Warrants.
S-29
<PAGE>
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 beneficial
owners of not less than a majority in number of the then outstanding Warrants
affected, provided that no such modification or amendment that changes the
Index Strike Price so as to adversely affect the beneficial owner, shortens the
period of time during which the Warrants may be exercised or otherwise
materially and adversely affects the exercise rights of the beneficial owners
of the Warrants or reduces the percentage of the number of outstanding
Warrants, the consent of whose beneficial owners is required for modification
or amendment of such Warrant Agreement or the terms of such Warrants may be
made without the consent of the beneficial owners 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 or Alternative Settlement Amount 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 Warrants to be performed by the Company.
S-30
<PAGE>
THE INDEX
Unless otherwise stated, all information herein on the Index is derived from
FRC or other publicly available sources. Such information reflects the policies
of FRC as stated in such sources and such policies are subject to change by
FRC. FRC is under no obligation to continue to publish the Index and may
discontinue publication of the Index at any time.
The Index is an index calculated, published and disseminated by FRC, and
measures the composite price performance of stocks of 2000 companies domiciled
in the U.S. and its territories. All 2000 stocks are traded on either the NYSE,
AMEX or the over-the-counter market and form a part of the Russell 3000 Index.
The Russell 3000 Index is composed of the 3,000 largest U.S. companies as
determined by market capitalization and represents approximately 98% of the
investable U.S. equity market. As of May 31, 1995, the average market
capitalization of companies included in the Russell 3000 Index was $1.74
billion.
The Index consists of the smallest 2,000 companies included in the Russell
3000 Index and represents approximately 11% of the total market capitalization
of the Russell 3000 Index. The Index is designed to track the performance of
the small capitalization segment of the U.S. equity market. As of May 31, 1995,
the average market capitalization of companies included in the Index was $288
million.
Only common stocks belonging to corporations domiciled in the U.S. and its
territories are eligible for inclusion in the Russell 3000 Index, and
subsequently the Index. Stocks traded on the different exchanges in the U.S.
but domiciled in other countries are excluded. Preferred stock, convertible
preferred stock, participating preferred stock, paired shares, warrants and
rights are also excluded. Trust receipts, Royalty Trusts, limited liability
companies, OTC Bulletin Board companies, pink sheets, closed-end mutual funds,
and limited partnerships that are traded on any of the exchanges, are also
ineligible for inclusion. Real Estate Investment Trusts and Beneficial Trusts
are eligible for inclusion, however. Generally, only one class of securities of
a company is allowed in the Russell 3000 Index, although exceptions to this
general rule have been made where FRC has determined that each class of
securities acts independent of the other.
The primary criteria used to determine the initial list of securities
eligible for the Russell 3000 Index is total market capitalization which is
defined as the price of the shares times the total number of shares
outstanding. Based on closing values on May 31st of each year, FRC
reconstitutes the composition of the Russell 3000 Index based on the then
existing market capitalization of the companies eligible for inclusion. As of
June 30th of each year, the Index is adjusted to reflect the reconstitution for
that year. Publication of the Index began on January 1, 1987.
As a capitalization-weighted index, Russell 2000 reflects changes in the
capitalization (market value) of the component stocks relative to the
capitalization on a base date. The current Index value is calculated by adding
the market values of the Index's component stocks, which are derived by
multiplying the price of each stock by the number of shares outstanding, to
arrive at the total market capitalization of the 2000 stocks. The total market
capitalization is then divided by a divisor, which represents the "adjusted"
capitalization of the Index on the base date of December 31, 1986. To calculate
the Index, last sale prices will be used for exchange-traded and NASDAQ stocks.
If a component stock is not open for trading, the most recently traded price
for that security will be used in calculating the Index. In order to provide
continuity for the Index's value, the divisor is adjusted periodically to
reflect such events as changes in the number of common shares outstanding for
component stocks, company additions or deletions, corporate restructurings and
other capitalization changes.
All disclosure contained in this Prospectus Supplement regarding the Index,
or its publisher, is derived from publicly available information. All
copyrights and other intellectual property rights relating to the Index are
owned by FRC. FRC has no relationship with the Company or the Warrants; it does
not sponsor, endorse, authorize, sell or promote the Warrants, and has no
obligation or liability in connection with the administration, marketing or
trading of the Warrants.
S-31
<PAGE>
Below is a breakdown of the component stocks of the Index by industry group
as of September 30, 1995:
<TABLE>
<CAPTION>
PERCENTAGE OF INDEX
INDUSTRY NUMBER OF COMPANIES MARKET CAPITALIZATION
- -------- ------------------- ---------------------
<S> <C> <C>
Technology............................ 240 13.0%
Health Care........................... 205 10.6%
Consumer Discretionary and Services... 378 16.4%
Consumer Staples...................... 60 3.0%
Integrated Oils....................... 10 0.5%
Other Energy.......................... 70 3.5%
Materials and Processing.............. 214 10.1%
Producer Durables..................... 150 7.9%
Auto and Transportation............... 89 4.1%
Financial Services, including REITS... 433 23.5%
Utilities............................. 101 5.9%
Other................................. 25 1.5%
----- -----
1,975 100.0%
</TABLE>
Source: FRC.
Note: The Index included fewer than 2000 stocks (1,975) as of September 30,
1995 due to company attrition (e.g., mergers, bankruptcies, etc.).
As of September 30, 1995, the ten largest holdings in the Index represented
2.1% of the aggregate market capitalization of the Index. Thirty-three of the
1,975 stocks in the Index were also components of the S&P 500 Index. These 33
stocks represented 3.1% of the Index market capitalization. The dividend yield
on the Index was 1.48%.
HISTORICAL DATA ON THE INDEX
The following table sets forth the closing level of the Index at the end of
each quarter, in the period from March 1979 through September 1995. All
historical data presented in the following table relating to periods prior to
January 1, 1987 (the date FRC commenced publication of the Index) are presented
as if the Index had existed during such periods and such closing levels have
been calculated hypothetically on the same basis that the Index is calculated.
All historical data presented in the following table relating to periods after
January 1, 1987 are based on actual data from the Index. These historical data
on the Index are not necessarily indicative of the future performance of the
Index or what the value of the Warrants may be. Any historical upward or
downward trend in the closing level of the Index during any period set forth
below is not any indication that the Index is more or less likely to decline at
any time during the term of the Warrants.
<TABLE>
<CAPTION>
QUARTER-END
CLOSING LEVEL
-------------
<C> <S> <C>
1979: March..................................................... 46.94
June...................................................... 49.62
September................................................. 54.68
December.................................................. 55.91
1980: March..................................................... 48.27
June...................................................... 57.47
September................................................. 69.94
December.................................................. 74.80
1981: March..................................................... 80.25
June...................................................... 82.56
September................................................. 67.55
December.................................................. 73.67
</TABLE>
S-32
<PAGE>
<TABLE>
<CAPTION>
QUARTER-END
CLOSING LEVEL
-------------
<C> <S> <C>
1982: March..................................................... 66.21
June...................................................... 64.67
September................................................. 70.84
December.................................................. 88.90
1983: March..................................................... 103.77
June...................................................... 124.17
September................................................. 117.43
December.................................................. 112.27
1984: March..................................................... 104.10
June...................................................... 100.30
September................................................. 105.17
December.................................................. 101.49
1985: March..................................................... 114.92
June...................................................... 118.38
September................................................. 112.65
December.................................................. 129.87
1986: March..................................................... 147.63
June...................................................... 154.23
September................................................. 134.73
December.................................................. 135.00
1987: March..................................................... 166.79
June...................................................... 164.75
September................................................. 170.81
December.................................................. 120.42
1988: March..................................................... 142.15
June...................................................... 151.30
September................................................. 149.09
December.................................................. 147.36
1989: March..................................................... 157.90
June...................................................... 167.43
September................................................. 178.21
December.................................................. 168.31
1990: March..................................................... 163.64
June...................................................... 169.12
September................................................. 126.74
December.................................................. 132.20
1991: March..................................................... 171.01
June...................................................... 167.61
September................................................. 180.16
December.................................................. 189.94
</TABLE>
S-33
<PAGE>
<TABLE>
<CAPTION>
QUARTER-END
CLOSING LEVEL
-------------
<C> <S> <C>
1992: March..................................................... 203.69
June...................................................... 188.64
September................................................. 192.92
December.................................................. 221.01
1993: March..................................................... 229.21
June...................................................... 233.35
September................................................. 252.95
December.................................................. 258.59
1994: March..................................................... 251.06
June...................................................... 240.29
September................................................. 256.12
December.................................................. 250.36
1995: March..................................................... 260.77
June...................................................... 283.63
September................................................. 310.38
</TABLE>
The closing value of the Index on October 11, 1995 was 297.91.
S-34
<PAGE>
The following graph sets forth the historical performance of the Index at the
end of each quarter from March 1979 through September 1995. PAST MOVEMENTS OF
THE INDEX ARE NOT NECESSARILY INDICATIVE OF THE FUTURE INDEX VALUES.
[The graph sets forth the historical quarter-end closing level values of the
Index from March 1979 through September 1995, with the vertical axis specifying
the quarter-end closing level in a range from 0 to 320 in increments of 10 and
the horizontal axis specifying the time period in increments of four months from
March 1979 to September 1995.]
Source: Prepared by the Company from data obtained from FRC.
The Index is a trademark of FRC and has been licensed for use by the Company.
The Warrants are not sponsored, endorsed, sold or promoted by FRC and FRC makes
no representation regarding the advisability of investing in the Warrants.
The Warrants are not sponsored, endorsed, sold or promoted by FRC. FRC makes
no representation or warranty, express or implied, to the owners of the
Warrants or any member of the public regarding the advisability of investing in
securities generally or in the Warrants particularly or the ability of the
Index to track general stock market performance or a segment of the same. FRC's
publication of the Index in no way suggests or implies an opinion by FRC as to
the advisability of investment in any or all of the securities upon which the
Index is based. FRC's only relationship to the Company is the licensing of
certain trademarks, and trade names of FRC and of the Index which is
determined, composed and calculated by FRC without regard to the Company or the
Warrants. FRC is not responsible for and has not reviewed the Warrants or any
associated literature or publications and FRC makes no representation or
warranty express or implied as to their accuracy or completeness, or otherwise.
FRC reserves the right, at any time and without notice, to alter, amend,
terminate or in any way change the Index. FRC has no obligation or liability in
connection with the administration, marketing or trading of the Warrants.
S-35
<PAGE>
FRC DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE INDEX OR
ANY DATA INCLUDED THEREIN AND FRC SHALL HAVE NO LIABILITY FOR ANY ERRORS,
OMISSIONS, OR INTERRUPTIONS THEREIN. FRC MAKES NO WARRANTY, EXPRESS OR IMPLIED,
AS TO RESULTS TO BE OBTAINED BY THE COMPANY, INVESTORS, OWNERS OF THE WARRANTS,
OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDEX OR ANY DATA INCLUDED
THEREIN. FRC MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS
ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE
WITH RESPECT TO THE INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF
THE FOREGOING, IN NO EVENT SHALL FRC HAVE ANY LIABILITY FOR ANY SPECIAL,
PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF
NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
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 beneficial owners 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, currencies 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.
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 beneficial owner of a Warrant that
is not a U.S. Holder.
U.S. HOLDERS
Although there is no authority directly dealing with instruments such as the
Warrants, pursuant to Revenue Ruling 94-63, each Warrant should be treated as a
"non-equity" option for purposes of Section 1256 of the Internal Revenue Code
of 1986, as amended (the "Code"), which must be "marked-to-market".
Accordingly, a U.S. Holder of a Warrant should be required to treat such
Warrant as if sold for its fair market value on the last business day of each
of the U.S. Holder's taxable years (assuming that the U.S. Holder has not
previously disposed of the Warrant) and should be required to recognize taxable
gain or loss for each such taxable year in an amount equal to the difference
between the fair market value of the Warrant on the last business day of each
such taxable year and such U.S. Holder's adjusted tax basis in the Warrant.
Thus, a U.S. Holder of a Warrant may incur United States Federal income tax
liability on an annual basis in respect of any increase in the value of a
Warrant without a corresponding receipt of cash. In addition, a U.S. Holder
should be required to recognize taxable gain or loss upon the sale, exchange,
exercise or expiration of the Warrant 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 such Warrant. In general, for
purposes of applying
S-36
<PAGE>
the preceding rules, a U.S. Holder's adjusted tax basis in a Warrant would
effectively 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. Any gain or loss recognized by a
U.S. Holder 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.
NON-U.S. HOLDERS
In general, 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 beneficial owner 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 beneficial owner fails to supply an accurate taxpayer
identification number (or fails to comply with certain other requirements) 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 beneficial owner'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 prices set
forth on the cover page of this Prospectus Supplement and to certain dealers at
such prices less a concession not in excess of $ . After the initial public
offering, the public offering prices 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 Warrants 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 THE WARRANTS
The validity of the Warrants will be passed upon for the Company and for the
Underwriter by Brown & Wood, New York, New York.
S-37
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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.
---------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Supplement Summary............................................. S-3
Certain Important Information Concerning the Warrants..................... S-9
Risk Factors.............................................................. S-9
Recent Developments....................................................... S-14
Description of the Warrants............................................... S-17
The Index................................................................. S-31
Certain United States Federal Income Tax Considerations Concerning the
Warrants................................................................. S-36
Use of Proceeds........................................................... S-37
Underwriting.............................................................. S-37
Validity of the Warrants.................................................. S-37
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............................................ 8
Description of Debt Warrants.............................................. 12
Description of Currency Warrants.......................................... 13
Description of Index Warrants............................................. 14
Plan of Distribution...................................................... 19
Experts................................................................... 20
</TABLE>
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[LOGO]
MERRILL LYNCH & CO., INC.
2,000,000 RUSSELL 2000 INDEX CALL WARRANTS
EXPIRING OCTOBER , 1998
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PROSPECTUS SUPPLEMENT
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MERRILL LYNCH & CO.
OCTOBER , 1995
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