<PAGE>
Pricing Supplement No. 2 For SEC Filing Purposes:
Dated: April 11, 1994 Filed Under Rule 424(b)(3)
To Prospectus dated January 10, 1994 and Registration Nos: 33-23628
Prospectus Supplement dated February 22, 1994 33-51675
Principal Amount $20,000,000
Hoechst Celanese Corporation
Medium-Term Notes, Series B
Equity Linked Medium-Term Notes Due 2001
Issue Date: April 11, 1994 Form of Note: Book-Entry Note(s)
Stated Maturity: April 11, 2001 Calculation Agent:
Merrill Lynch Capital Services, Inc.
Issue Price: 100%
Underwriting Discount or Commission received
from the Issuer (%): 0.55%
Proceeds to Company: $19,890,000
Interest Rate/Initial Interest Rate: 0.62% per annum
Interest Payment Dates: April 11 and October 11
of each year commencing October 11, 1994
Regular Record Dates: March 28 and September 27
At Maturity, holders of the Equity Linked Medium-Term Notes Due 2001 (the
"Notes") will be entitled to receive (i) interest due thereon, (ii) the
principal amount of the Note and (iii) a Supplemental Redemption Amount, which
is defined and calculated as set forth herein, based on the weighted-average
appreciation, if any, in stock exchange indices for eleven non-U.S. stock
exchanges from the issuance date to the Maturity.
Prospective purchasers of the Notes should review carefully the discussion of
the calculation of the Supplemental Redemption Amount, the information set forth
under "Special Considerations" and the discussion of the tax consequences of
investing in the Notes set forth under "Taxation" contained in this Pricing
Supplement, as well as the other information contained in the Prospectus
Supplement dated February 22, 1994 and the Propectus dated January 10, 1994
attached hereto.
Merrill Lynch & Co.
<PAGE>
ADDITIONAL TERMS OF THE NOTES
For a further description of the Notes, see "Description of the Notes" in
the Prospectus Supplement dated February 22, 1994 and "Description of
Securities" in the Prospectus dated January 10, 1994.
Interest on the Notes will be calculated as follows: The amount of
interest for each day that the Notes are outstanding (the "Daily Interest
Amount") will be calculated by dividing 0.62% by 365 (366 for each day in 1996
and 2000) and multiplying the result by the principal amount of the Notes. The
amount of interest to be paid on the Notes on each Interest Payment Date
relating to each Interest Payment Period will be calculated by adding the Daily
Interest Amounts for each day in the Interest Payment Period.
At Maturity holders of the Notes will be entitled to receive, in addition
to the interest thereon and the principal amount thereof, a "Supplemental
Redemption Amount". The Supplemental Redemption Amount with respect to any Note
shall be a U.S. Dollar amount equal to:
Principal Amount x (Final Average Basket Value - Initial Average Basket Value)
of such Note -----------------------------------------------------------
Initial Average Basket Value
provided, however, that if the Final Average Basket Value does not exceed the
- - -------- -------
Initial Average Basket Value, the Supplemental Redemption Amount shall equal
zero. Unless otherwise indicated, all references to "dollars" or "Dollars" in
this Pricing Supplement shall mean United States dollars.
Certain Definitions
- - -------------------
"Adjusted Average Basket Value" means the sum of the products determined
with respect to each Basket Index of (i) the Adjusted Value of such Basket Index
multiplied by (ii) the Index Coefficient of such Basket Index.
"Adjusted Value" means, with respect to any Basket Index, the average of
the Basket Values of such Basket Index on each of the Initial Valuation Dates.
"Basket Index" means any of the Indices listed in the left column of the
chart below (which are further described under "Description of Indices" herein)
or any replacement index as may be chosen by the Calculation Agent
<PAGE>
2
as provided under "Discontinuance." Each such index shall herein be referred to
by the term in the middle column.
<TABLE>
<CAPTION>
Index Name Used Herein Country
----- ---------------- -------
<S> <C> <C>
All Ordinaries Index ALL-ORD Australia
BEL20 Index BEL20 Belgium
Toronto 35-Stock Index TSE35 Canada
CAC40 Index CAC40 France
Deutscher Aktienindex DAX Germany
BCI30 Index BCI30 Italy
Tokyo Price Index TOPIX Japan
European Options EOE The Netherlands
Exchange Index
IBEX35 Index IBEX35 Spain
Swiss Market Index SMI Switzerland
Financial Times-Stock Exchange
100-Share Index FT-SE100 United Kingdom
</TABLE>
"Basket Value" means, with respect to any Basket Index as of any date of
determination, the closing value of such Basket Index as of the Valuation Time
on such date of determination, as displayed on the page of the Reuter Monitor
Money Rates Service (the "Reuters Service") listed in the column "Reuters Page"
in the chart titled "Index Information" under "Use of Index Coefficients" herein
(or such other page as may replace that page on that service or on such other
service as may be chosen as a replacement), converted from the Local Currency
into U.S. Dollars at an exchange rate determined by the Calculation Agent on the
basis of the rates shown on the applicable Reuters Service display on the page
listed in the column "Forex" in the chart titled "Index Information" under "Use
of Index Coefficients" herein (or such other page as may replace such page on
that service or on such other service as may be chosen as a replacement for the
purpose of displaying currency exchange rates or prices) as of the Valuation
Time on such date of determination. As used herein, "Local Currency" with
respect to any Basket Index means the official currency of the country listed
opposite such Basket Index under the definition of "Basket Index".
<PAGE>
3
"Final Average Basket Value" means the sum of the products determined with
respect to each Basket Index of (i) the Final Value of such Basket Index
multiplied by (ii) the Index Coefficient of such Basket Index.
"Final Valuation Dates" means, with respect to valuing any Basket Index,
March 25, 1999, March 27, 2000 and March 26, 2001, or if any such day is not an
Index Business Day with respect to such Basket Index, the immediately succeeding
Index Business Day; provided, that, if a Market Disruption Event with respect to
--------
such Basket Index occurred on any such Index Business Day, the Valuation Date
shall be the immediately succeeding Index Business Day during which no Market
Disruption Event shall have occurred and provided, further, if a Market
-------- -------
Disruption Event has occurred on each of the five Index Business Days
immediately succeeding March 25, 1999, March 27, 2000 or March 26, 2001, as the
case may be, then (i) the fifth succeeding Index Business Day following such
date will be deemed to be the relevant Final Valuation Date, notwithstanding the
occurrence of a Market Disruption Event on such day and (ii) with respect to any
such Index Business Day on which a Market Disruption Event occurs, the
Calculation Agent will determine the value of such Basket Index as of the
Valuation Time on such Index Business Day in accordance with the formula for and
method of calculating such Basket Index last in effect prior to the commencement
of the Market Disruption Event using the closing exchange traded price (or, if
trading in the relevant security has been materially suspended or materially
limited, its good faith estimate of the exchange traded price that would have
prevailed but for such suspension or limitation) as of the Valuation Time on
such Index Business Day of each security comprising such Basket Index.
"Final Value" means, with respect to any Basket Index, the average of the
Basket Values of such Basket Index on each of the Final Valuation Dates.
"Index Business Day" means, with respect to any Basket Index, any day that
is (or, but for the occurrence of a Market Disruption Event, would have been) a
trading day on the relevant Index Exchange or on any exchanges on which futures
or options on such Basket Index are traded, other than a day on which trading on
any such exchange is scheduled to close prior to its regular weekday closing
time.
<PAGE>
4
"Index Coefficient" with respect to any Basket Index means the number set
forth opposite such Basket Index below:
<TABLE>
<CAPTION>
Index Coefficient
---------- -----------
<S> <C>
ALL-ORD 0.001496
BEL20 0.042385
TSE35 0.027565
CAC40 0.029255
DAX 0.011502
BCI30 93.933255
TOPIX 2.612842
EOE 0.012583
IBEX35 0.167485
SMI 0.000985
FT-SE100 0.001655
</TABLE>
"Index Exchange" means, with respect to any Basket Index, the principal
exchange on which the shares comprising such Basket Index are traded.
"Initial Average Basket Value" equals the quotient of (a) U.S.$100 plus the
lesser of (i) the Adjusted Average Basket Value and (ii) U.S.$100, divided by
(b) two.
"Initial Valuation Dates" means, with respect to the determination of the
Basket Value of any Basket Index, the last five Index Business Days in June
1994, provided, that, if a Market Disruption Event with respect to such Basket
--------
Index occurred on one or more of such Index Business Days, then one or more
Index Business Days on which no Market Disruption Event has occurred immediately
following the last of such five Index Business Days shall replace the Index
Business Day or Days during which such Market Disruption Event occurred,
provided, further, if a Market Disruption Event has occurred on each of the five
- - -------- -------
original Index Business Days (i) the fifth original Index Business Day and the
four Index Business Days immediately succeeding will be deemed to be the Initial
Valuation Dates, notwithstanding any Market Disruption Event occurring on such
Index Business Days, and (ii) with respect to any such Index Business Days on
which a Market Disruption Event
<PAGE>
5
occurs, the Calculation Agent will determine the value of such Basket Index as
of the Valuation Time on each of such Index Business Days in accordance with the
formula for and method of calculating such Basket Index last in effect prior to
the commencement of the Market Disruption Event using the closing exchange
traded price (or, if trading in the relevant security has been materially
suspended or materially limited, its good faith estimate of the exchange traded
price that would have prevailed but for such suspension or limitation) as of the
Valuation Time on each of such five Index Business Days of each security
comprising such Basket Index.
"Interest Payment Period" means, with respect to the Notes, any period from
and including the Issue Date or from and including the most recent Interest
Payment Date with respect to which interest on such Note has been paid or duly
provided for, to but excluding, the relevant Interest Payment Date.
"Market Disruption Event" means, with respect to any Basket Index on any
Index Business Day, the occurrence or existence during the one-half hour period
that ends at the Valuation Time of any suspension of, or limitation imposed on,
trading (by reason of movements in price exceeding limits permitted by the
relevant exchange or otherwise) on (i) the Index Exchange in securities that
comprise 20% or more of the value of such Basket Index or (ii) any exchanges on
which futures or options on such Basket Index are traded if, in the
determination of the Calculation Agent, such suspension or limitation is
material. For the purposes of determining whether a Market Disruption Event
exists at any time, if trading in a security included in the relevant Basket
Index is materially suspended or materially limited at that time, then the
relevant percentage contribution of that security to the value of such Basket
Index will be based on a comparison of (i) the portion of the value of such
Basket Index attributable to that security relative to (ii) the overall value of
such Basket Index, in each case immediately before such suspension or
limitation. For the purpose of the foregoing definition, (x) a limitation on
the hours and number of days of trading will not constitute a Market Disruption
Event if it results from an announced change in the regular hours of the
relevant exchange and (y) a limitation on trading imposed during the course of a
day by reason of movements in price otherwise exceeding levels
<PAGE>
6
permitted by the relevant exchange will constitute a Market Disruption Event.
"Valuation Date" means any Initial Valuation Date or any Final Valuation
Date.
"Valuation Time" means, with respect to the determination of the Basket
Value of any Basket Index, the regular official weekday time at which trading
closes on the relevant Index Exchange.
USE OF INDEX COEFFICIENTS
The Index Coefficients were determined on the basis of (i) the closing
values of the Basket Indices on March 25, 1994, as displayed on the page of the
Reuters Service listed under the column "Reuters Page" in the chart below,
converted into Dollars on the basis of the rates shown on the pages of the
Reuters Service designated in the column "Forex" in the chart below, as of the
Valuation Time on March 25, 1994 and (ii) an Initial Basket Value equal to US
$100. Accordingly, the Index Coefficient relating to a particular Basket Index
is the number that, when multiplied by the Basket Value of such Basket Index on
March 25, 1994, yields the number expressed as a percentage of the Initial
Average Basket Value (US $100) set forth under "Percentage of Basket" in the
table below.
Index Information
-----------------
<TABLE>
<CAPTION>
As of March 25, 1994
--------------------
Initial
Reuters Percentage Index Exchange Basket
Index Page Forex of Basket Value Rate* Value
- - ----- ------- ----- ---------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
ALL-ORD .AORD ASAP 2.280% 2151.60 0.70825 1523.871
BEL20 .BFX FXFY 1.830% 1481.80 34.32 43.176
TSE35 .TSE35 WRLD 4.560% 227.67 1.37625 165.428
CAC40 .FCHI FXFX 10.930% 2136.62 5.7188 373.613
DAX .GDAX FXFX 14.740% 2130.06 1.66215 1281.509
BCI30 .BCIJ FXFX 8.810% 154.8 1650.50 0.09379
TOPIX .TOPX ASAP 40.000% 1610.35 105.19 15.309
EOE .AEX FXFX 2.730% 406.83 1.8751 216.964
IBEX35 .IBEX FXFY 4.400% 3610.14 137.42 26.271
SMI .SSMI FXFX 1.970% 2831.8 1.41565 2000.353
FT-
SE100 .FTSE FXFX 7.750% 3129.0 1.4966 4682.861
</TABLE>
*The Exchange Rates for the ALL-ORD and FT-SE 100 indices represent the
dollar equivalent of one unit of the Basket currency. All other Exchange
Rates in this column represent the number of units of the Basket currency
equal to one dollar.
<PAGE>
7
DESCRIPTION OF INDICES
Each of the Basket Indices is intended to provide an indication of the
pattern of movement among a range of common stocks. The Basket Indices are
based on the relative value of the aggregate market value of the common stocks
of the companies included in each such Basket Index. Any of the publishers of
the Basket Indices may, from time to time, add companies to, or delete companies
from, such Basket Index.
ALL-ORD--The All Ordinaries Index ("ALL-ORD"), compiled by the Australian Stock
Exchange ("ASX"), is comprised of over 320 common shares from the over 1500
companies listed on the ASX. Approximately 65% of the market value of the ALL-
ORD comes from industrial shares.
BEL20--The BEL20 Index ("BEL20") is comprised of the 20 most capitalized and
liquid Belgian stocks that are traded on the Brussels Stock Exchange.
TSE35--The Toronto 35-Stock Index ("TSE35"), compiled by the Toronto Stock
Exchange, is comprised of 35 Canadian companies.
CAC40--The Compagnie des Agents de Change 40 Index ("CAC40"), compiled by the
Societe des Bourses Francaises, is comprised of 40 companies listed on the Paris
Stock Exchange that are also traded on the monthly settlement market, Reglement
Mensuel, which is similar to the U.S. options market.
DAX--The Deutscher Aktienindex Index ("DAX"), compiled by the Frankfurt Stock
Exchange ("FWB"), is comprised of 30 of the most heavily traded stocks listed on
the FWB.
BCI30--The BCI30 ("BCI30") is compiled by Banca Commerciale Italiana and is
comprised of shares of 30 companies listed on the Milan Stock Exchange.
TOPIX--The Tokyo Price Index ("TOPIX"), compiled by the Tokyo Stock Exchange
("TSE"), is comprised of over 1,100 domestic stocks listed in the First Section
of the TSE. First Section stocks must meet certain criteria for number of
shares, dividends, and trading volume.
<PAGE>
8
EOE--The Amsterdam European Options Exchange Index ("EOE"), compiled by the
European Options Exchange, is comprised of 25 leading Dutch stocks listed on the
Amsterdam Stock Exchange, whose options are traded on the European Options
Exchange.
IBEX35--The Indice de las Bolsas Espanoles 35 ("IBEX35"), compiled by Sociedad
de Bolsas, S.A., is comprised of the 35 most liquid companies listed on the
Continuous Market of the four Spanish stock exchanges.
SMI--The Swiss Market Index ("SMI"), compiled by Telekurs AG, is comprised of 20
highly capitalized companies listed on the Zurich, Geneva, and Basel stock
exchanges.
FT-SE100--The Financial Times-Stock Exchange 100-Share Index ("FT-SE100"),
compiled by the Financial Times, is comprised of the 100 most highly capitalized
companies listed on The International Stock Exchange of the United Kingdom and
the Republic of Ireland.
DISCONTINUANCE
If a Basket Index is (i) not calculated and announced by its sponsor but is
calculated and announced by a successor sponsor acceptable to the Calculation
Agent or (ii) replaced by a successor index using, in the determination of the
Calculation Agent, the same or a substantially similar formula for and method of
calculation as used in the calculation of such Basket Index, then the Basket
Index will be deemed to be that index so calculated and announced by that
successor sponsor or that successor index, as the case may be.
If (i) on or prior to any Valuation Date the sponsor of the related Basket
Index makes a material change in the formula for or the method of calculating
such Basket Index or in any other way materially modifies such Basket Index
(other than a modification prescribed in such formula or method to maintain such
Basket Index in the event of changes in constituent stocks and capitalization
and other routine events) or (ii) on any Valuation Date the sponsor fails to
calculate and announce such Basket Index, then the Calculation Agent will
calculate the Final Basket Value using, in lieu of a published value for such
Basket Index, the value for that Basket Index as of the Valuation Date as
determined by the Calculation Agent in accordance with the
<PAGE>
9
formula for and method of calculating that Basket Index last in effect prior to
that change or failure, but using only those securities that comprised such
Basket Index immediately prior to that change or failure (other than those
securities that have since ceased to be listed on the related Index Exchange).
All determinations made by the Calculation Agent shall be at the sole
discretion of the Calculation Agent and, in the absence of manifest error, shall
be conclusive for all purposes and binding on the Company and the Holder.
The Indenture provides that the Indenture and the Notes will be governed by
and construed in accordance with the laws of the state of New York. Under
present New York law, the maximum rate of interest is 25% per annum on a simple
interest basis. This limit may not apply to Notes in which $2,500,000 or more
has been invested. While the Company believes that New York law would be given
effect by a state or federal court sitting outside of New York, state laws
frequently regulate the amount of interest that may be charged to and paid by a
borrower (including, in some cases, corporate borrowers). It is suggested that
prospective investors consult their personal advisors with respect to the
applicability of such laws. The Company has covenanted for the benefit of the
beneficial owners of the Notes, to the extent permitted by law, not to claim
voluntarily the benefits of any laws concerning usurious rates of interest
against a beneficial owner of the Notes.
SPECIAL CONSIDERATIONS
For a further description of the terms of the Notes, see "Description of
the Notes" in the Prospectus Supplement dated February 22, 1994 and "Description
of Securities" in the Prospectus. Prospective investors who consider purchasing
the Notes should reach an investment decision only after carefully considering
the suitability of the Notes in light of their particular circumstances and in
particular the factors discussed below, as well as any other information
included or incorporated by reference in the Prospectus to which this Pricing
Supplement is attached.
<PAGE>
10
PAYMENT AT MATURITY
The terms of the Notes differ from those of ordinary debt securities in
that, in addition to interest on and principal of the Notes payable at Maturity,
the Holder may receive an additional amount that is not fixed but is based on
the Final Average Basket Value. If the Final Average Basket Value is equal to
or less than the Initial Average Basket Value, the Supplemental Redemption
Amount will equal or be deemed to equal zero and the Holders of the Notes will
be entitled to receive only the principal amount of the Notes. This will be
true even though the cumulative weighted Dollar value of the Basket Indices (the
"Average Basket Value") as of, or on any day prior to, the Stated Maturity of
the Notes may have exceeded the Initial Average Basket Value because the
Supplemental Redemption Amount on the Notes is calculated on the basis of the
Final Average Basket Value, which in turn is computed as an average of the
Basket Values as of March 25, 1999, March 27, 2000 and March 26, 2001 (as such
dates may be adjusted as provided herein). Because the Final Average Basket
Value is based upon the values of the Basket Indices on each of three Final
Valuation Dates, a significant increase in the Average Basket Value as of one or
more such Final Valuation Dates may be substantially or entirely offset by the
Average Basket Value(s) on the remaining Final Valuation Date(s). It is
impossible to predict whether the Supplemental Redemption Amount will exceed
zero.
In addition, for purposes of determining the Initial Average Basket Value
and the Final Average Basket Value, the Initial Value and the Final Value,
respectively, of each Basket Index will be expressed in Dollars. Accordingly,
although the value of a Basket Index expressed in the currency of the home
country may have appreciated over the relevant period, the Final Value of such
Basket Index may be less than the Initial Value of such Basket Index if the rate
for exchanging the currency of the home country for Dollars is lower on the
Final Valuation Dates than it was on the date hereof.
The repayment of the principal amount of the Notes and Supplemental
Redemption Amount, if any, at maturity does not reflect any opportunity cost
implied by inflation and other factors relating to the time value of money.
<PAGE>
11
VALUE PRIOR TO MATURITY
The secondary market value of the Notes is expected to depend primarily on
the extent of the appreciation, if any, of the Average Basket Value over the
Initial Average Basket Value (each of which is Dollar weighted). If, however,
Notes are sold prior to the Stated Maturity at a time when the Average Basket
Value exceeds the Initial Average Basket Value, the sale price may be at a
discount from the amount expected to be payable to the Holder if such excess of
the Average Basket Value over the Initial Average Basket Value were to prevail
until maturity of the Notes, because of the possible fluctuation of the Average
Basket Value between the time of such sale and the Stated Maturity.
Furthermore, the price at which a Holder will be able to sell Notes prior to the
Stated Maturity may be at a discount, which could be substantial, from the
principal amount thereof, if, at such time, the Average Basket Value is below,
equal to or not sufficiently above the Initial Average Basket Value. A discount
could also result from rising interest rates.
The secondary market value of the Notes may be affected by a number of
interrelated factors, including those listed below. The relationship among
these factors is complex, including how these factors affect the relative value
of the fixed payments pursuant to the terms of the Notes, i.e., the interest on
and principal amount of the Notes to be repaid at the Stated Maturity and the
value of the Supplemental Redemption Amount, if any. Accordingly, investors
should be aware that factors other than the Average Basket Value are likely to
affect the secondary market value of the Notes. The expected effect on the
trading value of the Notes of each of the factors listed below, assuming in each
case that all other factors are held constant, is as follows:
Interest Rates. In general if U.S. interest rates increase, the secondary
--------------
market value of the Notes is expected to decrease. If U.S. interest rates
decrease, the value of the Notes is expected to increase. Changes in
interest rates in the home country of a Basket Index may affect the economy
in such country, and, in turn, the value of such Basket Index. Rising
interest rates may lower the value of the Basket Index and, thus, the
Average Basket Value and the value of the Notes. Falling interest rates
may increase the
<PAGE>
12
value of the Basket Index and, thus, may increase the Average Basket Value
and the value of the Notes.
Exchange Rates. Changes in the exchange rates between the Dollar and
--------------
each of the currencies of the home countries of the Basket Indices may
affect the Average Basket Value and the value of the Notes. If the Dollar
strengthens against the currency of the home country of a particular Basket
Index, the Dollar value of such Basket Index will decrease and, in turn,
the Average Basket Value and the value of the Notes may decrease. If the
Dollar weakens against the currency of the home country of a particular
Basket Index, the Dollar value of such Basket Index will increase and, in
turn, the Average Basket Value and the value of the Notes may increase.
Volatility of Basket Indices. If the volatility of one or more of the
----------------------------
Basket Indices increases, the secondary market value of the Notes is
expected to increase. If the volatility of one or more of the Basket
Indices decreases, the trading value of the Notes is expected to decrease.
Time Remaining to Maturity. The Notes may trade at a value above that
--------------------------
which may be inferred from the level of interest rates and the Average
Basket Value. This difference will reflect a "time premium" due to
expectations concerning the Average Basket Value during the period prior to
the Stated Maturity of the Notes. As the time remaining to the Stated
Maturity of the Notes decreases, however, this time premium is expected to
decrease, thus decreasing the trading value of the Notes.
Dividend Rates. If dividend rates on the stocks comprising a particular
--------------
Basket Index increase, the Average Basket Value and the value of the Notes
may decrease. Conversely, if dividend rates on the stocks comprising a
particular Basket Index decrease, the Average Basket Value and the value of
the Notes may increase.
As indicated above, the foregoing discussion regarding the expected
effects on the trading value of the Notes of each of the factors enumerated
above assumes that all other factors are held constant. Investors should be
aware, however, that certain of such factors may be
<PAGE>
13
interrelated. For example, increases in interest rates in the home country of a
Basket Index may be associated with economic growth in such country, which may
have the overall effect of increasing the value of certain of the securities
comprising such Basket Index and, in turn, the value of the Basket Index itself.
Furthermore, the same change in interest rates may also affect the exchange rate
between the Dollar and the currency of such home country and, thus, positively
or negatively affect the Dollar value of such Basket Index.
ACCURACY OF INDICES
There can be no assurance that any of the Basket Indices will accurately
track the movement of its home country stock market generally or that such index
will rise or fall in conjunction with or in proportion to, general advances or
declines in economic, business or financial conditions in its home country or
otherwise. None of the Basket Indices is sponsored, endorsed or promoted by the
Company or Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch")
and neither the Company nor Merrill Lynch makes any representation or warranty,
express or implied, to any Holder of a Note regarding the ability of any Basket
Index to track general stock market performance or economic, business or
financial trends. Neither the Company nor Merrill Lynch participates in
determining, composing or calculating any of the Basket Indices and,
accordingly, takes no responsibility therefor.
SECONDARY MARKET
The Notes are novel and innovative securities and there is currently no
secondary market for the Notes. It is not possible to predict how the Notes
will trade in the secondary market or whether such market will be liquid or
illiquid. There can be no assurance regarding the future development of a
market for the Notes, the ability of Holders of the Notes to sell their Notes or
the price at which such Holders may be able to sell their Notes.
TAXATION
The following summary of material U.S. Federal income tax consequences to
U.S. Holders of the ownership of the Notes is based upon laws, regulations,
rulings and
<PAGE>
14
decisions now in effect (or, in the case of certain regulations, in proposed
form), all of which are subject to change or possible differing interpretations.
The discussion below does not purport to deal with all the U.S. Federal income
tax consequences applicable to all potential U.S. Holders (such as tax-exempt
investors, dealers in securities, investors that do not hold the Notes as
capital assets, and investors holding Notes as part of a hedging or conversion
transaction or as a position in a "straddle" for tax purposes), and does not
deal with the income tax consequences under any state, local or foreign laws, or
with the non-income tax consequences to holders of the Notes. Persons
considering the purchase of the Notes should consult their own tax advisors
concerning the application of U.S. Federal, state, local and any other income,
estate and other tax laws to their particular situations, as well as any
consequences arising under the laws of any foreign taxing jurisdiction.
As used herein, the term "U.S. Holder" means a beneficial owner of a Note
that is for U.S. Federal income tax purposes (i) a citizen or resident of the
United States, (ii) a corporation 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 U.S. Federal income taxation regardless
of its source or (iv) any other person that is subject to U.S. Federal income
taxation with respect to its worldwide income.
TREATMENT OF THE NOTES
There are no final regulations, published rulings or judicial decisions
involving the treatment for U.S. Federal income tax purposes of securities with
terms substantially the same as the Notes. The Company intends to treat the
Notes for tax purposes in a manner consistent with the Existing Proposed
Regulations discussed below, unless future developments indicate that such
treatment is incorrect or inadvisable. However, it is possible that the
Internal Revenue Service (the "IRS") or a court might apply different rules for
treating the Notes, including an approach not outlined in this discussion.
PROSPECTIVE INVESTORS ARE THEREFORE STRONGLY URGED TO CONSULT THEIR TAX ADVISORS
AS TO THE PROPER FEDERAL INCOME TAX TREATMENT OF THE NOTES.
<PAGE>
15
EXISTING PROPOSED REGULATIONS
Under general principles of current U.S. Federal income tax law and the
Internal Revenue Code of 1986, as amended (the "Code"), payments of interest on
a Note generally would be taxable to a U.S. Holder as ordinary interest income
at the time such payments were accrued or received (in accordance with such U.S.
Holder's regular method of tax accounting). On the date the Supplemental
Redemption Amount were determined or paid, such amount, if any, would be treated
as contingent interest and would be includible in income by the U.S. Holder.
However, on February 28, 1991, the Treasury Department issued proposed
regulations (the "Existing Proposed Regulations") that, if adopted, would apply
to all debt instruments issued after such date. Under such regulations, a Note
would be "bifurcated" and treated as consisting of two separate instruments:
(i) a fixed payment component, consisting of the right to receive the Principal
Amount plus the semiannual interest payments (the "Fixed Payment Component");
and (ii) a contingent payment, consisting of the right to receive the
Supplemental Redemption Amount, if any (the "Contingent Payment").
The issue price of a Note would be allocated between the Fixed Payment
Component and the Contingent Payment based on their relative fair market values
at the time of issuance, and the allocation would determine the U.S. Holder's
tax basis in the Fixed Payment Component and the Contingent Payment. The
Company intends to treat 66.89% of the issue price of the Notes as the portion
of the issue price allocable to the Fixed Payment Component (and, therefore,
33.11% of the issue price of the Notes as the portion allocable to the
Contingent Payment).
Fixed Payment Component. The Fixed Payment Component would be treated as a
------------------------
debt obligation issued at an original issue discount ("OID"). A U.S. Holder
would recognize income equal to the interest payments received or accrued (in
accordance with such U.S. Holder's regular method of tax accounting). U.S.
Holders (whether cash or accrual method taxpayers) would also be required to
include any OID in income (using a constant yield method) over the term of the
Note in advance of the receipt of cash attributable to such income. The OID
required to be included in income would be equal to the difference between the
issue price of the Fixed Payment Component and the
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16
amount of the issue price allocable to such payment (i.e., 66.89% of the issue
----
price of the Notes, as discussed above).
Contingent Payment. The Contingent Payment would be taxed "in accordance
-------------------
with [its] economic substance" and would be treated separately from the Fixed
Payment Component. Under an "economic substance" analysis, the Contingent
Payment is likely to be treated as one or more complex cash settlement options
relating to the Basket Indices. The Federal income tax treatment of any such
option would depend upon whether or not it is "listed" (i.e., traded on a
----
qualified board or exchange) for purposes of Code Section 1256. Although the
matter is not free from doubt, the Company believes that the Contingent Payment
should not be treated in whole or in part as a listed option, because there are
not options listed and traded on a qualified board or exchange with respect to
each Basket Index, and in addition on the issue date there are no options traded
on a qualified board or exchange that are based upon the relationship among the
Basket Indices that would approximate the terms of the Contingent Payment.
Assuming the Contingent Payment is not treated as a listed option, a U.S.
Holder would recognize gain or loss with respect to the Contingent Payment only
upon a sale, exchange or other disposition of, or the final payment on, a Note.
The gain or loss in respect of the Contingent Payment would be measured by the
difference between the sales proceeds of the Note allocable to the Contingent
Payment (as discussed below) and the tax basis with respect to the Contingent
Payment or, in the case of a final payment, the difference between the
Contingent Payment and such tax basis. An initial U.S. Holder's basis in the
Contingent Payment generally would equal 33.11% of the issue price--that is, the
initial U.S. Holder's purchase price for the Note less the basis allocated to
the Fixed Payment Component, as described above.
However, it is possible that the IRS may assert that the Contingent Payment
should be treated as a "listed nonequity option", in which case such Contingent
Payment would generally be subject to the mark-to-market rules under Code
Section 1256 (i.e., treated as if it were sold for its fair market value on the
----
last day of each taxable year of the U.S. Holder). Any resulting gain or loss
would be treated as 60% long-term and 40% short-term capital gain or loss. The
U.S. Holder's basis in the Contingent Payment would be adjusted to reflect such
gain or loss. Similarly,
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17
gain or loss on the Contingent Payment upon the sale, exchange or other
disposition of, or the final payment on, a Note (based on an allocation to the
Contingent Payment of the proceeds therefrom or the payment thereon, as
described below) would be treated as 60% long-term and 40% short-term capital
gain or loss.
Disposition of a Note. Under the Existing Proposed Regulations, a U.S.
----------------------
Holder that disposes of a Note prior to the Maturity Date will generally
recognize gain or loss with respect to the Fixed Payment Component in an amount
equal to the difference (if any) between such U.S. Holder's adjusted tax basis
in the Fixed Payment Component and the sales proceeds of such Note allocable to
such Fixed Payment Component. Such gain or loss would be capital gain or loss,
and would be long-term capital gain or loss if the Note were held for more than
one year. A U.S. Holder's adjusted tax basis in the Fixed Payment Component
will generally equal the amount allocable to the Fixed Payment Component upon
the purchase of such Note, increased by any OID on the Fixed Payment Component
previously included in income by such U.S. Holder. The Existing Proposed
Regulations do not contain rules which describe how the proceeds of a Note
disposed of prior to the Maturity Date should be allocated between the Fixed
Payment Component and the Contingent Payment for purposes of determining gain or
loss on a disposition of the Fixed Payment Component. However, one reasonable
method of allocating the sales proceeds of a Note between the Fixed and
Contingent Payments would be to allocate the value of the Fixed Payment
Component to such Fixed Payment Component. Under that approach, since the Fixed
Payment Component does not trade separately, its value would be established by
reference to the market value of a comparable security with terms similar to
that of the Fixed Payment Component. The difference between the sales proceeds
of a Note and the value of the Fixed Payment Component would be allocated to the
Contingent Payment and taxed according to the rules described under "Contingent
Payment" above.
Status of the Existing Proposed Regulations. In January 1993, the Treasury
--------------------------------------------
Department released to the public proposed regulations (the "Suspended Proposed
Regulations") which were to replace the Existing Proposed Regulations and which
would have treated a Note as a debt instrument with fixed interest and market-
based contingent interest to be accrued into income over the term of the Note.
However, the Suspended Proposed Regulations were withdrawn for review
<PAGE>
18
prior to their official publication as proposed regulations, and it is unclear
whether they will be reproposed. It is possible that the Suspended Proposed
Regulations could be reissued, and as reissued, could apply to the Notes.
As a result of the foregoing, the Existing Proposed Regulations remain in
effect as proposed regulations and, if finalized in their current form, would
apply to the Notes. However, the Suspended Proposed Regulations did not contain
the bifurcation approach that exists under the Existing Proposed Regulations.
Moreover, because the Suspended Proposed Regulations would have applied to debt
issued at least 60 days after the date the regulations were finalized, it is
possible that no regulations will ultimately apply to the Notes, in which case
general principles of U.S. Federal income tax law and the Code would apparently
apply, or that the IRS or a court might apply an approach different than the
ones described herein.
The proper treatment of the Notes is therefore unclear. However, as
discussed above, the Company intends to treat the Notes for tax purposes in a
manner consistent with the Existing Proposed Regulations, unless future
developments indicate that such treatment is incorrect or inadvisable. In
addition, information returns will be filed with the IRS utilizing the
allocation of the issue price as described above between the Fixed Payment
Component and the Contingent Payment. Moreover, U.S. Holders may not be bound
by the Company's treatment of the Notes, but any U.S Holder that wishes to use a
different allocation may be required to disclose that it is doing so on its U.S.
Federal income tax returns.
PROSPECTIVE INVESTORS IN THE NOTES SHOULD CONSULT THEIR TAX ADVISORS AS TO
THE PROPER TREATMENT OF THE NOTES.
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19
NON-U.S. PERSONS
Non-U.S. Persons should note that on page S-22 of the Prospectus
Supplement, the following revisions should be made:
1. In the first paragraph under "Non-U.S. Holders", "Non-U.S. Person" should be
"Non-U.S. Holder" and the following should be added at the end thereof:
and who qualified for the exemption from Federal withholding tax described
above, provided, in the case of (a) or (b), that such Non-U.S. Holder is
--------
not a "10-percent shareholder" (as defined in Code Section 871(h)(3)(B)) or
related controlled foreign corporation with respect to the Company and that
the Non-U.S. Holder satisfies certain certification requirements as to its
non-U.S. status.
2. In the first paragraph under "Information Reporting and Backup Withholding",
add at the end of the second sentence:
, and, in the case of either (i) or (ii), that satisfy certain
certification requirements as to their non-U.S. status (unless the payor
has actual knowledge that the certification is incorrect).
PLAN OF DISTRIBUTION
Merrill Lynch and the Company have entered into a letter agreement (the
"Reverse Inquiry Letter Agreement") dated March 25, 1994, pursuant to which
Merrill Lynch has agreed to be bound by the terms of the Distribution Agreement
dated February 22, 1994 between the Company, CS First Boston Corporation and
Goldman Sachs & Co. (the "Distribution Agreement"). Under the terms of the
Reverse Inquiry Letter Agreement, Merrill Lynch is acting as sole distributor of
the Notes. Merrill Lynch Capital Services, Inc., an affiliate of Merrill Lynch,
is acting as Calculation Agent for the Notes pursuant to a Calculation Agent
Agreement dated April 11, 1994. See also "Plan of Distribution of Notes" in the
Prospectus Supplement dated February 22, 1994 and "Plan of Distribution" in the
Prospectus dated January 10, 1994.
