<PAGE>
PURSUANT TO RULE 424(b)(5)
REGISTRATION NUMBER 33-52647
SUBJECT TO COMPLETION
ISSUE DATE: JANUARY 6, 1995
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MARCH 24, 1994)
LOGO
MERRILL LYNCH & CO., INC.
1,000,000 NIKKEI STOCK INDEX 300* CALL WARRANTS
1,000,000 NIKKEI STOCK INDEX 300 PUT WARRANTS
ALL EXPIRING JANUARY , 1997
---------------
Each Nikkei Stock Index 300 Call Warrant, Expiring January , 1997 (the
"Call 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
Nikkei Stock Index 300 (the "Index"). Such amount (the "Call Cash Settlement
Value") will equal the product, if positive, of $50 multiplied by the Call
Percentage Change in the Index. The "Call Percentage Change" will equal (i)
the Index Spot Price minus the Index Strike Price, divided by (ii) the Index
Strike Price. Each Nikkei Stock Index 300 Put Warrant, Expiring January ,
1997 (the "Put Warrants", and together with the Call Warrants, the "Warrants")
will entitle the beneficial owner thereof to receive from the Company upon
exercise (including automatic exercise) an amount in U.S. dollars computed by
reference to decreases in the Index. Such amount (the "Put Cash Settlement
Value", and together with the Call Cash Settlement Value, the "Cash Settlement
Value") will equal the product, if positive, of $50 multiplied by the Put
Percentage Change in the Index. The "Put Percentage Change" will equal (i) the
Index Strike Price minus the Index Spot 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 in Tokyo 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 delivery of the Warrants until 1:00 p.m., New York City time, on
the second New York Business Day immediately preceding the earlier of their
expiration on January , 1997 (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 Put Warrants or 100 Call 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 RELATING TO THE WARRANTS", "DESCRIPTION OF
THE WARRANTS", "DESCRIPTION OF THE WARRANTS--DELISTING OF THE WARRANTS", "THE
INDEX" AND "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS CONCERNING THE
WARRANTS".
Prior to issuance, the Warrants will have been approved for listing on the
AMEX under the symbol "NKC.WS" for the Call Warrants and "NKP.WS" for the Put
Warrants, 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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO THE
PUBLIC DISCOUNT COMPANY(1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Call Warrant.......................... $ $ $
- --------------------------------------------------------------------------------
Total Call Warrants....................... $ $ $
- --------------------------------------------------------------------------------
Per Put Warrant........................... $ $ $
- --------------------------------------------------------------------------------
Total Put Warrants........................ $ $ $
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Before deducting expenses payable by the Company.
---------------
The Warrants are offered by the Underwriter, subject to prior sale, when, as
and if delivered to and accepted by the Underwriter, subject to certain other
conditions. The Underwriter reserves the right to reject orders in whole or in
part. It is expected that delivery of the Warrants will be made on or about
January , 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 January , 1995.
* The use of, and reference to, the term "Nikkei Stock Index 300" herein has
been consented to by Nihon Keizai Shimbum, Inc.
<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.............. 1,000,000 Nikkei Stock Index 300 Call Warrants,
Expiring January , 1997 (the "Call Warrants")
and 1,000,000 Nikkei Stock Index 300 Put War-
rants, Expiring January , 1997 (the "Put War-
rants", and together with the Call Warrants,
the "Warrants").
Call Cash Settlement Value.... Each Call Warrant will entitle the beneficial
owner thereof to receive from the Company the
cash value ("Call Cash Settlement Value") in
U.S. dollars of the following amount, if posi-
tive:
Call Percentage Change X $50
Call Percentage Change........ The Call Percentage Change will equal the fol-
lowing amount:
Index Spot Price-Index Strike Price
-----------------------------------
Index Strike Price
Put Cash Settlement Value..... Each Put Warrant will entitle the beneficial
owner thereof to receive from the Company the
cash value ("Put Cash Settlement Value") in
U.S. dollars of the following amount, if posi-
tive:
Put Percentage Change X $50
Put Percentage Change......... The Put Percentage Change will equal the fol-
lowing amount:
Index Strike Price-Index Spot Price
-----------------------------------
Index Strike Price
Closing Index Value........... For any Index Calculation Day, the closing
value 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 War-
rants are priced by the Company for initial
offering to the public.
Index......................... The Nikkei Stock Index 300 (the "Index") is a
market capitalization-weighted stock index de-
signed, calculated, published and presently
disseminated by Nihon Keizai Shimbum, Inc.
("NKS"). NKS commenced publication of the In-
dex on October 8, 1993, and has calculated the
historical value of the Index from October 8,
1993 back through October 1, 1982.
S-3
<PAGE>
The Index is being used by the Company with the
consent of NKS. The Index measures the aggre-
gate market value of 300 selected stocks trad-
ing on the Tokyo Stock Exchange (the "TSE")
and is designed to represent as equally as
possible each of thirty-six industry sectors.
The Index value for October 1, 1982 was set at
a value of 100.00.
As of January 5, 1995, the total capitalization
of each of the component stocks of the Index
ranged from approximately U.S. $77.9 billion
to U.S. $930.6 million, with the median being
U.S. $3.9 billion.
Stocks that constitute the Index may be changed
or substituted by NKS based on certain crite-
ria. See "The Index" herein. NKS is under no
obligation to continue the calculation and the
dissemination of the Index. If NKS or any
third party discontinues publication of the
Index or any Successor Index, Merrill Lynch,
Pierce, Fenner & Smith Incorporated
("MLPF&S"), as Calculation Agent, shall deter-
mine 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 Relating to the Warrants" herein.
Index Symbol on reporting
services operated by
Bloomberg, L.P. ............. NEY
Warrant Agent................. Citibank, N.A.
Calculation Agent............. Merrill Lynch, Pierce, Fenner & Smith Incorpo-
rated
Exercise of Warrants.......... Warrants will be exercisable at the option of
the beneficial owner from the date of 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 January , 1997
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 de-
scribed under "Description of the Warrants--
Automatic Exercise" and cancellation if the
Calculation Agent determines that an Extraor-
dinary 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 be-
fore 1:00 p.m., New York City time, on the
second New York Business Day immediately pre-
ceding the Expiration Date or the date of
their earlier expiration will be deemed auto-
matically exercised on the first New York
Business Day immediately pre-
S-4
<PAGE>
ceding 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 Call Warrants and no fewer than 100 Put
Warrants at any one time, except in the case
of automatic exercise. See "Description of the
Warrants--Minimum Exercise Amount". All exer-
cises of Warrants (other than on the Expira-
tion Date or an Early Expiration Date) are
subject, at the Company's option, to the limi-
tation that not more than 20% of either the
Call Warrants or the Put Warrants originally
issued may be exercised on any Exercise Date
and not more than 10% of either the Call War-
rants or the Put Warrants originally issued
may be exercised by or on behalf of any bene-
ficial owner, either individually or in con-
cert with any other beneficial owner, on any
Exercise Date, other than automatic exercise.
See "Description of the Warrants--Maximum Ex-
ercise 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 rep-
resenting such Warrants. See "Description of
the Warrants--Book-Entry Procedures and Set-
tlement".
Determination of Cash
Settlement Value of The Cash Settlement Value of a Warrant will be
Warrants..................... 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 War-
rants 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 exer-
cise, the "Exercise Date" will be the first
New York Business Day immediately preceding
the Expiration Date, or, in the case of auto-
matic 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 first Index Calculation Day following
the relevant Exercise Date, subject to post-
ponement upon the occurrence of a Market Dis-
ruption Event or an Extraordinary Event. As
used herein, "Index Calculation Day" means any
day on which the TSE is open for trading and
the Index or a Successor Index, if any, is
calculated and published. See
S-5
<PAGE>
"Description of the Warrants--Exercise and
Settlement of Warrants". If the Company deter-
mines 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 War-
rants 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 Dis-
ruption Events".
Listing....................... Prior to issuance, the Warrants will have been
approved for listing on the American Stock Ex-
change under the symbol "NKC.WS" for the Call
Warrants and "NKP.WS" for the Put Warrants,
subject to official notice of issuance.
Certain Risk Factors.......... The Warrants involve a high degree of risk, in-
cluding the risk of expiring worthless. If a
Call Warrant is not exercised, and at expira-
tion the Index Spot Price is less than the In-
dex Strike Price, the Call Warrant will expire
worthless. If a Put Warrant is not exercised,
and at expiration the Index Spot Price is
greater than the Index Strike Price, the Put
Warrant will expire worthless. INVESTORS
THEREFORE SHOULD BE PREPARED TO SUSTAIN A TO-
TAL LOSS OF THE PURCHASE PRICE OF THEIR WAR-
RANTS.
The underlying stocks that constitute the Index
have been issued by Japanese companies. In-
vestments in securities indexed to the value
of Japanese equity securities involve certain
risks associated with the Japanese securities
markets, including the risks of volatility in
such markets, government intervention in such
markets, cross-shareholdings in Japanese com-
panies, a lack of public information about
Japanese companies and accounting and finan-
cial standards that differ from those applica-
ble to certain U.S. companies.
Securities prices in Japan are subject to po-
litical, economic, financial and social fac-
tors that apply in Japan. These factors could
negatively affect the Japanese securities mar-
kets. Moreover, the Japanese economy may dif-
fer favorably or unfavorably from the U.S.
economy in such respects as growth of gross
national product, rate of inflation, capital
reinvestment, resources and self-sufficiency.
The stocks underlying the Index are traded on
the TSE. The TSE has adopted certain measures
intended to prevent any extreme short-term
price fluctuation resulting from order imbal-
ances. 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,
S-6
<PAGE>
adversely affect the value of the Warrants or
result in a Market Disruption Event. See "De-
scription 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 exer-
cised, 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 the Index Strike Price and also upon a
number of complex interrelated factors, in-
cluding the value of the Index, the volatility
of the Index, the time remaining to the expi-
ration of the Warrants, the dividend rates on
the stocks underlying the Index, Japanese
yen/U.S. dollar exchange rates and the inter-
est rates in Japan and the United States.
All exercises of Warrants (other than on auto-
matic exercise) are subject, at the Company's
option, to the limitation that not more than
20% of either the Call Warrants or the Put
Warrants originally issued may be exercised on
any Exercise Date and not more than 10% of ei-
ther the Call Warrants or the Put Warrants
originally issued may be exercised by or on
behalf of any beneficial owner, either indi-
vidually or in concert with any other benefi-
cial owner, on any Exercise Date. Thus, bene-
ficial owners of Warrants may under certain
circumstances be prevented from exercising all
of their Call Warrants and/or Put 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 Settle-
ment Value determined as of a date later than
the otherwise applicable Valuation Date. In
any such case, as a result of any such post-
ponement, 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 Call War-
rants and/or the Put Warrants had not been
postponed.
Except for cases of automatic exercise, a bene-
ficial owner must tender at least 100 Call
Warrants or 100 Put Warrants at any one time
in order to exercise Warrants. Thus, except in
such cases, beneficial owners with fewer than
100 Call Warrants or 100 Put Warrants, as the
case may be, 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 invest-
ment. 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 War-
rants at the time of any such purchase, in-
cluding the risk that there may be a limited
number of the appropriate Warrants available
in such market at such time
S-7
<PAGE>
and the other factors affecting the secondary
market discussed above. Furthermore, such ben-
eficial 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 ac-
cepted for trading pursuant to the rules of
another self-regulatory organization that are
filed with the Securities and Exchange Commis-
sion 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 effec-
tive (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 exer-
cise and the time the Index Spot Price relat-
ing to such exercise is determined. The delay
will, at a minimum, amount to almost an entire
day and could be much longer (e.g., an exer-
cise notice received by the Warrant Agent af-
ter 1:00 p.m. on Friday would generally result
in the Index Spot Price being determined the
following Tuesday).
The Index is calculated on the basis of price
quotations for stocks underlying the Index
from the TSE. There will be a time difference
between New York City time and the local time
in Tokyo. To the extent that the AMEX is
closed while the TSE is open, significant
movements in the value of the Index may take
place which will not be reflected in the last
sale price of a Warrant on the AMEX.
The initial public offering price of the War-
rants 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 Ex-
change 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 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.
S-8
<PAGE>
The Calculation Agent is an affiliate of the
Company, and, under certain circumstances,
conflicts of interest may arise. See "Descrip-
tion of the Warrants--Cash Settlement Value".
Investors are advised to carefully consider the
foregoing risk factors, and the risks, poten-
tial conflicts of interest and other matters
discussed under "Risk Factors Relating to the
Warrants", "Description of the Warrants", "The
Index" and "Certain United States Federal In-
come Tax Considerations Concerning the War-
rants", 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 for-
eign stock index transactions and reach an in-
vestment decision only after carefully consid-
ering the suitability of the Warrants in light
of their particular circumstances and the in-
formation set forth in this Prospectus Supple-
ment 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 Uni-
form Gift to Minors Act. INVESTORS SHOULD BE
PREPARED TO SUSTAIN A TOTAL LOSS OF THE PUR-
CHASE PRICE OF THEIR WARRANTS.
S-9
<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 issuance, the Cash Settlement Value of the Warrants will
equal zero. The Call 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. The
Put Warrants will be "in-the-money" on the relevant Valuation Date only if, as
of such date, the value of the Index decreases so that the Index Spot Price is
below 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 Call 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 Call Warrants. A decrease in the level of the Index
will result in a greater Cash Settlement Value for the Put Warrants, and an
increase 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 Put Warrants. If
a Call 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 Call Warrant will expire worthless and the
beneficial owner will have sustained a total loss of the purchase price of such
Call Warrant. Conversely, if a Put Warrant is not exercised prior to its
expiration and, on the Valuation Date with respect to its expiration, the value
of the Index is greater than or equal to the Index Strike Price, the Put
Warrant will expire worthless and the beneficial owner will have sustained a
total loss of the purchase price of such Put Warrant. Investors therefore
should be prepared to sustain a total loss of the purchase price of their
Warrants.
RISK FACTORS RELATING TO THE WARRANTS
THE WARRANTS INVOLVE A HIGH DEGREE OF RISK, INCLUDING THE RISK OF EXPIRING
WORTHLESS. INVESTORS THEREFORE SHOULD BE PREPARED TO SUSTAIN A TOTAL LOSS OF
THE PURCHASE PRICE OF THEIR WARRANTS. IT IS SUGGESTED THAT INVESTORS
CONSIDERING PURCHASING THE WARRANTS BE EXPERIENCED WITH RESPECT TO OPTIONS AND
OPTION TRANSACTIONS AND UNDERSTAND THE RISKS OF FOREIGN 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 have been
issued by Japanese companies. If a Successor Index is substituted for the
Index, such Successor Index would also be based upon stocks issued by Japanese
companies. Investments in securities indexed to the value of Japanese equity
securities involve certain risks. The Japanese securities markets may be more
volatile than U.S. or other securities markets and may be affected by market
developments in different ways than U.S. or other securities markets. Direct or
indirect government intervention to stabilize the Japanese securities markets
and cross-shareholdings in Japanese companies may affect prices and volume of
trading of Japanese equity securities. There is generally less publicly
available information about Japanese companies than about U.S. companies that
are subject to the reporting requirements of the U.S. Securities and Exchange
Commission. Also, Japanese companies are subject to accounting, auditing and
financial reporting standards and requirements that differ from those to which
U.S. reporting companies are subject.
The Tokyo Stock Exchange (the "TSE") has adopted certain measures intended to
prevent any extreme short-term price fluctuation resulting from order
imbalances. These include daily price floors and ceilings intended to prevent
extreme fluctuations in individual stock prices. Any stock listed on the TSE
cannot be traded at a price outside of these limits which are stated in
absolute Japanese yen limits, and not percentage limits, from the closing price
of the stock on the previous day. In addition, when there is a major order
imbalance in a listed stock, the TSE posts a "special bid quote" or a "special
asked quote" for that stock at a specified higher or lower price level than the
stock's last sale price in order to solicit counter orders and
S-10
<PAGE>
balance supply and demand for the stock. Investors should also be aware that
the TSE 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".
Important Considerations Relating to Japan. Securities prices in Japan are
subject to political, economic, financial and social factors that apply in
Japan. These factors (including the possibility that recent or future changes
in the Japanese government's economic and fiscal policies, the possible
imposition of, or changes in, currency exchange laws or other Japanese laws or
restrictions applicable to Japanese companies or investments in Japanese equity
securities and the possibility of fluctuations in the rate of exchange between
currencies) could negatively affect the Japanese securities markets. Moreover,
the Japanese economy may differ favorably or unfavorably from the U.S. economy
in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resources and self-sufficiency.
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.
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. 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.
Investors should also consider factors affecting the economy of Japan. See
"The Index" below and "Important Considerations Relating to Japan" above.
It is possible that the trading value of a Call Warrant may decline even if
there is an increase in the value of the Index and that the trading value of a
Put Warrant may decline even if there is a decrease in the value of the Index.
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 on the value of the Index Strike Price and also 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 Call Warrant is expected to increase and the trading value of a Put
Warrant is expected to decrease. If the value of the Index
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decreases, the trading value of a Call Warrant is expected to decrease and
the trading value of a Put Warrant is expected to increase.
(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 Japan and the United States. In general, if U.S.
interest rates increase, the trading value of the Warrants is expected to
decrease. If U.S. interest rates decrease, the trading value of the
Warrants is expected to increase. If interest rates in Japan increase, the
trading value of a Call Warrant is expected to increase and the trading
value of a Put Warrant is expected to decrease. If interest rates in Japan
decrease, the trading value of a Call Warrant is expected to decrease and
the trading value of a Put Warrant is expected to increase. Changes in
Japanese interest rates may affect the economy of Japan and, in turn, the
Index, and the trading value of the Warrants.
(5) Dividend rates in Japan. If dividend rates on the common stocks
underlying the Index increase, the trading value of a Call Warrant is
expected to decrease and the trading value of a Put Warrant is expected to
increase. If dividend rates on the common stocks underlying the Index
decrease, the trading value of a Call Warrant is expected to increase and
the trading value of a Put Warrant is expected to decrease. Changes in the
dividend rates on the common stocks underlying the Index may directly
affect the value of the Index and therefore the value of the Warrants as
described above.
(6) Japanese yen/U.S. dollar exchange rates. The Cash Settlement Value is
based on a given level of the Index and will not be affected by changes in
the Japanese yen/U.S. dollar exchange rate. However, a number of economic
factors, including the Japanese yen/U.S. dollar exchange rate, could affect
the value of the Underlying Stocks and, therefore, the value of the Index.
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. Some of the factors referred to above are,
in turn, influenced by the political and economic factors discussed above.
Minimum Exercise Amount. Except for cases of automatic exercise, a beneficial
owner must tender at least 100 Call Warrants or 100 Put Warrants at any one
time in order to exercise Warrants. Thus, except in cases of automatic
exercise, beneficial owners with fewer than 100 Call Warrants or 100 Put
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 the appropriate 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.
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 Call Warrants and not more than 20% of the Put Warrants
originally issued may be exercised on any Exercise Date and not more than 10%
of the Call Warrants and not more than 10% of the Put 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 Call
Warrants or more than 20% of the Put Warrants originally issued, then at the
Company's election 20% of the Call Warrants and/or 20% of the Put Warrants,
S-12
<PAGE>
as the case may be, originally issued (provided, however, that no more than 10%
of the Call Warrants and no more than 10% of the Put 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 Call Warrants or 100 Put
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 less 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 almost an entire day 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
Tuesday). Any downward movement, in the case of Call Warrants, or any upward
movement, in the Case of Put Warrants, 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
Business 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 Business 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 Business 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.
Time Difference. The Index is calculated on the basis of price quotations for
stocks underlying the Index from the TSE. There will be a time difference
between New York City time and the local time in Tokyo. To the extent that the
AMEX is closed while the TSE is open, significant movements in the value of the
Index may take place which will not be reflected in the last sale price of a
Warrant on the AMEX.
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<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 (a "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 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.
General Risk Considerations. Options and warrants provide opportunities for
investment and pose risks to investors as a result of fluctuations in the value
of the underlying investment. In general, certain of the risks associated with
the Warrants are similar to those generally applicable to other options or
warrants of private corporate issuers. 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, in the case of
Call Warrants, or the depreciation, in the case of Put Warrants, 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, in the case of Call Warrants, or greater than or equal to, in the
case of Put Warrants, 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 in the case of a Call Warrant or decrease in the case of a Put
Warrant 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. The Cash Settlement Value
S-14
<PAGE>
is based on a given level of the Index and will not be affected by changes in
the Japanese yen/U.S. dollar exchange rate. However, a number of economic
factors, including the Japanese yen/U.S. dollar exchange rate, could affect the
value of the Underlying Stocks and, therefore, the value of the Index.
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 foreign 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.
In the event that the Index is not published by Nihon Keizai Shimbum, Inc.
("NKS") 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 NKS 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 NKS 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 NKS 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 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-15
<PAGE>
RECENT DEVELOPMENTS
The following summary of certain consolidated financial information
concerning the Company was derived from, and is qualified in its entirety by
reference to, the condensed consolidated financial statements and data
contained in the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994; see "Documents Incorporated by Reference". Such condensed
consolidated financial statements are unaudited; however, in the opinion of
management of the Company, all adjustments (consisting only of normal
recurring accruals and a non-recurring charge related to the Company's
decision not to occupy certain office space in 1993) necessary for a fair
statement of the results of operations have been included.
<TABLE>
<CAPTION>
Income Statement Information NINE MONTHS ENDED
- ---------------------------- ------------------------------
SEPTEMBER 24, SEPTEMBER 30,
1993 1994
------------------------------
(IN THOUSANDS, EXCEPT RATIOS)
------------------------------
<S> <C> <C>
Revenues........................................ $ 12,062,041 $ 13,749,334
Net revenues(/1/)............................... $ 7,800,233 $ 7,531,792
Earnings before income taxes and cumulative
effect of change in accounting principle....... $ 1,827,528 $ 1,474,392
Cumulative effect of change in accounting prin-
ciple(/2/)..................................... $ (35,420) $ --
Net earnings.................................... $ 1,011,700 $ 855,147
Ratio of earnings to fixed charges(/3/)......... 1.4 1.2
<CAPTION>
Balance Sheet Information DECEMBER 31, SEPTEMBER 30,
- ------------------------- 1993 1994
------------------------------
(IN THOUSANDS)
------------------------------
<S> <C> <C>
Total assets(/4/)............................... $ 152,910,362 $ 168,394,906
Long-term borrowings(/5/)....................... $ 13,468,900 $ 15,847,957
Stockholders' equity............................ $ 5,485,913 $ 5,704,751
</TABLE>
- --------
Notes--
(1) Net revenues are revenues net of interest expense.
(2) Net earnings for 1993 have been reduced by $35,420,000 for the adoption of
Statement of Financial Accounting Standards No. 112, "Employers'
Accounting for Postemployment Benefits".
(3) For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" consists of earnings from continuing operations before income
taxes and fixed charges. "Fixed charges" consists of interest costs and
that portion of rentals estimated to be representative of the interest
factor.
(4) On January 1, 1994, the Company adopted Financial Accounting Standards
Board Interpretation No. 39, "Offsetting of Amounts Related to Certain
Contracts," which increased assets and liabilities at September 30, 1994
by approximately $12,000,000,000.
(5) To finance its diverse activities, the Company and certain of its
subsidiaries borrow substantial amounts of short-term funds on a regular
basis. Although the amount of short-term borrowings significantly varies
with the level of general business activity, on September 30, 1994,
$362,240,000 of bank loans and $13,599,697,000 of commercial paper were
outstanding. In addition, certain of the Company's subsidiaries lend
securities and enter into repurchase agreements to obtain financing. At
September 30, 1994, cash deposits for securities loaned and securities
sold under agreements to repurchase amounted to $2,128,231,000 and
$56,635,531,000, respectively. From October 1, 1994 to December 30, 1994,
long-term borrowings, net of new issuances and resales, decreased in the
amount of approximately $1,032,739,000.
S-16
<PAGE>
RESULTS OF OPERATIONS FOR THE PERIOD ENDED SEPTEMBER 30, 1994
Financial markets, strong throughout 1993 and the first six weeks of 1994,
weakened as a result of rising interest rates, unsettled currency markets,
volatile stock and bond markets, and investor caution. The broad market
decline, initially triggered by an increase in short-term interest rates in
February 1994 by the Federal Reserve, continued during the remainder of the
period ended September 30, 1994. As a result, volumes in institutional and
retail investor business activities decreased industrywide. These conditions
affected the Company's 1994 third quarter results. Net earnings were $231.6
million in the 1994 third quarter, down 8% from the 1994 second quarter and 36%
from the 1993 third quarter. Net revenues in the 1994 third quarter were $2,302
million, down 4% from the 1994 second quarter and 13% from the 1993 third
quarter, while non-interest expenses were $1,913 million, down 3% from the 1994
second quarter and 4% from the 1993 third quarter.
For the first nine months of 1994, net earnings were $855.1 million, down
$156.6 million (15%) from $1,011.7 million reported in last year's record nine-
month period. Net earnings for the 1993 nine-month period included a $35.4
million cumulative effect charge (net of $25.1 million of applicable income tax
benefits) related to the adoption of Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits". Earnings
before the cumulative effect of the change in accounting principle decreased
18% from $1,047.1 million reported in the comparable 1993 period. Earnings per
common share for the first nine months of 1994 were $3.98 primary and $3.97
fully diluted versus $4.45 primary and $4.42 fully diluted ($4.61 primary and
$4.58 fully diluted, before the 1993 cumulative effect charge) in the prior
year's period. As previously reported, 1993 nine-month results included a non-
recurring pretax lease charge totaling $103.0 million ($59.7 million after
income taxes) related to the Company's decision not to occupy certain office
space at its World Financial Center Headquarters ("Headquarters") facility. An
agreement to sublet this space was entered into in the 1993 fourth quarter.
Total revenues increased 14% from the 1993 nine-month period to $13,749
million. Net revenues (revenues after interest expense) decreased 3% to $7,532
million for the first nine months of 1994.
Commission revenues increased 7% from the 1993 nine-month period to $2,232
million on the strength of higher mutual fund, commodity, and listed securities
transactions commissions. Mutual fund commissions benefited from increased
distribution fees and redemption fees earned on mutual funds sold in prior
periods. Sales of third-party mutual funds were up from a year ago; however,
transactions in such funds declined during the 1994 second and third quarters
relative to the 1994 first quarter. Sales of mutual funds managed by the
Company have increased from the 1993 nine-month period. Commissions on listed
securities benefited from higher trading volume. Other commission revenues
advanced principally as a result of higher revenues from commodity transactions
partially offset by lower commissions from money market instruments.
Interest and dividend revenues for the first nine months of 1994 rose 38% to
$6,956 million. Interest expense, which includes dividend expense, increased
46% to $6,218 million. Net interest profit decreased 7% to $738 million due
primarily to an increase in short-term interest rates and a general flattening
of the yield curve, which is the difference between short-term and long-term
interest rates. As a result, interest spreads declined, while financing and
hedging costs increased from the comparable 1993 period.
Principal transactions revenues decreased 16% from the 1993 nine-month period
to $1,881 million as a result of rising interest rates and lower volumes. For
the first nine months of 1994, fixed-income and foreign exchange trading
revenues, in the aggregate, decreased 16% to $1,432 million. Lower revenues
from corporate bonds and preferred stock, non-U.S. governments and agencies
securities, foreign exchange trading, and money market instruments, were
partially offset by higher revenues from swaps and derivatives, municipal
securities, mortgage-backed securities, and U.S. Government and agency
securities. Equity and commodity trading revenues, in the aggregate, declined
16% to $449 million as lower trading revenues and a loss in convertible
securities were partially offset by higher revenues from trading in commodities
and foreign equities.
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Investment banking revenues totaled $1,012 million, down 23% in the 1994
nine-month period. Underwriting activity was slow as domestic volume
industrywide declined 29% from the comparable 1993 period. Lower underwriting
revenues were reported in most categories, including equities, corporate bonds
and preferred stock, convertible securities, and municipal bonds. 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 increased 15% to $1,308 million
principally as a result of growth in stock and bond fund assets under
management. Other revenues rose 63% from the 1993 nine-month period to $360
million due to net realized investment gains in the 1994 period, compared with
net investment losses in the comparable 1993 period.
Non-interest expenses increased 1% over the corresponding 1993 period to
$6,057 million (3% excluding the non-recurring pretax lease charge of $103.0
million). Compensation and benefits expense, which represented approximately
63% of non-interest expenses, was virtually unchanged from the 1993 nine-month
period. Higher salary and benefit expenses related to an increase in the number
of full-time employees were offset by lower levels of variable compensation.
Compensation and benefits expense, as a percentage of net revenues, was 50.8%
in the first nine months of 1994, compared with 49.2% in the corresponding 1993
period.
Occupancy costs decreased 28% from the corresponding 1993 period (7%
excluding the non-recurring pretax lease charge of $103.0 million), benefiting
from continued relocation of support staff to lower cost facilities and reduced
space requirements at the Headquarters facility. Other facilities-related
costs, which include communications and equipment rental expense and
depreciation and amortization expense, rose 11% primarily due to the increased
use of market data and news services, and higher depreciation expense from the
acquisition of technology-related equipment.
Advertising and market development expenses rose 8% from the 1993 nine-month
period as a result of increased travel costs related to international business
activity and higher recognition program costs. These expenses were partially
offset by reductions in advertising costs. Professional fees were up 37% from
the year-ago period due primarily to increased system consulting fees related
to technology improvements. Brokerage, clearing, and exchange fees were up 22%
from last year's nine-month period reflecting increased clearinghouse fees
related to risk management activities in volatile markets and higher commodity
trading volume. Other expenses advanced 6% due, in part, to increased
provisions related to various business activities.
Income tax expense totaled $619 million for the first nine months of 1994,
down 21% from the year earlier period due primarily to lower profitability. The
effective tax rate for the 1994 nine-month period was 42.0% versus 42.7% in the
comparable 1993 period.
CERTAIN BALANCE SHEET INFORMATION AS OF SEPTEMBER 30, 1994
The Company believes that its equity base is adequate relative to the level
and composition of its assets and the mix of its business.
In the normal course of business, the Company underwrites, trades, and holds
non-investment grade securities in connection with its market-making,
investment banking, and derivative structuring activities. These activities are
subject to risks related to the creditworthiness of the issuers and the
liquidity of the market for such securities, in addition to the usual risks
associated with investing in, extending credit, underwriting, and trading in
investment grade instruments.
At September 30, 1994, the fair value of long and short non-investment grade
trading inventories amounted to $3,271 million and $496 million, respectively,
and in the aggregate (i.e., the sum of long and short trading inventories)
represented 4.2% of aggregate consolidated trading inventories.
S-18
<PAGE>
At September 30, 1994, the carrying value of the extensions of credit
provided to corporations entering into leveraged transactions aggregated $283
million (excluding unutilized revolving lines of credit and other lending
commitments of $131 million) consisting primarily of senior term and
subordinated financings to 37 medium-sized corporations. At September 30, 1994,
the Company had no bridge loans outstanding. Loans to highly leveraged
corporations are carried at unpaid principal balance less a reserve for
estimated losses. The allowance for loan losses is estimated based on a review
of each loan, and consideration of economic, market, and credit conditions.
Subsequent to September 30, 1994, the Company assigned $116 million of a
$126 million commitment to third parties. As part of this transaction, a $38
million loan receivable was repaid. The Company has also funded $7 million of
its remaining $10 million commitment. Direct equity investments made in
conjunction with the Company's investment and merchant banking activities
aggregated $284 million at September 30, 1994, representing investments in 81
enterprises. Equity investments in privately-held corporations for which sale
is restricted by government or contractual requirements are carried at the
lower of cost or estimated net realizable value. At September 30, 1994, the
Company held interests in partnerships, totalling $98 million (recorded on the
cost basis), that invest in highly leveraged transactions and non-investment
grade securities. Prior to September 30, 1994, the Company had a co-investment
arrangement to enter into direct equity investments. At September 30, 1994, the
additional co-investment commitments were $7 million. At September 30, 1994,
the Company also committed to invest an additional $74 million in partnerships
that invest in leveraged transactions. Subsequent to quarter-end, the Company
committed to provide up to $52 million of financing to a non-investment grade
counterparty of which $45 million has been funded.
The Company's insurance subsidiaries hold non-investment grade securities. At
September 30, 1994, non-investment grade insurance investments were $386
million, representing 6.4% of total insurance investments. At September 30,
1994, non-investment grade securities of insurance subsidiaries were classified
as trading or available-for-sale and were carried at fair value.
At September 30, 1994, the largest non-investment grade concentration
consisted of various issues of a Latin American sovereign totalling $271
million, of which $74 million represented on-balance-sheet hedges for off-
balance-sheet instruments. No single industry sector accounted for more than
15% of total non-investment grade positions. At September 30, 1994, the Company
held an aggregate carrying value of $254 million in debt and equity securities
of issuers in various stages of bankruptcy proceedings. Approximately 59% of
this amount resulted from the Company's market-making activities.
S-19
<PAGE>
DESCRIPTION OF THE WARRANTS
GENERAL
An aggregate of 1,000,000 Nikkei Stock Index 300 Call Warrants, Expiring
January , 1997 (the "Call Warrants") and 1,000,000 Nikkei Stock Index 300 Put
Warrants, Expiring January , 1997 (the "Put Warrants", and together with the
Call Warrants, the "Warrants") will be issued. The Call Warrants will be issued
under a Warrant Agreement (the "Call Warrant Agreement"), to be dated as of
January , 1995, between the Company and Citibank, N.A., as Warrant Agent (the
"Warrant Agent"). The Put Warrants will be issued under a Warrant Agreement
(the "Put Warrant Agreement", and together with the Call Warrant Agreement, the
"Warrant Agreements"), to be dated January , 1995, between the Company and the
Warrant Agent. The following statements with respect to the Warrants are
summaries of the detailed provisions of the Warrant Agreements, the form of
which is filed as an exhibit to the Registration Statement relating to the
Warrants. Wherever particular provisions of the Warrant Agreements 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.
The Warrants will be exercisable commencing on the date of delivery of the
Warrants, as set forth under "Exercise of Warrants". The Warrants will expire
on January , 1997 (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 TSE 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 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.
S-20
<PAGE>
CASH SETTLEMENT VALUE
The Cash Settlement Value of an exercised Call Warrant is an amount stated in
U.S. dollars that results from the following formula:
Call Percentage Change X $50
The "Call Percentage Change" will equal the following amount:
Index Spot Price-Index Strike Price
-----------------------------------
Index Strike Price
The Cash Settlement Value of an exercised Put Warrant is an amount stated in
U.S. dollars that results from the following formula:
Put Percentage Change X $50
The "Put Percentage Change" will equal the following amount:
Index Strike Price-Index Spot 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 Nikkei Stock Index 300, as presently calculated and
disseminated by NKS, 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).
Set forth below are illustrations of the Cash Settlement Values for both Call
and Put 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
Strike Price and actual Index Spot Price 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>
INDEX PERCENTAGE CALL WARRANT PUT WARRANT
CHANGE ON CASH SETTLEMENT CASH SETTLEMENT
VALUATION DATE VALUE VALUE
---------------- --------------- ---------------
<S> <C> <C>
50% increase................................. $25.00 $0.00
45% increase................................. 22.50 0.00
40% increase................................. 20.00 0.00
35% increase................................. 17.50 0.00
30% increase................................. 15.00 0.00
25% increase................................. 12.50 0.00
20% increase................................. 10.00 0.00
15% increase................................. 7.50 0.00
10% increase................................. 5.00 0.00
5% increase.................................. 2.50 0.00
No change.................................... 0.00 0.00
</TABLE>
S-21
<PAGE>
<TABLE>
<CAPTION>
INDEX PERCENTAGE CALL WARRANT PUT WARRANT
CHANGE ON CASH SETTLEMENT CASH SETTLEMENT
VALUATION DATE VALUE VALUE
---------------- --------------- ---------------
<S> <C> <C>
5% decrease................................. $ 0.00 $ 2.50
10% decrease................................. 0.00 5.00
15% decrease................................. 0.00 7.50
20% decrease................................. 0.00 10.00
25% decrease................................. 0.00 12.50
30% decrease................................. 0.00 15.00
35% decrease................................. 0.00 17.50
40% decrease................................. 0.00 20.00
45% decrease................................. 0.00 22.50
50% decrease................................. 0.00 25.00
</TABLE>
BOOK-ENTRY PROCEDURES AND SETTLEMENT
Upon issuance, all Call Warrants and all Put Warrants held will be
represented by one registered global Warrant for each of the Call Warrants and
Put Warrants (each, a "Global Warrant"). Each 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 each Global
Warrant is exchanged in whole or in part for Warrants in definitive form in the
limited circumstances described below, each 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, 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, 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 a Global Warrant representing
either the Call or Put 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 a 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
S-22
<PAGE>
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 a Global Warrant.
So long as the Securities Depository, or its nominee, is the registered owner
of each 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 each such Global Warrant for all purposes under each Warrant Agreement.
Except as provided below, owners of beneficial interests in a 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 applicable Warrant Agreement. Accordingly,
each person owning a beneficial interest in a 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 applicable
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 a Global Warrant desires to give or take
any action which a beneficial owner is entitled to give or take under the
applicable 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 a 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
each Global 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 a 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 each Global Warrant. In addition, the Company
may at any time determine not to have the Warrants represented by the Global
Warrants and, in such event, will issue Warrants in definitive form in exchange
for the Global Warrants. In any such instance, an owner of a beneficial
interest in a 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
S-23
<PAGE>
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 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
S-24
<PAGE>
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 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 January , 1997 (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 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 , 1995 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 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
S-25
<PAGE>
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 or, if such day is not a New York Business Day, the next
succeeding New York Business Day. 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. 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 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 first Index Calculation Day
following 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". NKS will calculate the Index
once on each Index Calculation Day based upon the most recent official closing
prices of each of the Underlying Stocks as reported by the TSE. "Index
Calculation Day" means any day on which the TSE is open for trading and the
Index or a Successor Index, if any, is calculated and published. Due to time
differences, trading on the TSE occurs when the AMEX is closed for business.
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,
February 8, 1995, the Exercise Date for such Warrants will be February 8 and
the Valuation Date for such Warrants will be Thursday, February 9, 1995 (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
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<PAGE>
first Index Calculation Day following such Exercise Date). The Index Spot Price
used to determine the Cash Settlement Value of such Warrants will be the
closing level of the Index on February 9 (i.e., the level of the Index
calculated using values for the Underlying Stocks as of the close of the TSE on
February 9 (assuming such day is an Index Business Day), which, because of time
differences, will occur at 1:00 a.m., New York City time, on February 9 (or
2:00 a.m., New York City time, during the months in which Eastern Daylight
Savings Time is in effect)).
Following receipt of Warrants and the related Exercise Notice in proper form,
the Warrant Agent will, not later than 5:00 p.m., New York City time, on the
applicable Valuation Date (or, if such Valuation Date is not a New York
Business Day, on the next succeeding New York Business Day which is an Index
Calculation Day) (i) obtain the Index Spot Price from the Calculation Agent
(which will be the level of the Index 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 (or, if the Valuation Date is not a New York Business Day, on the fourth
New York Business Day following the New York Business Day next succeeding 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 Tokyo 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 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
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
S-27
<PAGE>
organization whose rules are filed with the Securities and Exchange Commission
(a "Self-Regulatory Organization") under the Securities Exchange Act of 1934,
as amended, Warrants not previously exercised will expire on the date such
delisting or trading suspension becomes effective (an "Early Expiration Date")
and the Warrants will be deemed automatically exercised on the New York
Business Day immediately preceding such Early Expiration Date, and the Cash
Settlement Value, if any (determined as provided under "Exercise and Settlement
of Warrants"), of such automatically exercised Warrants will be paid on the
fifth New York Business Day following such Early Expiration Date. Settlement
shall otherwise occur as described under "Book-Entry Procedures and Settlement"
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 Calculation Date, and the Cash Settlement Value or Alternative
Settlement Amount, as the case may be, 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".
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, on the second New York
Business Day immediately preceding the Expiration Date, or for which the
Warrant Agent has received a valid Exercise Notice but with respect to which
timely delivery of the relevant Warrants 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, will
be automatically exercised on the first New York Business Day preceding the
Expiration 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 Call Warrants or 100 Put Warrants may be exercised by 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 Call Warrants or 100 Put 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 Call
Warrants or more than 20% of the Put Warrants, as the case may be, originally
issued (provided, however, that no more than 10% of the Call Warrants or more
than 10% of the Put Warrants, as the case may be, 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 Call Warrants or more than 10% of
the Put Warrants, as the case may be, 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 Call Warrants or more than 20% of the Put
Warrants, as the case may be, originally issued, then at the Company's
election, 20% of the Call Warrants or 20% of the
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<PAGE>
Put Warrants, as the case may be, originally issued (provided, however, that no
more than 10% of either the Call Warrants or the Put 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 less 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
less 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 Call Warrants or 10% of the Put
Warrants originally issued, as the case may be, on any New York Business Day,
then, at the Company's election, 10% of such Call Warrants or such Put
Warrants, as the case may be, 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 NKS discontinues publication of the Index and NKS 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 NKS 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 NKS 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 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 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
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<PAGE>
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 Agreements 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 the 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 TSE 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 Agreements 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 opinion of the Calculation Agent may materially and
adversely affect the economy of Japan or the trading of securities
generally on the TSE) 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.
For the purposes of determining whether an Extraordinary Event has occurred:
(1) a limitation on the hours or number of days of trading on the TSE will not
constitute an Extraordinary Event if it results from an announced change in the
regular business hours of the TSE and (2) an "absence of trading" on the TSE
will not include any time when the TSE itself is closed for trading under
ordinary circumstances.
The Company is not aware of any circumstances that have arisen since the
inception of the Index that could have constituted an Extraordinary Event, and
based on the information currently available to the Company, the Company is not
aware of any circumstances that would have constituted an Extraordinary Event
during the ten years prior to the inception of the Index, except that on
January 7, 1989 trading was suspended due to the death of the Emperor of Japan.
The existence of such circumstances, however, is not necessarily indicative of
the likelihood of such circumstances arising or not arising in the future. See
"The Index--The Tokyo Stock Exchange" herein.
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 sale prices, as available, of the Warrants on the AMEX (or
any successor securities exchange on which the
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<PAGE>
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
described in clause (i) of the definition of 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 Call Warrant, in the case of
Call Warrants; T = U.S.$ , the initial offering price per Put Warrant, in the
case of Put Warrants;
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
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<PAGE>
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 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 Business 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, such fifth Index Business
Day shall be the Valuation Date regardless of whether a Market Disruption
Event has occurred on such day.
"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 TSE 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 Singapore International
Monetary Exchange, Ltd. (the "SIMEX"), the Osaka Securities Exchange (the
"OSE") 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 the TSE will not include any time when
the TSE 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.
To the Company's knowledge, no circumstances have arisen since the inception
of the Index that could have constituted a Market Disruption Event. However,
most recently, on January 31 and February 1 of 1994, prices for futures
contracts for the Nikkei Stock Index 225 reached price limits imposed by the
OSE, which would have been a Market Disruption Event if such limits had been
reached with respect to futures contracts for the Index. Futures contracts for
the Index were not traded at that time. Given that the Nikkei Stock Index 225
and the Index are comprised of stocks which trade on the TSE and that many of
the stocks in the Index are also in the Nikkei Stock Index 225, it is possible
that prices for the futures contracts for the two indexes would have increased
in a similar manner. The existence or non-existence of such circumstances,
however, is not necessarily indicative of the likelihood of such circumstances
arising or not arising in the future.
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.
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<PAGE>
MODIFICATION
The Warrant Agreements 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.
The Company and the Warrant Agent also may modify or amend the Warrant
Agreements 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 Agreements and of the Warrants to be performed by the Company.
THE INDEX
Unless otherwise stated, all information herein on the Index is derived from
NKS or other publicly available sources. Such information reflects the policies
of NKS as stated in such sources and such policies are subject to change by
NKS. NKS is under no obligation to continue to publish the Index and may
discontinue publication of the Index at any time. NKS is under no obligation to
continue to publish the Index and may discontinue publication of the Index at
any time.
The Nikkei Stock Index 300 is an index calculated, published and disseminated
by NKS, and measures the composite price performance of stocks of 300 Japanese
companies. All 300 stocks are listed in the First Section of the TSE. Stocks
listed in the First Section are among the most actively traded stocks on the
TSE. Publication of the Nikkei Stock Index 300 began on October 8, 1993.
The Nikkei Stock Index 300 is a market capitalization-weighted index which is
calculated by (i) multiplying the per share price of each stock included in the
Nikkei Stock Index 300 by the number of outstanding shares (excluding shares
held by the Japanese Government), (ii) calculating the sum of all these
products (such sum being hereinafter referred to as the "Aggregate Market
Price"), (iii) dividing the Aggregate Market Price by the Base Aggregate Market
Price (i.e., the Aggregate Market Price as of October 1, 1982, as calculated by
NKS) and (iv) multiplying the result by 100. Because of such capitalization-
weighting, movements in share prices of companies with relatively larger market
capitalization will have a greater effect on the level of the entire Nikkei
Stock Index 300 than will movements in share prices of companies with
relatively smaller market capitalization.
Although the Nikkei Stock Index 300 was first published in October 1993, NKS
has calculated values for the Nikkei Stock Index 300 for the period from
October 1, 1982 through October 8, 1993. The stocks
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<PAGE>
included in the Nikkei Stock Index 300 (such stocks being hereinafter referred
to as the "Underlying Stocks") were selected from a reference group of stocks
which were selected by excluding stocks listed in the First Section of the TSE
that have relatively low market liquidity or extremely poor financial results.
The Underlying Stocks were selected from this reference group by (i) selecting
from the remaining stocks in this reference group the stocks with the largest
aggregate market value in each of 36 industrial sectors and (ii) selecting
additional stocks (with priority within each industrial sector given to the
stock with the largest aggregate market value) so that the selection ratios
(i.e., the ratio of the aggregate market value of the included stocks to that
of the stocks in the reference group) with respect to all 36 industry sectors
will be as nearly equal as possible and the total number of companies with
stocks included in the Nikkei Stock Index 300 will be 300.
In order to maintain continuity in the level of the Nikkei Stock Index 300,
the Nikkei Stock Index 300 will be reviewed annually by NKS and the Underlying
Stocks may be replaced, if necessary, in accordance with the
"deletion/addition" rules. The "deletion/addition" rules provide generally for
the deletion of a stock from the Nikkei Stock Index 300 if such stock is no
longer included in the reference group or if the aggregate market value of such
stock is low relative to other stocks in the relevant industry sector. Stocks
deleted pursuant to the "deletion/addition" rules will be replaced by stocks
included in the reference group which have relatively high aggregate market
values. In addition, stocks may be added or deleted from time to time for
extraordinary reasons.
All disclosure contained in this Prospectus Supplement regarding the Nikkei
Stock Index 300, or its publisher is derived from publicly available
information. All copyrights and other intellectual property rights relating to
the Index are owned by NKS. NKS 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 tradings of the Warrants.
HISTORICAL DATA ON THE INDEX
The following table sets forth the closing level of the Index at the end of
each month, in the period from January 1989 through December 1994. All
historical data presented in the following table relating to periods prior to
October 8, 1993 (the date NKS commenced the daily calculation and public
dissemination of the Index) is presented as if the Index had existed during
such periods, based on the Underlying Stocks contained in the Index as of
October 8, 1993, 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 September 1993 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>
MONTH-END
CLOSING LEVEL
-------------
<S> <C>
1989:
January..................................................... 465.05
February.................................................... 463.39
March....................................................... 467.53
April....................................................... 468.55
May......................................................... 478.09
June........................................................ 458.54
July........................................................ 494.97
August...................................................... 483.64
September................................................... 494.67
October..................................................... 493.60
November.................................................... 519.11
December.................................................... 521.28
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
MONTH-END
CLOSING LEVEL
-------------
<S> <C>
1990:
January..................................................... 493.66
February.................................................... 458.18
March....................................................... 395.83
April....................................................... 400.28
May......................................................... 439.67
June........................................................ 417.76
July........................................................ 398.77
August...................................................... 351.89
September................................................... 283.76
October..................................................... 332.99
November.................................................... 294.24
December.................................................... 310.32
1991:
January..................................................... 305.35
February.................................................... 352.18
March....................................................... 347.60
April....................................................... 344.08
May......................................................... 342.82
June........................................................ 315.19
July........................................................ 325.92
August...................................................... 303.60
September................................................... 322.64
October..................................................... 329.24
November.................................................... 301.51
December.................................................... 300.23
1992:
January..................................................... 288.95
February.................................................... 276.17
March....................................................... 254.18
April....................................................... 242.84
May......................................................... 251.22
June........................................................ 226.03
July........................................................ 222.39
August...................................................... 249.29
September................................................... 235.83
October..................................................... 231.23
November.................................................... 239.82
December.................................................... 237.58
1993:
January..................................................... 236.67
February.................................................... 234.07
March....................................................... 262.94
April....................................................... 298.52
May......................................................... 295.79
June........................................................ 283.39
July........................................................ 298.27
August...................................................... 305.09
September................................................... 293.04
</TABLE>
S-35
<PAGE>
<TABLE>
<CAPTION>
MONTH-END
CLOSING LEVEL
-------------
<S> <C>
October..................................................... 299.62
November.................................................... 254.54
December.................................................... 267.06
1994:
January..................................................... 302.15
February.................................................... 302.23
March....................................................... 285.73
April....................................................... 293.10
May......................................................... 307.79
June........................................................ 304.62
July........................................................ 297.16
August...................................................... 299.25
September................................................... 288.39
October..................................................... 290.50
November.................................................... 280.08
December.................................................... 287.17
</TABLE>
The following graph sets forth the historical performance of the Index at the
end of each month from January 1989 through December 1994 and the value of the
Index on January 5, 1995. PAST MOVEMENTS OF THE INDEX ARE NOT NECESSARILY
INDICATIVE OF THE FUTURE INDEX VALUES. The January 5, 1995 closing level of the
Index was 285.05.
[GRAPHIC APPEARS HERE]
Source: Prepared by the Company from data obtained from NKS.
S-36
<PAGE>
THE TOKYO STOCK EXCHANGE
The TSE is one of the world's largest securities exchanges in terms of market
capitalization. TSE is a two-way, continuous pure auction market. Trading hours
are currently from 9:00 a.m. to 11:00 a.m. and from 1:00 p.m. to 3:00 p.m.,
Tokyo time, Monday through Friday.
Due to the time zone difference, on any normal trading day the TSE will close
prior to the opening of business in New York City on the same calendar day.
Therefore, the closing level of the Index on such trading day will generally be
available in the United States by the opening of business on the same calendar
day.
The TSE has adopted certain measures intended to prevent any extreme short-
term price fluctuation resulting from order imbalances. These include daily
price floors and ceilings intended to prevent extreme fluctuations in
individual stock prices. Any stock listed on the TSE cannot be traded at a
price outside of these limits which are stated in absolute Japanese yen, and
not percentage, limits from the closing price of the stock on the previous day.
In addition, when there is a major order imbalance in a listed stock, the TSE
posts a "special bid quote" or a "special asked quote" for that stock at a
specified higher or lower price level than the stock's last sale price in order
to solicit counter orders and balance supply and demand for the stock.
Investors should also be aware that the TSE 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".
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.
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
S-37
<PAGE>
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. For these
purposes, a U.S. Holder's adjusted tax basis in a Warrant would equal such U.S.
Holder's initial investment in the Warrant, increased or decreased by any net
gain or loss recognized by the U.S. Holder in respect of the Warrant in prior
taxable years. 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.
S-38
<PAGE>
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 $ per Call Warrant and $ per
Put Warrant. After the initial public offering, the public offering prices and
concessions 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 currency 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-39
<PAGE>
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- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR BY THE UNDERWRITER. NEITHER THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER AND
THEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION.
---------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUPPLEMENT
<CAPTION>
PAGE
----
<S> <C>
Prospectus Supplement Summary............................................. S-3
Certain Important Information Concerning the Warrants..................... S-10
Risk Factors Relating to the Warrants..................................... S-10
Recent Developments....................................................... S-16
Description of the Warrants............................................... S-20
The Index................................................................. S-33
Certain United States Federal Income Tax Considerations Concerning the
Warrants................................................................. S-37
Use of Proceeds........................................................... S-38
Underwriting.............................................................. S-39
Validity of the Warrants.................................................. S-39
PROSPECTUS
Available Information..................................................... 2
Incorporation of Certain Documents
by Reference............................................................. 2
Merrill Lynch & Co., Inc. ................................................ 3
Use of Proceeds........................................................... 3
Summary Financial Information............................................. 4
Description of Debt Securities............................................ 7
Description of Debt Warrants.............................................. 11
Description of Currency Warrants.......................................... 12
Description of Index Warrants............................................. 13
Plan of Distribution...................................................... 17
Experts................................................................... 18
</TABLE>
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- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
LOGO
MERRILL LYNCH & CO., INC.
1,000,000 NIKKEI STOCK INDEX 300 CALL WARRANTS
1,000,000 NIKKEI STOCK INDEX 300 PUT WARRANTS
ALL EXPIRING JANUARY , 1997
------------------------
PROSPECTUS SUPPLEMENT
------------------------
MERRILL LYNCH & CO.
JANUARY , 1995
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
GRAPHICS APPENDIX LIST
DESCRIPTION OF GRAPHIC
- -------------------------------------------------------------------------------
The graph sets forth the month-end values of the Index
from January 1989 through December 1994, and the value of
the Index on January 5, 1995. The vertical axis denotes
the range of values of the Index from 100 to 600, in
increments of 100; the horizontal axis denotes the time
period, in increments of four months, beginning with
January 1989 and ending with September 1994.
