RULE NO. 424(b)(3) REGISTRATION NO. 33-49947 PRELIMINARY AND SUBJECT TO COMPLETION AND AMENDMENT ISSUE DATE: JANUARY 14, 1994 PROSPECTUS SUPPLEMENT (TO PROSPECTUS DATED AUGUST 27, 1993) [LOGO OF MERRILL LYNCH & CO., INC. APPEARS HERE] MERRILL LYNCH & CO., INC. 1,000,000 CONSTANT MATURITY U.S. TREASURY YIELD INCREASE WARRANTS, EXPIRING AUGUST 25, 1995 Each Constant Maturity U.S. Treasury Yield Increase Warrant ("Warrant") will entitle the Holder thereof to receive from Merrill Lynch & Co., Inc. (the "Company") a payment, if any, (the "Cash Settlement Value") on August 25, 1995 (the "Expiration Date"), or on such earlier date as described herein, based upon the increase in the CMT Yield. The CMT Yield is the yield to maturity on U.S. Treasury securities with a constant maturity of five years as more fully described herein. The Cash Settlement Value will equal the greater of (i) U.S. $100 x 4 x (Spot Yield - Strike Yield) and (ii) zero. The "Strike Yield" will equal the CMT Yield on the date the Warrants are priced by the Company for initial offering to the public. The "Spot Yield" will equal the CMT Yield, as determined by the Calculation Agent on the Exercise Date. The Warrants will be automatically exercised on the earlier of the fifth New York Business Day immediately preceding August 25, 1995 or the New York Business Day immediately preceding the date of their earlier expiration upon delisting from, or permanent suspension from trading on, the American Stock Exchange unless the Warrants are simultaneously accepted for trading pursuant to the rules of another Self-Regulatory Organization (as defined herein). The Warrants are not exercisable at the option of the Holder. See "Description of the Warrants". THE WARRANTS INVOLVE A HIGH DEGREE OF RISK, INCLUDING THE RISK OF EXPIRING WORTHLESS UNLESS THE CMT YIELD INCREASES. INVESTORS THEREFORE SHOULD BE PREPARED TO SUSTAIN A TOTAL LOSS OF THE PURCHASE PRICE OF THEIR WARRANTS, AND ARE ADVISED TO CAREFULLY CONSIDER THE INFORMATION UNDER "RISK FACTORS RELATING TO THE WARRANTS", "DESCRIPTION OF THE WARRANTS", "DESCRIPTION OF THE WARRANTS-- DELISTING OF THE WARRANTS" AND "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS CONCERNING THE WARRANTS". Prior to issuance, the Warrants will have been approved for listing by the American Stock Exchange, subject to official notice of issuance. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNTS THE COMPANY(1) - ------------------------------------------------------------------------------- Per Warrant.............................. $ $ $ - ------------------------------------------------------------------------------- - - Total.................................... $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) Before deducting expenses payable by the Company. ---------------- The Warrants are offered by the Underwriter, subject to prior sale, when, as and if delivered to and accepted by the Underwriter, subject to certain other conditions. The Underwriter reserves the right to reject orders in whole or in part. It is expected that delivery of the Warrants will be made on or about , 1994. This Prospectus Supplement and related Prospectus may be used by the Underwriter in connection with offers and sales related to market-making transactions in the Warrants. The Underwriter may act as principal or agent in such transactions. Such sales will be made at prices related to prevailing market prices at the time of sale. ---------------- MERRILL LYNCH & CO. ---------------- The date of this Prospectus Supplement is , 1994. 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 PROSPECTUS SUPPLEMENT SUMMARY The information below is qualified in its entirety by the detailed information appearing elsewhere in this Prospectus Supplement and in the Prospectus. THE OFFERING Securities Offered........ 1,000,000 Constant Maturity U.S. Treasury Yield Increase Warrants, Expiring August 25, 1995 (the "Warrants"). Cash Settlement Value....... Each Warrant will entitle the Holder thereof to receive from the Company a cash payment (the "Cash Settlement Value") based upon the increase in the CMT Yield. The Cash Settlement Value of a Warrant will be determined on the Exercise Date as the amount which is the greater of: (i) $100 x 4 x (Spot Yield - Strike Yield), and (ii) $0. See "Description of the Warrants--Cash Settlement Value." Spot Yield.................. The CMT Yield as determined by the Calculation Agent on the Exercise Date. Strike Yield................ The CMT Yield on the date the Warrants are priced by the Company for initial offering to the public. CMT Yield................... U.S. Treasury securities, including those used to calculate the CMT Yield, are direct obligations of the United States government and carry the full faith and credit of the United States of America. The Warrants, however, are solely the obligation of the Company and are not backed by the full faith and credit of the United States. If the CMT Yield is determined using yields reported on Telerate Page 7052, in H.15(519) or as reported by the Federal Reserve Bank of New York as described in "Description of the Warrants--Cash Settlement Value", the CMT Yield will be a one-week average yield on 5-year United States Treasury securities at "constant maturity" (the "Weekly CMT Yield"). Yields on Treasury securities at "constant maturity" used to calculate the Weekly CMT Yield are interpolated from the daily yield curve. This curve, which relates the yield on a security to its time to maturity, is based upon the market yields on actively traded Treasury securities in the over-the-counter market. The constant maturity yield values are derived from the yield curve at fixed maturities. This method permits estimation of the yield for a five year maturity, even if no outstanding security has exactly five years remaining to maturity. If the Weekly CMT Yield cannot be calculated, the CMT Yield will be determined based on the yield to maturity of certain Treasury securities on the Exercise Date based on secondary market offer prices of certain dealers as more fully described in "Description of the Warrants--Cash Settlement Value". S-3 Automatic Exercise of Warrants.................... The Warrants will be automatically exercised on the fifth New York Business Day, as hereinafter defined, immediately preceding August 25, 1995 or, if the Warrants are subject to automatic exercise in the event they cease to be traded pursuant to the rules of a Self-Regulatory Organization, the New York Business Day immediately preceding the Early Expiration Date. The Warrants will be automatically exercised on the Exercise Date and are not exercisable at the option of the Holder. See "Description of the Warrants--Exercise of Warrants" and "Description of the Warrants--Delisting of Warrants". Form........................ The Warrants will be in book-entry form and, accordingly, no Holder will be entitled to receive a certificate representing such Warrants. See "Description of the Warrants-- Book-Entry Procedures and Settlement". Listing..................... Prior to issuance, the Warrants will have been approved for listing by the American Stock Exchange, subject to official notice of issuance. AMEX Symbol................. YIW.WS Certain Risk Factors........ The Warrants involve a high degree of risk, including the risk of expiring worthless. If the Spot Yield is equal to or less than the Strike Yield, the Warrant will expire worthless. INVESTORS THEREFORE SHOULD BE PREPARED TO SUSTAIN A TOTAL LOSS OF THE PURCHASE PRICE OF THEIR WARRANTS. The Warrants are not exercisable at the option of the Holder. It is not possible to predict the price at which the Warrants will trade in the secondary market or whether such market will be liquid or illiquid. The trading value of a Warrant is expected to be dependent upon a number of complex interrelated factors, including the CMT Yield, the volatility of the CMT Yield and the time remaining to the expiration of the Warrants. In the event that the Warrants are delisted from, or permanently suspended from trading on, the American Stock Exchange and the Warrants are not simultaneously accepted for trading pursuant to the rules of another self-regulatory organization whose rules are filed with the Securities and Exchange Commission (a "Self- Regulatory Organization") under the Securities Act of 1934, as amended, the Warrants will be automatically exercised on the New York Business Day immediately preceding the date such delisting or trading suspension becomes effective. At the time of such automatic exercise, the Warrants may be out-of-the-money such that the Cash Settlement Value will equal zero. The initial public offering price of the Warrants is expected to be in excess of the price a commercial purchaser might pay in the market for a comparable option involving significantly larger amounts. S-4 The CMT Yield is based upon the value of United States Treasury securities. The value of any debt, including U.S. government debt, may be affected by complex political and economic factors, including the rate of inflation, growth of gross national product and balance of payments for the United States. Prospective investors in the Warrants should be aware that the proper characterization of the Warrants for United States Federal income tax purposes is uncertain and that the ultimate United States Federal income tax treatment of the Warrants could differ significantly depending upon how the Warrants are characterized for United States Federal income tax purposes. Accordingly, prospective investors in the Warrants are urged to consult their own tax advisors as to the proper characterization of the Warrants for United States Federal income tax purposes. Investors are advised to carefully consider the foregoing risk factors, and the risks and other matters discussed under "Risk Factors Relating to the Warrants", "Description of the Warrants" and "Certain Federal Income Tax Considerations Concerning the Warrants", prior to purchasing the Warrants. Investors in Warrants....... The AMEX requires that Warrants be sold only to investors with options approved accounts and requires that its members and member organizations and registered employees thereof make certain suitability determinations before recommending transactions in Warrants. It is suggested that investors considering purchasing the Warrants be experienced with respect to options on securities and option transactions and reach an investment decision only after carefully considering the suitability of the Warrants in light of their particular circumstances. The Warrants are not suitable for persons solely dependent upon a fixed income, for retirement plan accounts or for accounts under the Uniform Gift to Minors Act. INVESTORS SHOULD BE PREPARED TO SUSTAIN A TOTAL LOSS OF THE PURCHASE PRICE OF THEIR WARRANTS. S-5 CERTAIN IMPORTANT INFORMATION CONCERNING THE WARRANTS A Holder will receive a cash payment on the Expiration Date only if the Warrants have a Cash Settlement Value in excess of zero on the Exercise Date. The Spot Yield determined on the Exercise Date will establish whether the Warrants have a positive Cash Settlement Value on the Expiration Date. The Warrants may be "out-of-the-money" (i.e., their Cash Settlement Value will be zero) when initially sold and the Warrants will be "in-the-money" (i.e., their Cash Settlement Value will exceed zero) only if the Spot Yield is greater than the Strike Yield. If the Spot Yield is equal to or less than the Strike Yield, the Warrant will expire worthless and the Holder will have sustained a total loss of the purchase price of such Warrant. Investors therefore should be prepared to sustain a total loss of the purchase price of their Warrants. On January 10, 1994 the CMT Yield quoted by the Federal Reserve Bank for the week ended January 7, 1994 was 5.21%. RISK FACTORS RELATING TO THE WARRANTS THE WARRANTS INVOLVE A HIGH DEGREE OF RISK, INCLUDING THE RISK OF EXPIRING WORTHLESS. INVESTORS THEREFORE SHOULD BE PREPARED TO SUSTAIN A TOTAL LOSS OF THE PURCHASE PRICE OF THEIR WARRANTS. IT IS SUGGESTED THAT INVESTORS CONSIDERING PURCHASING THE WARRANTS BE EXPERIENCED WITH RESPECT TO OPTIONS ON SECURITIES AND OPTION TRANSACTIONS AND REACH AN INVESTMENT DECISION ONLY AFTER CAREFULLY CONSIDERING ALL THE RISK FACTORS SET FORTH IN THIS SECTION OF THIS PROSPECTUS SUPPLEMENT, THE SUITABILITY OF THE WARRANTS IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES AND ALL THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS SUPPLEMENT AND IN THE ACCOMPANYING PROSPECTUS. Exercise of the Warrants. The Warrants will be automatically exercised on the Exercise Date and are not exercisable at the option of the Holder. Automatic Exercise of the Warrants upon Delisting. In the event that the Warrants are delisted from, or permanently suspended from trading on, the American Stock Exchange and the Warrants are not simultaneously accepted for trading pursuant to the rules of another self-regulatory organization (a "Self- Regulatory Organization") that are filed with the Securities and Exchange Commission under the Securities Act of 1934, as amended, the Warrants will expire on the date such delisting or trading suspension becomes effective and will be automatically exercised on the New York Business Day immediately preceding the date of such early expiration. At the time of such automatic exercise, the Warrants may be out-of-the-money such that the Cash Settlement Value will equal zero. Offering Price of the Warrants. The initial public offering price of the Warrants is expected to be in excess of the price a commercial purchaser of or dealer in options on the CMT Yield might pay for a comparable option involving significantly larger amounts. Certain Factors Affecting the Value of the Warrants. Each Warrant may have a Cash Settlement Value of zero at issuance. The Cash Settlement Value of the Warrants at any time prior to expiration is typically expected to be less than the Warrants' trading value at that time. The difference between the trading value and the Cash Settlement Value will reflect a number of factors, including a "time value" for the Warrants. The "time value" of the Warrants will depend upon the length of the period remaining to expiration, among other factors. The expiration date of the Warrants will be accelerated should the Warrants be delisted or should their trading on the American Stock Exchange be suspended permanently unless the Warrants simultaneously are accepted for trading pursuant to the rules of another Self-Regulatory Organization. Any such acceleration would result in the total loss of any otherwise remaining "time value" and could occur when the Warrants are out-of-the-money, thus resulting in total loss of the purchase price of the Warrants. See "Description of the Warrants--Delisting of the Warrants". Before exercising or selling Warrants, Holders should carefully consider the trading value of the Warrants, the value of the CMT Yield and probable range of Cash Settlement Values and any related transaction costs. S-6 There can be no assurance as to how the Warrants will trade in the secondary market or whether such market will be liquid. The trading value of a Warrant is expected to be dependent upon a number of complex interrelated factors, including those listed below. The expected effect on the trading value of a Warrant of each of the factors listed below, assuming in each case that all other factors are held constant, is as follows: (1) The CMT Yield. If the CMT Yield increases relative to the Strike Yield, the trading value of a Warrant is expected to increase. If the CMT Yield decreases relative to the Strike Yield, the trading value of a Warrant is expected to decrease. (2) The volatility of the CMT Yield. If the volatility of the CMT Yield increases, the trading value of a Warrant is expected to increase. If such volatility decreases, the trading value of a Warrant is expected to decrease. (3) The general level of interest rates in the United States. If the general level of interest rates in the United States increases, the trading value of a Warrant is expected to increase. If the general level of interest rates in the United States decreases, the trading value of a Warrant is expected to decrease. (4) The time remaining to the expiration date of the Warrants. As the time remaining to the expiration date of the Warrants decreases, the trading value of a Warrant is expected to decrease. As noted above, these hypothetical scenarios are based on the assumption that all other factors are held constant. In reality, it is unlikely that only one factor would change in isolation, since changes in one factor usually cause, or result from, changes in others. Some of the factors referred to above are, in turn, influenced by the political and economic factors discussed below. Warrants Not Standardized Options Issued by the Options Clearing Corporation. Each Warrant constitutes an option having a value based upon one or more United States Treasury securities, as calculated in the CMT Yield. However, the Warrants are not standardized options of the type issued by the Options Clearing Corporation (the "OCC"), a clearing agency regulated by the Securities and Exchange Commission. For example, unlike purchasers of OCC standardized options who have the credit benefits of guarantees and margin and collateral deposits by OCC clearing members to protect the OCC from a clearing member's failure, purchasers of Warrants must look solely to the Company for performance of its obligations to pay the Cash Settlement Value on the exercise of Warrants. Further, the market for the Warrants is not expected to be generally as liquid as the market for some OCC standardized options. The Warrants are unsecured contractual obligations of the Company and will rank on a parity with the Company's other unsecured contractual obligations and with the Company's unsecured and unsubordinated debt. However, since the Company is a holding company, the right of the Company, and hence the right of creditors of the Company (including Holders of the Warrants), to participate in any distribution of the assets of any subsidiary upon its liquidation or reorganization or otherwise is necessarily subject to the prior claims of creditors of the subsidiary, except to the extent that claims of the Company itself as a creditor of the subsidiary may be recognized. In addition, dividends, loans and advances from certain subsidiaries, including Merrill Lynch, Pierce, Fenner & Smith Incorporated, to the Company are restricted by net capital requirements under the Securities Exchange Act of 1934, as amended, and under rules of certain exchanges and other regulatory bodies. General Risk Considerations. Options and warrants provide opportunities for investment and pose risks to investors as a result of fluctuations in the value of the underlying investment. In general, certain of the risks associated with the Warrants are similar to those generally applicable to other options or warrants of private corporate issuers. The purchaser of a Warrant may lose his entire investment. This risk reflects the nature of a Warrant as an asset which tends to decline in value over time and which may, depending on the CMT Yield as compared to the Strike Yield, become worthless when it expires. Assuming all other factors are held constant, the more a Warrant is out-of-the-money and the shorter its remaining term to expiration, the greater the risk that a S-7 purchaser of the Warrant will lose all of his investment. This means that the purchaser of a Warrant who does not sell it in the secondary market will necessarily lose his entire investment in the Warrant if it expires when the Spot Yield is less than or equal to the Strike Yield. If the CMT Yield does not increase relative to the Strike Yield to an extent sufficient to cover an investor's cost of the Warrant (i.e., the purchase price plus transaction costs, if any) before the Warrant expires, the investor will lose all or a part of his investment in the Warrant upon expiration. The CMT Yield is derived from United States Treasury securities. The value of any debt security, including Treasury securities, may be affected by complex political and economic factors, including the rate of inflation, growth of gross national product and balance of payments for the United States. Prospective investors in the Warrants should be aware that the proper characterization of the Warrants for United Stated Federal income tax purposes is uncertain and that the ultimate United States Federal income tax treatment of the Warrants could differ significantly depending upon how the Warrants are characterized for United States Federal income tax purposes. Accordingly, prospective investors in the Warrants are urged to consult their own tax advisors as to the proper characterization of the Warrants for United States Federal income tax purposes. The AMEX requires that Warrants be sold only to investors with options approved accounts and requires that its members and member organizations and registered employees thereof make certain suitability determinations before recommending transactions in Warrants. It is suggested that investors considering purchasing the Warrants be experienced with respect to options on securities and option transactions and understand the risks of transactions such as the Warrants and reach an investment decision only after carefully considering the suitability of the Warrants in light of their particular circumstances. The Warrants are not suitable for persons solely dependant upon a fixed income, for retirement plan accounts or for accounts under the Uniform Gift to Minors Act. INVESTORS SHOULD BE PREPARED TO SUSTAIN A TOTAL LOSS OF THE PURCHASE PRICE OF THEIR WARRANTS. S-8 RECENT DEVELOPMENTS The following summary of certain consolidated financial information concerning the Company for the nine months ended September 25, 1992 and September 24, 1993 was derived from, and is qualified in its entirety by reference to, the condensed consolidated financial statements and data contained in the Company's Quarterly Report on Form 10-Q for the quarter ended September 24, 1993 and other documents incorporated by reference herein. See "Incorporation of Certain Documents by Reference" in the accompanying Prospectus. Such condensed consolidated financial statements are unaudited; however, in the opinion of management of the Company, all adjustments (consisting only of normal recurring accruals and a non-recurring pretax charge of $103.0 million ($59.7 million after income taxes) related to the Company's decision not to occupy certain floors at its World Financial Center Headquarters facility) necessary for a fair statement of the results of operations have been included. The Company conducts its business in highly volatile markets. Consequently, the Company's results can be affected by many factors, including general market conditions, the liquidity of secondary markets, the level and volatility of interest rates and currency values, the valuation of securities positions, competitive conditions, and the size, number and timing of transactions. In periods of unfavorable market activity, profitability can be adversely affected because certain expenses remain relatively fixed. As a result, net earnings and revenues can vary significantly from period to period. Thus, interim results may not necessarily be representative of the full year results of operations.
NINE MONTHS ENDED ------------------------- SEPT. 25, SEPT. 24, 1992 1993 ------------ ------------ (IN THOUSANDS, EXCEPT RATIOS) Revenues............................................. $ 10,160,808 $ 12,078,667 Net Revenues(1)...................................... $ 6,512,337 $ 7,816,859 Earnings before income taxes and cumulative effect of changes in accounting principles................. $ 1,260,284 $ 1,827,528 Net earnings......................................... $ 672,384 $ 1,047,120 Ratio of earnings to fixed charges(2)................ 1.3 1.4 Total assets......................................... $111,896,715 $147,611,339 Long-term borrowings(3).............................. $ 10,818,478 $ 13,027,015 Stockholders' equity................................. $ 4,439,352 $ 5,608,656
- -------- (1) Net revenues are revenues net of interest expense. (2) For the purpose of calculating the ratio of earnings to fixed charges, "earnings" consists of earnings from continuing operations before income taxes and fixed charges. "Fixed charges" consists of interest costs and that portion of rentals estimated to be representative of the interest factor. (3) To finance its diverse activities, the Company and certain of its subsidiaries borrow substantial amounts of short-term funds on a regular basis. Although the amount of short-term borrowings significantly varies with the level of general business activity, on September 24, 1993, $336,151,000 of bank loans and $12,916,972,000 of commercial paper were outstanding. In addition, certain of the Company's subsidiaries lend securities and enter into repurchase agreements to obtain financing. At September 24, 1993, cash deposits for securities loaned and securities sold under agreements to repurchase amounted to $3,267,169,000 and $52,771,145,000, respectively. From September 25, 1993 to January 7, 1994, long-term borrowings, net of repayments and repurchases, increased in the amount of approximately $368,470,000. NINE MONTHS ENDED SEPTEMBER 24, 1993 Net earnings for the first nine months of 1993 were a record $1,047.1 million and surpassed full year 1992 results. Nine month 1993 net earnings increased $374.7 million (56%) above the $672.4 million reported S-9 in the corresponding 1992 period. Results for the first nine months of 1993 include a previously announced (1993 first quarter) non-recurring pretax lease charge totaling $103.0 million ($59.7 million after income taxes) related to the Company's decision not to occupy certain space at its World Financial Center Headquarters facility. Net earnings in 1992 were restated to reflect the previously reported $58.6 million cumulative effect charge related to the early adoption of Statement of Financial Accounting Standards ("SFAS") No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions" and SFAS No. 109, "Accounting for Income Taxes." Earnings before cumulative effect of changes in accounting principles increased 43% above the $731.0 million reported in the corresponding 1992 period. Revenues after interest expense ("net revenues") advanced 20% in the first nine months of 1993 to $7,817 million. The increase was broad based with total revenues up 19% from the comparable 1992 period to $12,079 million. Commission revenues increased 14% during the first nine months of 1993 to $2,071 million on the continued strength of listed securities transactions and higher mutual fund commission volume. Commissions on listed securities benefited from higher trading volume and increases in average market prices. Demand for mutual funds remained strong as investors continued to diversify their assets to achieve potentially higher returns. Contributing to the increase in mutual fund commissions was the growth in sales of front-end funds and a higher level of distribution fees earned on deferred charge funds. Interest and dividend revenues for the first nine months of 1993 advanced 17% to $5,056 million, while interest expense, which includes dividend expense, increased 17% to $4,262 million. As a result, net interest and dividend profit rose 16% to $794 million. The increase in interest and dividend profit is attributable to increased collateralized lending activities, higher interest earning assets, reduced financing costs due to lower interest rates, and a growing equity base. Principal transactions revenues for the 1993 nine-month period rose 28% to $2,222 million. Fixed-income and foreign exchange trading, in the aggregate, benefited from higher revenues in swaps and derivatives, corporate bonds, municipal securities and money market instruments. Equity trading revenues increased due primarily to higher volume in over-the-counter and foreign equities. Investment banking revenues rose 17% during the first nine months of 1993 to $1,311 million. Contributing to this strong performance were higher underwriting revenues from equity securities, corporate bonds, private placements and high-yield debt. Strategic services revenues, which includes merger and acquisition and advisory services, advanced during the 1993 third quarter, but on a year-to-date basis, revenues from strategic services were slightly below last year's levels. Asset management and custodial fees rose 12% during the 1993 nine-month period to $727 million, due primarily to increases in stock and bond fund assets under management. Other revenues increased 38% from a year ago to $692 million. Contributing to the advance were higher fee revenues from the Merrill Lynch Consults(Registered Trademark) investor portfolio management service, decreases in net investment losses attributable to merchant banking and insurance activities, and increased revenues from mortgage related transactions. Non-interest expenses increased 14% over the corresponding 1992 period to $5,989 million. Compensation and benefits expense, which represented approximately 64.1% of total non-interest expenses, increased 16% due primarily to increases in incentive and production related compensation tied directly to the Company's performance. Nevertheless, compensation and benefits expense as a percentage of net revenues declined to 49.1% from 50.6% in the year-ago period. Facilities-related costs, including occupancy, communications and equipment rental expenses, and depreciation and amortization, increased 15% as a result of the non-recurring pretax lease charge of $103.0 million. Excluding the lease charge, facilities-related costs rose 2%. Brokerage, clearing and exchange fees were up 6% due to increased business volume. Advertising and market development expenses increased 18% as a result of higher sales promotion costs and recognition programs for Financial Consultants tied to the higher level of business activity and discretionary increases in local advertising. Professional fees were up 3%, partially as a result of higher system consulting S-10 and employment service fees, while other expenses increased 2% due in part to the write-off of certain fixed assets. Income tax expense totaled $780 million representing a 42.7% effective tax rate. This compared with a 42.0% effective tax rate in the corresponding 1992 period. The increase in the effective tax rate is due primarily to legislation raising corporate income tax rates retroactive to the beginning of the year. Subsequent to quarter-end, the Company's Board of Directors declared a two- for-one common stock split, effected in the form of a 100% stock dividend, paid November 24, 1993 to stockholders of record on October 22, 1993. All amounts included in the prospectus are presented on a pre-split basis. The Company believes that its equity base is adequate relative to the level and composition of its assets and the mix of its businesses. In the normal course of its investment banking, trading and insurance activities, the Company underwrites, purchases, sells and makes markets in high-yield securities and other non-investment grade securities. Additionally, the Company provides financing and advisory services to corporations entering into leveraged transactions. These activities are subject to risks related to the creditworthiness of the issuers and the liquidity of the market for such securities, in addition to the usual risks associated with investing, extending credit, underwriting and trading in investment grade instruments. At September 24, 1993, the carrying value of extensions of credit provided to corporations entering into leveraged transactions aggregated $496 million (excluding unutilized revolving lines of credit and other lending commitments of $72 million), consisting primarily of senior term and subordinated financing to 44 medium-sized corporations. At September 24, 1993, the Company had one bridge loan outstanding, totaling $70 million, which has since been repaid. Loans to highly leveraged corporations are carried at unpaid principal balance less a reserve for estimated losses. The allowance for loan losses is estimated based on a review of each loan, and considerations of economic, market and credit conditions. Direct equity investments made in conjunction with the Company's investment and merchant banking activities, which are generally recorded at the lower of cost or estimated net realizable value, aggregated $306 million at September 24, 1993, representing investments in 85 enterprises. At September 24, 1993, the Company held interests in partnerships, totaling $85 million (recorded on the cost basis), that invest in highly leveraged transactions and non-investment grade securities. The Company has a co- investment arrangement to enter into direct equity investments. At September 24, 1993, the additional co-investment commitments were $81 million. The Company also has committed to invest an additional $14 million in partnerships that invest in leveraged transactions. As a market-maker, the Company holds trading positions in non-investment grade securities. At September 24, 1993, the fair value of long and short non- investment grade trading positions amounted to $2,065 million and $236 million, respectively, and in aggregate (i.e., the sum of long and short trading positions), represented 3.6% of aggregate consolidated trading positions. Investments of the Company's insurance subsidiaries, which are carried at amortized cost, include non-investment grade securities. At September 24, 1993, $492 million or 6.0% of the aggregate carrying value of such investments were non-investment grade. As of September 24, 1993, the largest non-investment grade holdings related to a single issuer totaled $158 million. No one industry sector represented more than 16% of total non-investment grade positions. At September 24, 1993, the Company held an aggregate carrying value of $294 million in securities of issuers who were in various stages of bankruptcy proceedings or in default. Approximately 46% of this amount resulted from the Company's market-making activities in such securities. S-11 DESCRIPTION OF THE WARRANTS GENERAL An aggregate of 1,000,000 Warrants will be issued. The Warrants will be issued under a Warrant Agreement (the "Warrant Agreement"), to be dated as of , 1994, between the Company and Citibank, N.A., as Warrant Agent (the "Warrant Agent"). The following statements with respect to the Warrants are summaries of the detailed provisions of the Warrant Agreement, the form of which is filed as an exhibit to the Registration Statement. Wherever particular provisions of the Warrant Agreement or terms defined therein are referred to, such provisions or definitions are incorporated by reference as a part of the statements made, and the statements are qualified in their entirety by such reference. A Warrant will not require, or entitle, a Holder to sell or purchase a U.S. Treasury security to or from the Company. The Company will make only a cash settlement, if any, with respect to the Warrants. The Warrants will expire on August 25, 1995 (the "Expiration Date") or on such earlier date as described under "Exercise of Warrants" and "Delisting of Warrants". The Warrants will be automatically exercised on the Exercise Date, as set forth under "Exercise of Warrants", and are not exercisable at the option of the Holder. The term "New York Business Day", as used herein, means any day other than a Saturday or a Sunday or a day on which commercial banks in The City of New York are required or authorized by law or executive order to be closed. The Warrants will be unsecured contractual obligations of the Company and will rank on a parity with the Company's other unsecured contractual obligations and with the Company's unsecured and unsubordinated debt. However, since the Company is a holding company, the right of the Company, and hence the right of creditors of the Company (including Holders of the Warrants), to participate in any distribution of the assets of any subsidiary upon its liquidation or reorganization or otherwise is necessarily subject to the prior claims of creditors of the subsidiary, except to the extent that claims of the Company itself as a creditor of the subsidiary may be recognized. In addition, dividends, loans and advances from certain subsidiaries, including Merrill Lynch, Pierce, Fenner & Smith Incorporated, to the Company are restricted by net capital requirements under the Securities Exchange Act of 1934, as amended, and under rules of certain exchanges and other regulatory bodies. CASH SETTLEMENT VALUE The Cash Settlement Value of a Warrant will be determined on the Exercise Date as the amount which is the greater of: (i) $100 x 4 x (Spot Yield - Strike Yield), and (ii) $0 The "Strike Yield" will equal the CMT Yield on the date the Warrants are priced by the Company for initial offering to the public. The "Spot Yield" will be determined on the Exercise Date by Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Calculation Agent"), an affiliate of the Company. The "Spot Yield will be determined as follows: (i) The Spot Yield will equal the rate which appears on Telerate Page 7052, "WEEKLY AVG YIELDS ON TREASURY CONSTANT MATURITIES ", under the column entitled "5 YR", which appears as of 2:30 P.M., New York time, on the Exercise Date. "Telerate Page 7052" means the display designated as page 7052 on the Dow Jones Telerate Service (or such page as may replace page 7052 on that service). The rate which appears on Telerate Page 7052 under the column entitled "5 YR" is the rate described in paragraph (ii) below published in the most recent H.15(519) (as defined below). (ii) If the Spot Yield as described in clause (i) is not available by 2:30 P.M., New York City time, on the Exercise Date, the Spot Yield will equal the one-week average yield on 5-year United States Treasury securities at "constant maturity", as published in the most recent H.15(519) available on the Exercise Date, in the column "Week Ending" for the most recent date opposite the heading "Treasury constant maturities, 5- Year." "H.15(519)" means the weekly statistical release designated as such, published by the Board of Governors of the Federal Reserve System. S-12 (iii) If the most recent H.15(519) available on the Exercise Date as described in clause (ii) above was published more than fourteen calendar days prior to the Exercise Date, the Spot Yield will equal the one-week average yield on 5-year United States Treasury securities at "constant maturity" as otherwise announced by the Federal Reserve Bank of New York on the Exercise Date for the preceding week. (iv) If the Spot Yield as described in clause (iii) is not announced by 3:00 p.m., New York City time, on the Exercise Date, the Spot Yield will be calculated by the Calculation Agent and will be a yield to maturity (expressed as a bond equivalent and as a decimal rounded, if necessary, to the nearest one hundred-thousandth of a percentage point with five one- millionths of a percentage point rounded up, on the basis of a year of 365 days, applied on a daily basis) based on the arithmetic mean of the secondary market offer prices as of approximately 3:30 p.m., New York City time, on the Exercise Date of three leading primary United States government securities dealers in The City of New York selected by the Calculation Agent (from five such dealers and eliminating the highest quotation (or, in the event of equality, one of the highest) and the lowest quotation (or, in the event of equality, one of the lowest)) for Treasury Notes with an original maturity of approximately five years, a remaining term to maturity of not less than four years and in an amount of $100,000,000. If three or four (and not five) of such dealers are quoting as described in this clause (iv), then the Spot Yield will be based on the arithmetic mean of the bid prices obtained and neither the highest nor lowest of such quotations will be eliminated. (v) If fewer than three dealers selected by the Calculation Agent are quoting as described in clause (iv), the Spot Yield will be calculated by the Calculation Agent and will be a yield to maturity (expressed as a bond equivalent and as a decimal rounded, if necessary, to the nearest one hundred-thousandth of a percentage point with five one-millionths of a percentage point rounded up, on the basis of a year of 365 days, and applied on a daily basis) based on the arithmetic mean of the secondary market offer prices as of approximately 3:30 p.m., New York City time, on the Exercise Date of three leading primary United States government securities dealers in The City of New York selected by the Calculation Agent (from five such dealers and eliminating the highest quotation (or, in the event of equality, one of the highest) and the lowest quotation (or, in the event of equality, one of the lowest)), for Treasury Notes with an original maturity of approximately ten years, a remaining term to maturity closest to five years and in an amount of $100,000,000. If three or four (and not five) of such dealers are quoting as described in this clause, then the Spot Yield will be based on the arithmetic mean of the bid prices obtained and neither the highest nor lowest of such quotes will be eliminated. If two Treasury Notes with an original maturity of approximately ten years have remaining terms to maturity equally close to five years, the quotes for the Treasury Note with the shorter remaining term to maturity will be used. The Cash Settlement Value will be rounded, if necessary, to the nearest cent (with one-half cent being rounded upwards). Set forth below is an illustration of the Cash Settlement Values of Warrants on the Exercise Date based on the Strike Yield equal to 5.00% and various hypothetical Spot Rates. The actual Cash Settlement Value of a Warrant will depend entirely on the actual Strike Yield and the actual Spot Yield on the Exercise Date. The illustrative Cash Settlement Values in the table do not reflect any "time value" for a Warrant, which may be reflected in trading value, and are not necessarily indicative of potential profit or loss, which are also affected by purchase price and transaction costs.
HYPOTHETICAL CASH SETTLEMENT CMT SPOT YIELD VALUE OF A WARRANT -------------- ------------------ 4.00%................................................. $0.00 4.50%................................................. $0.00 5.00%................................................. $0.00 5.50%................................................. $2.00 6.00%................................................. $4.00 6.50%................................................. $6.00 7.00%................................................. $8.00
S-13 BOOK-ENTRY PROCEDURES AND SETTLEMENT Upon issuance, all Warrants will be represented by one registered global currency Warrant (the "Global Warrant"). The Global Warrant will be deposited with, or on behalf of, The Depository Trust Company, as Securities Depository, and registered in the name of the Securities Depository or a nominee thereof. Unless and until it is exchanged in whole or in part for Warrants in definitive form in the limited circumstances described below, the Global Warrant may not be transferred except as a whole by the Securities Depository to a nominee of such Securities Depository or by a nominee of such Securities Depository to such Securities Depository or another nominee of such Securities Depository or by such Securities Depository or any such nominee to a successor of such Securities Depository or a nominee of such successor. The Securities Depository has advised the Company as follows: The Securities Depository is a limited-purpose trust company organized under the Banking Law of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provision of Section 17A of the Securities Exchange Act of 1934, as amended. The Securities Depository was created to hold securities of its participants and to facilitate the clearance and settlement of securities transactions among its participants in such securities through electronic book-entry changes in accounts of the participants, thereby eliminating the need for physical movement of securities certificates. The Securities Depository's participants include securities brokers and dealers (including the Underwriter), banks, trust companies, clearing corporations, and certain other organizations, some of whom (and/or their representatives) own the Securities Depository. Access to the Securities Depository book-entry system is also available to others, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly. Persons who are not participants may beneficially own securities held by the Securities Depository only through participants. Ownership of beneficial interests in the Warrants will be limited to persons that have accounts with the Securities Depository ("Agent Members") or persons that may hold interests through Agent Members. The Securities Depository has advised the Company that upon the issuance of the Global Warrant representing the Warrants, the Securities Depository will credit, on its book-entry registration and transfer system, the Agent Members' accounts with the respective principal amounts of the Warrants represented by the Global Warrant. Ownership of beneficial interests in the Global Warrant will be shown on, and the transfer of such ownership interests will be effected only through, records maintained by the Securities Depository (with respect to interests of Agent Members) and on the records of Agent Members (with respect to interests of persons held through Agent Members). The laws of some states may require that certain purchasers of securities take physical delivery of such securities in definitive form. Such limits and such laws may impair the ability to own, transfer or pledge beneficial interests in the Global Warrant. So long as the Securities Depository, or its nominee, is the registered owner of the Global Warrant, the Securities Depository or its nominee, as the case may be, will be considered the sole owner or Holder of the Warrants represented by the Global Warrant for all purposes under the Warrant Agreement. Except as provided below, owners of beneficial interests in the Global Warrant will not be entitled to have the Warrants represented by the Global Warrant registered in their names, will not receive or be entitled to receive physical delivery of the Warrants in definitive form and will not be considered the owners or Holders thereof under the Warrant Agreement. Accordingly, each person owning a beneficial interest in the Global Warrant must rely on the procedures of the Securities Depository and, if such person is not an Agent Member, on the procedures of the Agent Member through which such person owns its interest, to exercise any rights of a Holder under the Warrant Agreement. The Company understands that under existing industry practices, in the event that the Company requests any action of Holders or that an owner of a beneficial interest in such a Global Warrant desires to give or take any action which a Holder is entitled to give or take under the Warrant Agreement, the Securities Depository would authorize the Agent Members holding the relevant beneficial interests to give or take such action, and such Agent Members would authorize beneficial owners owning through such Agent Members to give or take such action or would otherwise act upon the instructions of beneficial owners through them. S-14 The Cash Settlement Value in exercise of Warrants registered in the name of the Securities Depository or its nominee will be paid by the Warrant Agent to the Agent Members or, in the case of delisting, to the Securities Depository. None of the Company, the Warrant Agent or any other agent of the Company or agent of the Warrant Agent will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests or for supervising or reviewing any records relating to such beneficial ownership interests. The Company expects that the Warrant Agent, upon the receipt of payment of the Cash Settlement Value in respect of the Global Warrant, will pay the relevant Agent Member in an amount proportionate to its beneficial interest in the Global Warrant and that such Agent Member will credit the accounts of the beneficial owners of such Warrants. The Company expects that the Securities Depository, in the case of delisting, upon receipt of payment of the Cash Settlement Value in respect of the Global Warrant, will credit the accounts of the Agent Members with payment in amounts proportionate to their respective beneficial interests in the Global Warrant so delisted, as shown on the records of the Securities Depository. The Company also expects that payments by Agent Members to owners of beneficial interests in the Global Warrant will be governed by standing customer instructions and customary practices, as is now the case with securities held for the accounts of customers in bearer form or registered in "street name", and will be the responsibility of such Agent Members. It is suggested that purchasers of Warrants with accounts at more than one brokerage firm effect transactions in the Warrants, only through the brokerage firm or firms which hold that purchaser's Warrants. If the Securities Depository is at any time unwilling or unable to continue as depository and a successor Securities Depository is not appointed by the Company within 90 days or if the Company is subject to certain events in bankruptcy, insolvency or reorganization, the Company will issue Warrants in definitive form in exchange for the Global Warrant. In addition, the Company may at any time determine not to have the Warrants represented by the Global Warrant and, in such event, will issue Warrants in definitive form in exchange for the Global Warrant. In any such instance, an owner of a beneficial interest in the Global Warrant will be entitled to have a number of Warrants equivalent to such beneficial interest registered in its name and will be entitled to physical delivery of such Warrants in definitive form. EXERCISE OF WARRANTS The Warrants are not exercisable at the option of the Holder. The Warrants will be automatically exercised on the fifth New York Business Day immediately preceding the Expiration Date or, if an Early Expiration Date occurs, the New York Business Day immediately preceding the Early Expiration Date (the "Exercise Date"). The Warrant Agent will obtain the Spot Yield on the Exercise Date from Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Calculation Agent"), an affiliate of the Company, and determine the Cash Settlement Value of the Warrants. The Warrant Agent will pay the Cash Settlement Value of a Warrant to the Securities Depository by check on the Expiration Date and, if August 25, 1995 is not a New York Business Day, on the next succeeding New York Business Day. If an Early Expiration Date occurs, as described below under "Automatic Exercise Prior to the Expiration Date", the Warrant Agent will pay the Cash Settlement Value of a Warrant to the Securities Depository by check on the fifth New York Business Day following the Early Expiration Date (as defined below). See "Description of the Warrants--Book-Entry Procedures and Settlement". LISTING OF THE WARRANTS Prior to issuance, the Warrants will have been approved for listing by the American Stock Exchange, subject to official notice of issuance. The American Stock Exchange will expect to cease trading the Warrants on such Exchange as of the close of business on the Expiration Date. S-15 AUTOMATIC EXERCISE PRIOR TO THE EXPIRATION DATE In the event that the Warrants are delisted from, or permanently suspended from trading on, the American Stock Exchange and the Warrants are not simultaneously accepted for trading pursuant to the rules of another self- regulatory organization whose rules are filed with the Securities and Exchange Commission (a "Self-Regulatory Organization") under the Securities Act of 1934, as amended, the Warrants will expire on the date such delisting or trading suspension becomes effective (an "Early Expiration Date") and the Warrants will be automatically exercised on the New York Business Day immediately preceding such Early Expiration Date, and the Cash Settlement Value, if any (determined as provided under "Exercise of Warrants"), of such automatically exercised Warrants will be paid on the fifth New York Business Day following such Early Expiration Date. Settlement shall otherwise occur as described under "Book- Entry Procedures and Settlement". The Company will notify Holders as soon as practicable of such delisting or trading suspension. The Company has agreed in the Warrant Agreement that it will not seek delisting of the Warrants or suspension of their trading on the American Stock Exchange. The Warrants may also expire on the date of occurrence of certain events in bankruptcy, insolvency or reorganization involving the Company (any such date also being an "Early Expiration Date") and the Warrants will be automatically exercised as of the New York Business Day immediately preceding such Early Expiration Date. The Cash Settlement Value, if any (determined as provided under "Exercise of Warrants"), of such automatically exercised Warrants will be due and payable on the fifth New York Business Day following such Early Expiration Date. Settlement will otherwise occur as described under "Book-Entry Procedures and Settlement". MODIFICATION The Warrant Agreement and the terms of the Warrants may be amended by the Company and the Warrant Agent, without the consent of the Holders of any Warrants, for the purpose of curing any ambiguity, or of curing, correcting or supplementing any defective or inconsistent provision contained therein, or in any other manner which the Company may deem necessary or desirable and which will not materially and adversely affect the interests of the Holders of the Warrants. The Company and the Warrant Agent also may modify or amend the Warrant Agreement and the terms of the Warrants, with the consent of the Holders of not less than a majority in number of the then outstanding Warrants affected, provided that no such modification or amendment that changes the Spot Yield so as to adversely affect the Holder, shortens the period of time remaining to the Expiration Date or otherwise materially and adversely affects the exercise rights of the Holders of the Warrants or reduces the percentage of the number of outstanding Warrants, the consent of whose Holders is required for modification or amendment of a Warrant Agreement or the terms of Warrants may be made without the consent of the Holders of Warrants affected thereby. MERGER AND CONSOLIDATION The Company may consolidate or merge with or into any other corporation, and the Company may sell, lease or convey all or substantially all of its assets to any corporation, provided that the corporation (if other than the Company) formed by or resulting from any such consolidation or merger or which shall have received such assets shall be a corporation organized and existing under the laws of the United States of America or a state thereof and shall assume payment of the Cash Settlement Value with respect to all unexercised Warrants, according to their tenor, and the due and punctual performance and observance of all of the covenants and conditions of the Warrant Agreement and of the Global Warrant to be performed by the Company. CMT YIELD GENERAL U.S. Treasury securities, including those used to calculate the CMT Yield, are direct obligations of the United States government and carry the full faith and credit of the United States of America. The Warrants, S-16 however, are solely the obligation of the Company and are not backed by the full faith and credit of the United States. If the CMT Yield is determined using yields reported on Telerate Page 7052, in H.15(519) or as reported by the Federal Reserve Bank of New York as described in "Description of the Warrants-- Cash Settlement Value", the CMT Yield will be a one-week average yield on 5- year United States Treasury securities at "constant maturity" (the "Weekly CMT Yield"). Yields on Treasury securities at "constant maturity" used to calculate the Weekly CMT Yield are interpolated from the daily yield curve. This curve, which relates the yield on a security to its time to maturity, is based upon the market yields on actively traded Treasury securities in the over-the- counter market. The constant maturity yield values are derived from the yield curve at fixed maturities. This method permits estimation of the yield for a five year maturity, even if no outstanding security has exactly five years remaining to maturity. If the Weekly CMT Yield cannot be calculated, the CMT Yield will be determined based on the yield to maturity of certain Treasury securities on the Exercise Date based on secondary market offer prices of certain dealers as more fully described in "Description of the Warrants--Cash Settlement Value". The value of the CMT Yield during the term of the Warrants will likely not be calculated based on one specific Treasury security. HISTORICAL INFORMATION ON THE CMT YIELD The following table sets forth the monthly averages of the daily CMT Yield from 1989 to the present. The CMT Yield used to calculate the Cash Settlement Value will be the one-week average yield on 5-year United States Treasury securities at "constant maturity" for the calendar week preceding the Exercise Date, or if such yield is not available as described under "Description of the Warrants--Cash Settlement Value", the yield to maturity on specified United States Treasury securities on the Exercise Date. The historical experience of the CMT Yield should not be taken as an indication of future performance and no assurance can be given that the value of the CMT Yield will not decline and thereby cause the Cash Settlement Value with respect to the Warrants to equal zero.
CMT YIELD --------- 1989: January........................................................ 9.15 February....................................................... 9.27 March.......................................................... 9.51 April.......................................................... 9.30 May............................................................ 8.91 June........................................................... 8.29 July........................................................... 7.83 August......................................................... 8.09 September...................................................... 8.17 October........................................................ 7.97 November....................................................... 7.81 December....................................................... 7.75 1990: January........................................................ 8.12 February....................................................... 8.42 March.......................................................... 8.60 April.......................................................... 8.77 May............................................................ 8.74 June........................................................... 8.43 July........................................................... 8.33 August......................................................... 8.44 September...................................................... 8.51 October........................................................ 8.33 November....................................................... 8.02 December....................................................... 7.73
S-17
CMT YIELD --------- 1991: January........................................................ 7.70 February....................................................... 7.47 March.......................................................... 7.77 April.......................................................... 7.70 May............................................................ 7.70 June........................................................... 7.94 July........................................................... 7.91 August......................................................... 7.43 September...................................................... 7.14 October........................................................ 6.87 November....................................................... 6.62 December....................................................... 6.19 1992: January........................................................ 6.24 February....................................................... 6.58 March.......................................................... 6.95 April.......................................................... 6.78 May............................................................ 6.69 June........................................................... 6.48 July........................................................... 5.84 August......................................................... 5.60 September...................................................... 5.38 October........................................................ 5.60 November....................................................... 6.04 December....................................................... 6.08 1993: January........................................................ 5.83 February....................................................... 5.43 March.......................................................... 5.19 April.......................................................... 5.13 May............................................................ 5.20 June........................................................... 5.22 July........................................................... 5.09 August......................................................... 5.03 September...................................................... 4.73 October........................................................ 4.71 November....................................................... 5.06 December....................................................... 5.15 1994: January (week ending January 7, 1994).......................... 5.21
- -------- Source: Federal Reserve Board Statistical Release H.15(519) under "Selected Interest Rates". S-18 The following graph sets forth the historical performance of the monthly averages of the daily CMT Yield from January 1989 through December 1993. PAST MOVEMENTS OF THE CMT YIELD ARE NOT NECESSARILY INDICATIVE OF THE FUTURE CMT YIELD. The actual CMT Yield could materially differ from those set forth below. The CMT Yield for the week ending January 7, 1994 was 5.21%. [GRAPHIC #1 APPEARS HERE] Source: Federal Reserve statistical release The information presented in this Prospectus Supplement relating to the CMT Yield is furnished as a matter of information only. The fluctuations in the CMT Yield that have occurred in the past are not necessarily indicative of fluctuations in that rate which may occur over the term of the Warrants. CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS CONCERNING THE WARRANTS Set forth in full below is the opinion of Brown & Wood, counsel to the Company, as to certain United States Federal income tax consequences of the purchase, ownership and disposition of a Warrant. Such opinion is based upon laws, regulations, rulings and decisions now in effect, all of which are subject to change (possibly with retroactive effect) or possible differing interpretations. The following discussion of certain United States Federal income tax consequences to Holders of the Warrants applies only to a person who holds a Warrant as a capital asset and does not purport to address the United States Federal income tax consequences to special classes of investors including persons who are securities or options dealers, or persons who may hold the Warrants as part of an integrated transaction (e.g., as part of a hedge or straddle for tax purposes). Prospective purchasers of Warrants are urged to consult their own tax advisors as to the application of the United States Federal income tax laws to their particular situations as well as any consequences of the purchase, ownership and disposition of the Warrants arising under the laws of any other taxing jurisdiction. S-19 As used herein, the term "U.S. Holder" means a beneficial owner of a Warrant that is for United States Federal income tax purposes (i) a citizen or resident of the United States, (ii) a corporation, partnership or other entity created or organized in or under the laws of the United States or of any political subdivision thereof, (iii) an estate or trust the income of which is subject to United States Federal income taxation regardless of its source or (iv) any other person whose income or gain in respect of a Warrant is effectively connected with the conduct of a United States trade or business. As used herein, the term "non-U.S. Holder" means a Holder of a Warrant that is not a U.S. Holder. GENERAL The United States Federal income tax treatment of the Warrants will depend upon how the Warrants are characterized for United States Federal income tax purposes and the United States Federal income tax consequences of the purchase, ownership and disposition of the Warrants could differ significantly depending upon whether the Warrants are characterized as "options" or as some financial instrument other than an option. Prospective investors in the Warrants should be aware that there are no statutes, regulations, published rulings or judicial decisions involving the characterization, for United States Federal income tax purposes, of securities with terms substantially the same as the Warrants. Accordingly, it is unclear how the Warrants will be characterized for United States Federal income tax purposes. U.S. HOLDERS If the Warrants are characterized as "options" for United States Federal income tax purposes, then each Warrant should be treated as a "nonequity" option for purposes of Section 1256 of the Internal Revenue Code of 1986, as amended (the "Code"), which must be "marked-to-market". Accordingly, under such circumstances, a U.S. Holder of a Warrant would be required to treat such Warrant as if sold for its fair market value on the last business day of the U.S. Holder's taxable year and would be required to recognize taxable gain or loss for that taxable year in an amount equal to the difference between the fair market value of the Warrant on the last business day of such taxable year and the U.S. Holder's adjusted tax basis in the Warrant. A U.S. Holder's adjusted tax basis in a Warrant would equal such U.S. Holder's initial investment in the Warrant, increased or decreased by any net gain or loss recognized by the U.S. Holder in respect of the Warrant in prior taxable years. In addition, upon the sale, exchange, exercise or expiration of a Warrant, a U.S. Holder would be required to recognize taxable gain or loss in an amount equal to the difference between the amount realized upon such sale, exchange, exercise or expiration and the U.S. Holder's adjusted tax basis in the Warrant. Any gain or loss recognized by a U.S. Holder of a Warrant in accordance with the preceding rules would generally be treated as 60 percent long-term capital gain or loss and 40 percent short-term capital gain or loss. If the Warrants are not characterized as "options" for United States Federal income tax purposes, then the United States Federal income tax treatment of the purchase, ownership and disposition of the Warrants could differ from the treatment discussed above with the result that the timing and character of income, gain or loss recognized by a U.S. Holder with respect to a Warrant could differ from the timing and character of income, gain or loss recognized with respect to a Warrant had the Warrants been treated as "options" for United States Federal income tax purposes. For instance, the Warrants could possibly be characterized as notional principal contracts for United States Federal income tax purposes. If the Warrants were characterized as notional principal contracts for United States Federal income tax purposes, then a U.S. Holder of a Warrant will be required to recognize taxable gain or loss with respect to a Warrant only upon the sale, exchange, exercise or expiration of the Warrant. The amount of gain or loss required to be recognized by a U.S. Holder with respect to a Warrant under such circumstances would be equal to the difference between the amount realized upon such sale, exchange, exercise or expiration and the amount of the U.S. Holder's initial investment in the Warrant. Such gain or loss would generally be treated as long-term capital gain or loss if the Warrant was held by the U.S. Holder for more than one year. Alternatively, it is also possible that the Warrants could be characterized, for United States Federal income tax purposes, as either contingent payment debt instruments or some other type of commercial or financial contract. In light of the uncertainty concerning the proper United States Federal income tax characterization of the Warrants, S-20 prospective investors are urged to consult their own tax advisors as to the proper characterization of the Warrants for United States Federal income tax purposes. The Company, where required, currently intends to report any gross proceeds received upon the sale, exchange or exercise of a Warrant on an IRS Form 1099B. NON-U.S. HOLDERS Gains realized on the sale, exchange or exercise of a Warrant by a non-U.S. Holder will not be subject to United States Federal income or withholding tax in respect of such amounts, assuming the income is not effectively connected with a United States trade or business of the non-U.S. Holder. Certain other exceptions may be applicable, and a non-U.S. Holder should consult its own tax advisor in this regard. Under current law, the fair market value of a Warrant may be includible in the estate of an individual non-U.S. Holder for United States Federal estate tax purposes, unless an applicable estate tax treaty provides otherwise. Individual non-U.S. Holders should consult their own tax advisors concerning the United States Federal estate tax consequences, if any, of investing in the Warrants. BACKUP WITHHOLDING A Holder of a Warrant will be subject to backup withholding at the rate of 31 percent with respect to the gross proceeds upon a sale or exercise of a Warrant if such Holder fails to supply an accurate taxpayer identification number and does not establish, when required, that it is an exempt recipient or a non-U.S. Holder. Any amount withheld under the backup withholding rules would be allowed as a refund or a credit against the Holder's United States Federal income tax provided the required information is furnished to the IRS. USE OF PROCEEDS A substantial portion of the proceeds from the sale of the Warrants may be used to hedge market risks with respect to the payment at expiration of the Warrants. The Company does not intend to confine its hedging activities to any particular domestic or foreign exchanges. UNDERWRITING Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter") has agreed, subject to the terms and conditions of the Underwriting Agreement and a Terms Agreement, to purchase from the Company all of the Warrants offered hereby. The Underwriting Agreement and Terms Agreement provide that the Underwriter will purchase all the Warrants if any are purchased. The Underwriter has advised the Company that it proposes initially to offer all or part of the Warrants directly to the public at the offering price set forth on the cover page of this Prospectus Supplement and to certain dealers at such price less a concession not in excess of $ . After the initial public offering, the public offering price and concession may be changed. An affiliate of the Underwriter will receive a fee from the Company for assisting the Company in arranging hedging of the Company's risks with respect to the Warrants. The underwriting of the Securities will conform to the requirements set forth in the applicable sections of Schedule E to the By-Laws of the National Association of Securities Dealers, Inc. VALIDITY OF SECURITIES The validity of the Securities will be passed upon for the Company and for the Underwriter by Brown & Wood, New York, New York. S-21 PROSPECTUS LOGO MERRILL LYNCH & CO., INC. DEBT SECURITIES AND WARRANTS Merrill Lynch & Co., Inc. (the "Company") intends to sell from time to time up to $5,003,249,783 aggregate principal amount (or net proceeds in the case of warrants and in the case of securities issued at an original issue discount), or its equivalent in such foreign currencies or units of two or more currencies, based on the applicable exchange rate at the time of offering, as shall be designated by the Company at the time of offering, of its senior debt securities ("Senior Debt Securities"), subordinated debt securities ("Subordinated Debt Securities" and, together with the Senior Debt Securities, the "Debt Securities"), warrants to purchase Debt Securities ("Debt Warrants"); warrants entitling the holders thereof to receive from the Company an amount in cash determined by reference to decreases or increases in the level of a specified stock or security index or the value of a portfolio of specified stocks or other securities which may be based on U.S. or foreign stocks or securities or a combination thereof (the "Index Warrants") and warrants to receive from the Company the cash value in U.S. dollars of the right to purchase ("Currency Call Warrants") or to sell ("Currency Put Warrants" and, together with the Currency Call Warrants, the "Currency Warrants") such foreign currencies or units of two or more currencies as shall be designated by the Company at the time of offering. The Debt Securities, Debt Warrants, Index Warrants and Currency Warrants, which are collectively called the "Securities", may be offered either jointly or separately and will be offered to the public on terms determined by market conditions at the time of sale and set forth in a prospectus supplement. The Securities will be unsecured and, except in the case of Subordinated Debt Securities, will rank equally with all other unsecured and unsubordinated indebtedness of the Company. The Subordinated Debt Securities will be subordinated to all existing and future Senior Indebtedness of the Company. Each issue of Securities may vary, where applicable, as to aggregate principal amount, maturity date, public offering or purchase price, interest rate or rates, if any, and timing of payments thereof, provision for redemption, sinking fund requirements, if any, exercise provisions, currencies of denomination or currencies otherwise applicable thereto and any other variable terms and method of distribution. The accompanying Prospectus Supplement (the "Prospectus Supplement") sets forth the specific terms with regard to the Securities in respect of which this Prospectus is being delivered. ---------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ---------------- The Securities may be sold directly or through Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") as agent or may be offered and reoffered through, or through underwriting syndicates managed or co-managed by, one or more of the following: MLPF&S; Bear, Stearns & Co. Inc.; Donaldson, Lufkin & Jenrette Securities Corporation; The First Boston Corporation; Goldman, Sachs & Co.; Kidder, Peabody & Co. Incorporated; Lehman Brothers Inc.; Morgan Stanley & Co. Incorporated; Nomura Securities International, Inc.; PaineWebber Incorporated; and Salomon Brothers Inc, or directly to purchasers by the Company. The Company has entered into agreements with such firms with respect to the Securities providing for agency sales of the Securities through MLPF&S or the purchase and offering from time to time by one or more of such firms, either alone or with the several members of any syndicate formed by them. Additional agreements respecting the distribution of the Securities may be entered into from time to time by the Company. Securities may not be sold without delivery of a Prospectus Supplement describing such issue of Securities and the method and terms of offering thereof. ---------------- The date of this Prospectus is August 27, 1993. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files reports and other information with the Securities and Exchange Commission (the "Commission"). Reports, proxy and information statements and other information filed by the Company can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of the Commission: Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and New York Regional Office, Seven World Trade Center, New York, New York 10048. Copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Reports, proxy and information statements and other information concerning the Company may also be inspected at the offices of the New York Stock Exchange, the American Stock Exchange, the Midwest Stock Exchange and the Pacific Stock Exchange. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The Company's Annual Report on Form 10-K for the year ended December 25, 1992, Quarterly Reports on Form 10-Q for the quarters ending March 26, 1993 and June 25, 1993, and Current Reports on Form 8-K dated January 25, 1993, January 26, 1993, January 28, 1993, February 1, 1993, February 22, 1993, March 1, 1993, March 19, 1993, April 13, 1993, April 15, 1993, April 22, 1993, April 27, 1993, April 29, 1993, June 24, 1993, June 28, 1993, July 7, 1993, July 13, 1993 and July 27, 1993 filed pursuant to Section 13 of the Exchange Act, are hereby incorporated by reference into this Prospectus. All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof and prior to the termination of the offering of the Securities shall be deemed to be incorporated by reference into this Prospectus and to be a part hereof from the date of filing of such documents. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. THE COMPANY WILL PROVIDE WITHOUT CHARGE TO EACH PERSON TO WHOM THIS PROSPECTUS IS DELIVERED, ON WRITTEN OR ORAL REQUEST OF SUCH PERSON, A COPY (WITHOUT EXHIBITS OTHER THAN EXHIBITS SPECIFICALLY INCORPORATED BY REFERENCE) OF ANY OR ALL DOCUMENTS INCORPORATED BY REFERENCE INTO THIS PROSPECTUS. REQUESTS FOR SUCH COPIES SHOULD BE DIRECTED TO MR. GREGORY T. RUSSO, SECRETARY, MERRILL LYNCH & CO., INC., 100 CHURCH STREET, 12TH FLOOR, NEW YORK, NEW YORK 10080-6512; TELEPHONE NUMBER (212) 602-8435. 2 MERRILL LYNCH & CO., INC. Merrill Lynch & Co., Inc. is a holding company that, through its subsidiaries and affiliates, provides investment, financing, insurance and related services. Its principal subsidiary, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), is one of the largest securities firms in the world. MLPF&S is a broker in securities, options contracts, commodity and financial futures contracts and selected insurance products, a dealer in options and in corporate and municipal securities and an investment banking firm. Merrill Lynch Asset Management manages mutual funds and provides investment advisory services. Merrill Lynch Government Securities Inc. is a primary dealer in obligations issued by the U.S. Government or agencies thereof or guaranteed or insured by Federal agencies. Other subsidiaries provide financial services outside the United States similar to those of MLPF&S and are engaged in such other activities as international banking, lending and providing other investment and financing services. The Company's insurance underwriting and marketing operations consist of the underwriting of life insurance and annuity products through subsidiaries of Merrill Lynch Insurance Group, Inc., and the sale of life insurance and annuities through Merrill Lynch Life Agency Inc. and other life insurance agencies associated with MLPF&S. The principal executive office of the Company is located at World Financial Center, North Tower, 250 Vesey Street, New York, New York 10281; its telephone number is (212) 449-1000. USE OF PROCEEDS The Company intends to use the net proceeds from the sale of the Securities for general corporate purposes. Such uses may include the funding of investments in, or extensions of credit to, its subsidiaries, the funding of assets held by the Company or its subsidiaries, including securities inventories, customer receivables and loans (including business loans, home equity loans and loans in connection with investment banking-related merger and acquisition activities) and the lengthening of the average maturity of the Company's borrowings (including the refunding of maturing indebtedness). The precise amount and timing of investments in, and extensions of credit to, its subsidiaries will depend upon their funding requirements and the availability of other funds to the Company and its subsidiaries. A substantial portion of the proceeds from the sale of any Currency Warrants or Index Warrants may be used to hedge market risks with respect to such Warrants. Pending such applications, the net proceeds will be temporarily invested or applied to the reduction of short-term indebtedness. Management of the Company expects that it will, on a recurrent basis, engage in additional financings as the need arises to finance the growth of the Company or to lengthen the average maturity of its borrowings. To the extent that Securities being purchased for resale by MLPF&S are not resold, the aggregate proceeds to the Company and its subsidiaries would be reduced. 3 SUMMARY FINANCIAL INFORMATION The following summary financial information was derived from, and is qualified in its entirety by reference to, the financial statements and other information and data contained in the Company's Annual Report on Form 10-K for the year ended December 25, 1992. See "Incorporation of Certain Documents by Reference". The year-end results include 52 weeks for 1989, 1990, 1991 and 1992 and 53 weeks for 1988. The Company conducts its business in highly volatile markets. Consequently, the Company's results can be affected by many factors, including general market conditions, the liquidity of secondary markets, the level and volatility of interest rates and currency values, the valuation of securities positions, competitive conditions, and the size, number and timing of transactions. In periods of unfavorable market activity, profitability can be adversely affected because certain expenses remain relatively fixed. As a result, net earnings and revenues can vary significantly from period to period.
YEAR ENDED LAST FRIDAY IN DECEMBER ------------------------------------------------------------- 1988 1989 1990 1991 1992 ----------- ----------- ----------- ----------- ------------ (IN THOUSANDS, EXCEPT RATIOS) Revenues................ $ 9,694,980 $11,275,951 $11,150,816 $12,362,845 $ 13,428,291 Net Revenues............ $ 5,926,777 $ 5,904,923 $ 5,786,916 $ 7,256,501 $ 8,593,024 Earnings (loss) before income taxes, discon- tinued operations and cumulative effect of changes in accounting principles(1).......... $ 611,256 $ (158,386) $ 282,328 $ 1,017,418 $ 1,621,389 Discontinued operations (net of income tax- es)(1)................. $ 17,287 $ 3,981 -- -- -- Cumulative effect of changes in accounting principles (net of ap- plicable income tax- es)(1)................. -- -- -- -- $ (58,580) Net earnings (loss)(1).. $ 463,182 $ (213,385) $ 191,856 $ 696,117 $ 893,825 Ratio of earnings to fixed charges(2)....... 1.2 -- 1.1 1.2 1.3 Total assets............ $64,402,655 $63,942,263 $68,129,527 $86,259,343 $107,024,173 Long-term borrowings(3). $ 6,283,349 $ 6,897,109 $ 6,341,559 $ 7,964,424 $ 10,871,100 Stockholders' equity.... $ 3,484,178 $ 3,151,343 $ 3,225,430 $ 3,818,088 $ 4,569,104
- -------- (1) Net loss for 1989 includes an after-tax reduction of $395,000,000 ($470,000,000 before income taxes) resulting from a provision for the costs of divesting certain nonstrategic product lines and business activities, consolidating and relocating selected retail and support facilities and downsizing certain other operations. Net earnings for 1988 include an after-tax gain of $254,699,000 ($286,075,000 before income taxes) resulting from the curtailment of the Company's defined benefit pension plan which covered substantially all U.S. employees and an after- tax reduction of $44,436,000 ($65,509,000 before income taxes) resulting from a provision for the costs of merging or downsizing certain foreign and domestic branch offices and operating facilities. Net earnings for 1992 have been reduced by $58,580,000 to reflect the effects of the adoption in 1992 of Statement of Financial Accounting Standards ("SFAS") No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions" and SFAS No. 109, "Accounting for Income Taxes". Results for 1988 and 1989 have been restated to reflect the effects of discontinued operations related to the sale of the Company's real estate brokerage, relocation and related services subsidiary, Fine Homes International, L.P. ("FHI"), in the third quarter of 1989. Discontinued operations include the results of FHI's operations through September 15, 1989 (the date of final disposition) and the loss on disposal in 1989. (2) For the purpose of calculating the ratio of earnings to fixed charges, "earnings" consists of earnings from continuing operations before income taxes and fixed charges. "Fixed charges" consists of interest costs and that portion of rentals estimated to be representative of the interest factor. In 1989, fixed charges exceeded pretax earnings before fixed charges by $187,564,000. (3) To finance its diverse activities, the Company and certain of its subsidiaries borrow substantial amounts of short-term funds on a regular basis. Although the amount of short-term borrowings significantly varies with the level of general business activity, on December 25, 1992, $243,754,000 of bank loans and $9,578,612,000 of commercial paper were outstanding. In addition, certain of the Company's subsidiaries lend securities and enter into repurchase agreements to obtain financing. At December 25, 1992, cash deposits for securities loaned and securities sold under agreements to repurchase amounted to $3,357,555,000 and $32,410,407,000, respectively. FISCAL YEAR 1992 Net earnings were a record $893.8 million, an increase of $197.7 million (28%) above the $696.1 million reported for 1991. The 1992 results reflect the early adoption of two accounting pronouncements, Statement of Financial Accounting Standards ("SFAS") No. 106, "Employers' Accounting for Postretirement Benefits 4 Other Than Pensions" and SFAS No. 109, "Accounting for Income Taxes." The cumulative effect of these changes in accounting principles reduced 1992 net earnings by $58.6 million. Revenues after interest expense ("Net Revenues") reached a record $8,593 million, up 18% over the $7,257 million reported in 1991. Total revenues advanced 9% to $13,428 million versus $12,363 million for the prior year. Commission revenues rose 12% to $2,400 million due to growth in listed securities transactions and sales of mutual funds. Heightened investor activity in the equity markets led to increases in commissions earned on listed securities, while mutual fund commissions benefitted from both the sales of front-end funds and a higher level of distribution and redemption fees earned on deferred charge funds. Interest and dividend revenues increased slightly to $5,807 million, as compared with the $5,761 million reported in 1991. Interest expense (including dividend expense) declined 5% in 1992 to $4,835 million. As a result, net interest and dividend profit was a record $972 million, up 48% from 1991. Underlying the record performance in net interest and dividend profit were growth of the balance sheet, increases in equity capital and margin lending, and an increase in the Company's interest rate spreads. Contributing to improved rate spreads were lower borrowing costs due to credit upgrades by rating agencies. Principal transactions revenues rose to record levels in 1992, up 13% to $2,147 million from the $1,894 million reported in 1991. Fixed-income and foreign exchange trading revenues increased due to substantially higher revenues from swaps and derivatives and foreign exchange. Corporate equities revenues also rose on the strength of the over-the-counter markets and higher revenues from international equities. Investment banking revenues advanced 26% to a record $1,484 million from the $1,176 million reported in the prior year. Underwriting revenues benefited from the low interest rate environment, leading to strong corporate demand for debt refinancing and investor demand for equities offering greater potential return opportunities. Underwritings of closed-end funds, preferred stock, corporate debt, and high-yield and municipal bonds benefited from these favorable market conditions. Revenues from strategic services, including fees for debt restructuring, merger and acquisition activity and other advisory services rose 14% over 1991, but remain well below revenue levels of the late 1980's. Asset management and custodial fees were also a record, advancing 11% to $859 million due to increased levels of fees earned from both fund management and central asset account management services. The increase in fee based revenues from CMA (R) and retirement accounts was attributable to the growth in new accounts and the full year effect of an increase in annual fees instituted in the 1991 third quarter. Other revenues rose 18% to $732 million due to higher fees from Merrill Lynch Consults (R), an investor portfolio management service, as well as higher securities processing fees. Substantially offsetting increases in other revenues were net investment losses which include provisions related to merchant banking activities. Non-interest expenses totaled $6,972 million, up 12% from the $6,239 million reported in 1991. Compensation and benefits expense, which represents approximately 63% of total non-interest expenses, increased 13% from 1991 as a result of higher variable incentive compensation tied to the Company's profitability and return on equity. Nevertheless, compensation and benefits expense, as a percentage of net revenues, declined to 50.8% from 53.3% in 1991. Brokerage, clearing and exchange fees increased 17% primarily as a result of increased trading volume. Facilities-related costs including occupancy, communications and equipment rental, and depreciation and amortization, were up 1% from 1991. Advertising and market development expenses increased 21% reflecting the higher costs of both recognition and sales promotion programs for Financial Consultants and Account Executives that are tied to the level of business activity, as well as the discretionary expansion of certain national advertising campaigns. Professional fees increased 9% due to ongoing discretionary systems and strategic development projects, while other expenses increased 19% principally as a result of additions to loss provisions related to various business activities. Income tax expense was $669 million versus $321 million in the prior year as the effective rate in 1992 rose to 41.3% as compared with 31.6% a year ago. The higher effective tax rate in 1992 results principally from the reduced availability of net operating loss and alternative minimum tax benefit carryforwards. 5 The Company believes that its equity base is adequate relative to the level and composition of its assets and the mix of its businesses. In the normal course of its investment banking, trading and insurance activities, the Company underwrites, purchases, sells and makes markets in high-yield securities and other non-investment grade securities. Additionally, the Company provides financing and advisory services to corporations entering into leveraged transactions. These activities are subject to risks related to the creditworthiness of the issuers and the liquidity of the market for such securities, in addition to the usual risks associated with investing, extending credit, underwriting and trading in investment grade instruments. At December 25, 1992, the carrying value of extensions of credit provided to corporations entering into leveraged transactions aggregated $822 million (excluding unutilized revolving lines of credit and other lending commitments of $75 million), consisting primarily of senior term and subordinated financings to 50 medium-sized corporations. Loans to highly leveraged enterprises are carried at unpaid principal balance less a reserve for estimated losses. At December 25, 1992, the Company had no bridge loans outstanding. Direct equity investments made in conjunction with the Company's investment and merchant banking activities, which are generally recorded at the lower of cost or estimated net realizable value, aggregated $360 million at December 25, 1992, representing investments in approximately 100 enterprises. At December 25, 1992, the Company held $120 million (recorded on the cost basis) in indirect equity investments through its participation in partnerships that invest in highly leveraged transactions. The Company has a co-investment arrangement in connection with a leverage buyout fund it has sponsored and manages. Assuming the fund was fully invested as of December 25, 1992, the Company's investment would be an additional $89 million. At December 25, 1992, the Company was also committed to invest up to $42 million in other limited partnerships that invest in leveraged transactions. As a market maker, the Company holds trading positions in non-investment grade securities. At December 25, 1992, the fair value of long and short non- investment grade trading positions amounted to $1,723 million and $209 million, respectively, and in aggregate (i.e., sum of long and short trading positions), represented 4.2% of aggregate consolidated trading positions. Investments of the Company's insurance subsidiaries, which are carried at amortized cost, include non-investment grade securities. At December 25, 1992, $409 million or 4.5% of the aggregate carrying value of such investments were non-investment grade. As of December 25, 1992, the largest concentration of highly leveraged or non-investment grade positions related to a single issuer totaled $161 million. Additionally, no one industry sector represented more than 13% of such positions. At December 25, 1992, the Company held an aggregate carrying value of $194 million in securities of issuers who were in various stages of bankruptcy proceedings or in default. Approximately 58% of this amount results from the Company's market-making activities for securities of corporations in bankruptcy. 6 DESCRIPTION OF DEBT SECURITIES Unless otherwise specified in a Prospectus Supplement, the Senior Debt Securities are to be issued under an indenture (the "Senior Indenture"), dated as of April 1, 1983, as amended and restated, between the Company and Chemical Bank (successor by merger to Manufacturers Hanover Trust Company), as trustee (the "Senior Debt Trustee"). The Subordinated Debt Securities are to be issued under an indenture (the "Subordinated Indenture"), dated as of August 1, 1991, between the Company and Chemical Bank (successor by merger to Manufacturers Hanover Trust Company), as trustee (the "Subordinated Debt Trustee"). The Senior Debt Securities and Subordinated Debt Securities may also be issued under one or more other indentures (each, a "Subsequent Indenture") and have one or more other trustees (each, a "Subsequent Trustee"). Any Subsequent Indenture relating to Senior Debt Securities will have terms and conditions identical in all material respects to the above-referenced Senior Indenture and any Subsequent Indenture relating to Subordinated Debt Securities will have terms and conditions identical in all material respects to the above- referenced Subordinated Indenture, including, but not limited to, the applicable terms and conditions described below. Any Subsequent Indenture relating to a series of Debt Securities, and the trustee with respect thereto, will be identified in the applicable Prospectus Supplement. The Senior Indenture, the Subordinated Indenture and any Subsequent Indentures (whether senior or subordinated) are referred to herein as the "Indentures"; and the Senior Debt Trustee, the Subordinated Debt Trustee and any Subsequent Trustees are referred to herein as the "Trustees". A copy of each Indenture is filed (or, in the case of a Subsequent Indenture, will be filed) as an exhibit to the registration statements relating to the Securities (collectively, the "Registration Statement"). The following summaries of certain provisions of the Indentures do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all provisions of the respective Indentures, including the definitions therein of certain terms. GENERAL Each Indenture provides that Debt Securities (Senior Debt Securities in the case of the Senior Indenture or a Subsequent Indenture for Senior Debt Securities, and Subordinated Debt Securities in the case of the Subordinated Indenture or a Subsequent Indenture for Subordinated Debt Securities) may be issued thereunder, without limitation as to aggregate principal amount, in one or more series, by the Company from time to time upon satisfaction of certain conditions precedent, including the delivery by the Company to the applicable Trustee of a resolution of the Board of Directors, or the Executive Committee thereof, of the Company which fixes or provides for the establishment of terms of such Debt Securities, including: (1) the aggregate principal amount of such Debt Securities and whether there is any limit upon the aggregate principal amount of such Debt Securities that may be subsequently issued; (2) the date on which such Debt Securities will mature; (3) the principal amount payable with respect to such Debt Securities whether at maturity or upon earlier acceleration, and whether such principal amount will be determined with reference to an index, formula or other method; (4) the rate or rates per annum (which may be fixed or variable) at which such Debt Securities will bear interest, if any; (5) the dates on which such interest, if any, will be payable; (6) the provisions for redemption of such Debt Securities, if any, the redemption price and any remarketing arrangements relating thereto; (7) the sinking fund requirements, if any, with respect to such Debt Securities; (8) whether such Debt Securities are denominated or provide for payment in United States dollars or a foreign currency or units of two or more of such foreign currencies; (9) the form (registered or bearer or both) in which such Debt Securities may be issued and any restrictions applicable to the exchange of one form for another and to the offer, sale and delivery of such Debt Securities in either form; (10) whether and under what circumstances the Company will pay additional amounts ("Additional Amounts") in respect of such Debt Securities held by a person who is not a U.S. person (as defined in the Prospectus Supplement, as applicable) in respect of specified taxes, assessments or other governmental charges and whether the Company has the option to redeem the affected Debt Securities rather than pay such Additional Amounts; (11) whether such Debt Securities are to be issued in global form; (12) the title of the Debt Securities and the series of which such Debt Securities shall be a part; and (13) the denominations of such Debt Securities. Reference is made to the Prospectus Supplement for the terms of the Debt Securities being offered thereby, including whether such Debt Securities are Senior Debt Securities or Subordinated Debt Securities. Debt Securities may also be issued 7 under the Indenture upon the exercise of Debt Warrants. See "Description of Debt Warrants". Nothing in the Indentures or in the terms of the Debt Securities will prohibit the issuance of securities representing subordinated indebtedness that is senior or junior to the Subordinated Debt Securities. The Debt Securities will be issued, to the extent provided in the Prospectus Supplement, in fully registered form without coupons, and/or in bearer form with or without coupons, and in denominations set forth in the Prospectus Supplement. No service charge will be made for any registration of transfer of registered Debt Securities or exchange of Debt Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charges that may be imposed in connection therewith. Each Indenture provides that Debt Securities issued thereunder may be issued in global form. If any series of Debt Securities is issuable in global form, the applicable Prospectus Supplement will describe the circumstances, if any, under which beneficial owners of interest in any such global Debt Securities may exchange such interests for Debt Securities of such series and of like tenor and principal amount in any authorized form and denomination. Principal of, and any premium, Additional Amounts and interest on, a global Debt Security will be payable in the manner described in the applicable Prospectus Supplement. The provisions of the Indentures described above provide the Company with the ability, in addition to the ability to issue Debt Securities with terms different from those of Debt Securities previously issued, to "reopen" a previous issue of a series of Debt Securities and issue additional Debt Securities of such series. The Senior Debt Securities will be unsecured and will rank pari passu with all other unsecured and unsubordinated indebtedness of the Company. The Subordinated Debt Securities will be unsecured and will be subordinated to all existing and future Senior Indebtedness (as defined below) of the Company. Since the Company is a holding company, the right of the Company, and hence the right of creditors of the Company (including the Holders of the Debt Securities), 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 MLPF&S, to the Company are restricted by net capital requirements under the Securities Exchange Act of 1934 and under rules of certain exchanges and other regulatory bodies. Principal and interest, premium and Additional Amounts, if any, will be payable in the manner, at the places and subject to the restrictions set forth in the applicable Indenture, the Debt Securities and the Prospectus Supplement relating thereto, provided that payment of any interest and any Additional Amounts may be made at the option of the Company by check mailed to the holders of registered Debt Securities at their registered addresses. Debt Securities may be presented for exchange, and registered Debt Securities may be presented for transfer, in the manner, at the places and subject to the restrictions set forth in the applicable Indenture, the Debt Securities and the Prospectus Supplement relating thereto. Debt Securities in bearer form and the coupons, if any, pertaining thereto will be transferable by delivery. No service charge will be made for any transfer or exchange of Debt Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. 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 (i) 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 principal of, and any premium, Additional Amounts or interest on, the Debt Securities and the performance and observance of all of the covenants and conditions of the Indentures to be performed or observed by the Company, and (ii) the Company or such successor corporation, as the case may be, shall not immediately thereafter be in default under the Indentures. 8 MODIFICATION AND WAIVER Modification and amendment of each Indenture may be effected by the Company and the applicable Trustee with the consent of the Holders of 66 2/3% in principal amount of the Outstanding Debt Securities of each series issued pursuant to such Indenture and affected thereby, provided that no such modification or amendment may, without the consent of the Holder of each Outstanding Debt Security affected thereby, (a) change the Stated Maturity of, or any installment of interest or Additional Amounts on, any Debt Security or any premium payable on the redemption thereof, or change the Redemption Price; (b) reduce the principal amount of, or the interest or Additional Amounts payable on, any Debt Security or reduce the amount of principal which could be declared due and payable prior to the Stated Maturity; (c) change the place or currency of any payment of principal of, or any premium, interest or Additional Amounts on, any Debt Security; (d) impair the right to institute suit for the enforcement of any payment on or with respect to any Debt Security; (e) reduce the percentage in principal amount of the Outstanding Debt Securities of any series, the consent of whose Holders is required to modify or amend such Indenture; or (f) modify the foregoing requirements or reduce the percentage of Outstanding Debt Securities necessary to waive any past default to less than a majority. No modification or amendment of the Subordinated Indenture or any Subsequent Indenture for Subordinated Debt Securities may adversely affect the rights of any Holder of Senior Indebtedness without the consent of such Holder. Except with respect to certain fundamental provisions, the Holders of at least a majority in principal amount of Outstanding Debt Securities of any series may, with respect to such series, waive past defaults under the applicable Indenture and waive compliance by the Company with certain provisions of such Indenture. EVENTS OF DEFAULT Under each Indenture, the following will be Events of Default with respect to Debt Securities of any series issued thereunder: (a) default in the payment of any interest or Additional Amounts upon any Debt Security of that series when due, continued for 30 days; (b) default in the payment of any principal of or premium, if any, on any Debt Security of that series when due; (c) default in the deposit of any sinking fund payment, when due, in respect of any Debt Security of that series; (d) default in the performance of any other covenant of the Company contained in such Indenture for the benefit of such series or in the Debt Securities of such series, continued for 60 days after written notice as provided in such Indenture; (e) certain events in bankruptcy, insolvency or reorganization; and (f) any other Event of Default provided with respect to Debt Securities of that series. The applicable Trustee or the Holders of 25% in principal amount of the Outstanding Debt Securities of that series may declare the principal amount (or such lesser amount as may be provided for in the Debt Securities of that series) of all Outstanding Debt Securities of that series and the interest accrued thereon and Additional Amounts payable in respect thereof, if any, to be due and payable immediately if an Event of Default with respect to Debt Securities of such series shall occur and be continuing at the time of declaration. At any time after a declaration of acceleration has been made with respect to Debt Securities of any series but before a judgment or decree for payment of money due has been obtained by the applicable Trustee, the Holders of a majority in principal amount of the Outstanding Debt Securities of that series may rescind any declaration of acceleration and its consequences, if all payments due (other than those due as a result of acceleration) have been made and all Events of Default have been remedied or waived. Any Event of Default with respect to Debt Securities of any series may be waived by the Holders of a majority in principal amount of all Outstanding Debt Securities of that series, except in a case of failure to pay principal of or premium, if any, or interest or Additional Amounts, if any, on any Debt Security of that series for which payment had not been subsequently made or in respect of a covenant or provision which cannot be modified or amended without the consent of the Holder of each Outstanding Debt Security of such series affected. The Holders of a majority in principal amount of the Outstanding Debt Securities of a series may direct the time, method and place of conducting any proceeding for any remedy available to the applicable Trustee or exercising any trust or power conferred on such Trustee with respect to Debt Securities of such series, provided that such direction shall not be in conflict with any rule of law or the applicable Indenture. Before 9 proceeding to exercise any right or power under an Indenture at the direction of such Holders, the applicable Trustee shall be entitled to receive from such Holders reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in complying with any such direction. The Company will be required to furnish to each Trustee annually a statement as to the fulfillment by the Company of all of its obligations under the applicable Indenture. SPECIAL TERMS RELATING TO THE SENIOR DEBT SECURITIES LIMITATIONS UPON LIENS The Senior Indenture provides that the Company may not, and may not permit any Subsidiary to, create, assume, incur or permit to exist any indebtedness for borrowed money secured by a pledge, lien or other encumbrance (except for certain liens specifically permitted by the Senior Indenture) on the Voting Stock owned directly or indirectly by the Company of any Subsidiary (other than a Subsidiary which, at the time of incurrence of such secured indebtedness, has a net worth of less than $3,000,000) without making effective provision whereby the Outstanding Senior Debt Securities will be secured equally and ratably with such secured indebtedness. LIMITATION ON DISPOSITION OF VOTING STOCK OF, AND MERGER AND SALE OF ASSETS BY, MLPF&S The Senior Indenture provides that the Company may not sell, transfer or otherwise dispose of any Voting Stock of MLPF&S or permit MLPF&S to issue, sell or otherwise dispose of any of its Voting Stock, unless, after giving effect to any such transaction, MLPF&S remains a Controlled Subsidiary (defined in the Senior Indenture to mean a corporation more than 80% of the outstanding shares of Voting Stock of which are owned directly or indirectly by the Company). In addition, the Senior Indenture provides that the Company may not permit MLPF&S to (i) merge or consolidate, unless the surviving company is a Controlled Subsidiary, or (ii) convey or transfer its properties and assets substantially as an entirety, except to one or more Controlled Subsidiaries. SPECIAL TERMS RELATING TO THE SUBORDINATED DEBT SECURITIES Upon any distribution of assets of the Company resulting from any dissolution, winding up, liquidation or reorganization, payments on Subordinated Debt Securities are to be subordinated to the extent provided in the Subordinated Indenture in right of payment to the prior payment in full of all Senior Indebtedness, but the obligation of the Company to make payments on the Subordinated Debt Securities will not otherwise be affected. No payment on Subordinated Debt Securities may be made at any time when there is a default in the payment of any principal, premium, interest, Additional Amounts or sinking fund of or on any Senior Indebtedness. Holders of Subordinated Debt Securities will be subrogated to the rights of holders of Senior Indebtedness to the extent of payments made on Senior Indebtedness upon any distribution of assets in any such proceedings out of the distributive shares of Subordinated Debt Securities. By reason of such subordination, in the event of a distribution of assets upon insolvency, certain creditors of the Company may recover more, ratably, than Holders of Subordinated Debt Securities. Senior Indebtedness is defined in the Subordinated Indenture as the principal of, premium, if any, and unpaid interest on (a) indebtedness of the Company (including indebtedness of others guaranteed by the Company), other than the Subordinated Debt Securities, whether outstanding on the date of execution of the Subordinated Indenture or thereafter created, incurred, assumed or guaranteed, (i) for money owing to banks, (ii) for money borrowed from sources other than banks or (iii) in connection with the acquisition by the Company or a subsidiary of assets of any kind except in the ordinary course of business, unless in the instrument creating or evidencing the same or pursuant to which the same is outstanding it is provided that such indebtedness is not superior in right of payment to the Subordinated Debt Securities, and (b) renewals, extensions, modifications and refundings of any such indebtedness. As of June 25, 1993, a total of approximately $24.3 billion of the Company's indebtedness would have been Senior Indebtedness as so defined. 10 DESCRIPTION OF DEBT WARRANTS The Company may issue, together with Debt Securities, Currency Warrants or Index Warrants or separately, Debt Warrants for the purchase of Debt Securities. The Debt Warrants are to be issued under Debt Warrant Agreements (each a "Debt Warrant Agreement") to be entered into between the Company and a bank or trust company, as Debt Warrant Agent (the "Debt Warrant Agent"), all as shall be set forth in the Prospectus Supplement relating to Debt Warrants being offered thereby. A copy of the form of Debt Warrant Agreement, including the form of Warrant Certificates representing the Debt Warrants (the "Debt Warrant Certificates"), reflecting the alternative provisions to be included in the Debt Warrant Agreements that will be entered into with respect to particular offerings of Debt Warrants, is filed as an exhibit to the Registration Statement. The following summaries of certain provisions of the Debt Warrant Agreement and the Debt Warrant Certificates do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all the provisions of the Debt Warrant Agreement and the Debt Warrant Certificates, respectively, including the definitions therein of certain terms. GENERAL The applicable Prospectus Supplement will describe the terms of Debt Warrants offered thereby, the Debt Warrant Agreement relating to such Debt Warrants and the Debt Warrant Certificates representing such Debt Warrants, including the following: (1) the designation, aggregate principal amount, price at which such principal amount may be purchased upon exercise and terms of the Debt Securities purchasable upon exercise of such Debt Warrants, including whether such Debt Securities are Senior Debt Securities or Subordinated Debt Securities, and the procedures and conditions relating to the exercise of such Debt Warrants; (2) the designation and terms of any related Debt Securities with which such Debt Warrants are issued, including whether such Debt Securities are Senior Debt Securities or Subordinated Debt Securities, and the number of such Debt Warrants issued with each such Debt Security; (3) the date, if any, on and after which such Debt Warrants and the related Debt Securities will be separately transferable; (4) the date on which the right to exercise such Debt Warrants shall commence and the date on which such right shall expire (the "Expiration Date"); (5) if the Debt Securities purchasable upon exercise of such Debt Warrants are original issue discount Debt Securities, a discussion of Federal income tax considerations applicable thereto; and (6) whether the Debt Warrants represented by the Debt Warrant Certificates will be issued in registered or bearer form, and, if registered, where they may be transferred and registered. Debt Warrant Certificates will be exchangeable for new Debt Warrant Certificates of different denominations and Debt Warrants may be exercised at the corporate trust office of the Debt Warrant Agent or any other office indicated in the Prospectus Supplement. Prior to the exercise of their Debt Warrants, holders of Debt Warrants will not have any of the rights of Holders of the Debt Securities purchasable upon such exercise and will not be entitled to payments of principal of, and any premium, Additional Amounts or interest on, the Debt Securities purchasable upon such exercise. EXERCISE OF DEBT WARRANTS Each Debt Warrant will entitle the Holder to purchase for cash such principal amount of Debt Securities at such exercise price as shall in each case be set forth in, or be determinable as set forth in, the Prospectus Supplement relating to the Debt Warrants offered thereby. Debt Warrants may be exercised at any time up to the close of business on the Expiration Date set forth in the Prospectus Supplement relating to the Debt Warrants offered thereby. After the close of business on the Expiration Date, unexercised Debt Warrants will become void. Debt Warrants may be exercised as set forth in the Prospectus Supplement relating to the Debt Warrants offered thereby. Upon receipt of payment and the Debt Warrant Certificate properly completed and duly executed at the corporate trust office of the Debt Warrant Agent or any other office indicated in the Prospectus Supplement, the Company will, as soon as practicable, forward the Debt Securities purchasable 11 upon such exercise. If less than all of the Debt Warrants represented by such Debt Warrant Certificate are exercised, a new Debt Warrant Certificate will be issued for the remaining amount of Debt Warrants. DESCRIPTION OF CURRENCY WARRANTS The Company may issue, together with Debt Securities, Debt Warrants or Index Warrants or separately, Currency Warrants either in the form of Currency Put Warrants entitling the Holders thereof to receive from the Company the cash settlement value in U.S. dollars of the right to sell a specified amount of a specified foreign currency or currency units for a specified amount of U.S. dollars, or in the form of Currency Call Warrants entitling the Holders thereof to receive from the Company the cash settlement value in U.S. dollars of the right to purchase a specified amount of a specified foreign currency or units of two or more currencies for a specified amount of U.S. dollars. The Currency Warrants are to be issued under a Currency Put Warrant Agreement or a Currency Call Warrant Agreement, as applicable (each a "Currency Warrant Agreement"), to be entered into between the Company and a bank or trust company, as Currency Warrant Agent (the "Currency Warrant Agent"), all as shall be set forth in the applicable Prospectus Supplement. Copies of the forms of Currency Put Warrant Agreement and Currency Call Warrant Agreement, including the forms of global Warrant Certificates representing the Currency Put Warrants and Currency Call Warrants (the "Currency Warrant Certificates"), reflecting the provisions to be included in the Currency Warrant Agreements that will be entered into with respect to particular offerings of Currency Warrants, are filed as exhibits to the Registration Statement. The following summaries of certain provisions of the Currency Warrant Agreements and the Currency Warrant Certificates do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all the provisions of the Currency Warrant Agreements and the Currency Warrant Certificates, respectively, including the definitions therein of certain terms. GENERAL The applicable Prospectus Supplement will describe the terms of Currency Warrants offered thereby, the Currency Warrant Agreement relating to such Currency Warrants and the Currency Warrant Certificates representing such Currency Warrants, including the following: (1) whether such Currency Warrants shall be Currency Put Warrants, Currency Call Warrants, or both; (2) the formula for determining the cash settlement value of each Currency Warrant; (3) the procedures and conditions relating to the exercise of such Currency Warrants; (4) the circumstances which will cause the Currency Warrants to be deemed to be automatically exercised; (5) any minimum number of Currency Warrants which must be exercised at any one time, other than upon automatic exercise; and (6) the date on which the right to exercise such Currency Warrants shall commence and the date on which such right shall expire (the "Expiration Date"), provided that the commencement date and the Expiration Date may be the same date. BOOK-ENTRY PROCEDURES AND SETTLEMENT Except as may otherwise be provided in an applicable Prospectus Supplement, the Currency Warrants will be issued in the form of global Currency Warrant Certificates, registered in the name of a depository or its nominee. Beneficial owners will not be entitled to receive definitive certificates representing Currency Warrants. Ownership of a Currency Warrant will be recorded on or through the records of the brokerage firm or other entity that maintains a beneficial owner's account. In turn, the total number of Currency Warrants held by an individual brokerage firm for its clients will be maintained on the records of the depository in the name of such brokerage firm or its agent. Transfer of ownership of any Currency Warrant will be effected only through the selling beneficial owner's brokerage firm. EXERCISE OF CURRENCY WARRANTS Each Currency Warrant will entitle the Holder to the cash settlement value of such Currency Warrant on the applicable Exercise Date, in each case as such terms will be defined in the applicable Prospectus Supplement. If a Currency Warrant has more than one exercise date and is not exercised prior to 1:30 P.M., New York City time, on the fifth New York Business Day preceding the Expiration Date, Currency Warrants will be deemed automatically exercised. 12 LISTING Each issue of Currency Warrants will be listed on a national securities exchange, subject only to official notice of issuance, as a condition of sale of any such Currency Warrants. In the event that the Currency Warrants are delisted from, or permanently suspended from trading on, such exchange, the Expiration Date for such Currency Warrants will be the date such delisting or trading suspension becomes effective and Currency Warrants not previously exercised will be deemed automatically exercised on such Expiration Date. The applicable Currency Warrant Agreement will contain a covenant of the Company not to seek delisting of the Currency Warrants, or suspension of their trading, on such exchange. DESCRIPTION OF INDEX WARRANTS The Company may issue from time to time Index Warrants consisting of put warrants (the "Index Put Warrants") and call warrants (the "Index Call Warrants"). The Index Warrants will entitle the holders to receive from the Company an amount in cash determined by reference to decreases (in the case of Index Put Warrants) or to increases (in the case of Index Call Warrants) in the level of a specified stock or security index or the value of a portfolio of specified stocks or other securities (the "Index"). The Index may be composed of U.S. or foreign stocks or securities or a combination thereof (the "Underlying Securities"). Unless otherwise specified in the accompanying Prospectus Supplement, payments, if any, on the Index Warrants will be made in U.S. dollars. An Index Warrant will not require or entitle the holder thereof (the "Index Warrantholder") to purchase or take delivery of or sell or make delivery of any securities (including Underlying Securities); nor will the Company be under any obligation to, nor will it, purchase or take delivery of or sell or make delivery of any securities (including Underlying Securities) from or to Index Warrantholders pursuant to the Index Warrants. The Index Warrants will be offered on terms to be determined at the time of sale. GENERAL The applicable Prospectus Supplement will describe the Index Warrant Agreement or Index Warrant Trust Indenture (each as defined below), as the case may be, relating to the Index Warrants being offered thereby and the terms of such Index Warrants, including, without limitation: (i) whether the Index Warrants to be issued will be Index Put Warrants, Index Call Warrants or both; (ii) the aggregate number and initial public offering price or purchase price; (iii) the Index for such Index Warrants, which may be based on U.S. or foreign stocks or securities or a combination thereof and may be a preexisting U.S. or foreign stock or security index compiled and published by a third party or a portfolio of Underlying Securities selected by the Company in connection with the issuance of such Index Warrants, and certain information regarding such Index and the Underlying Securities; (iv) the date on which the right to exercise such Index Warrants commences and the date on which such right expires; (v) the manner in which such Index Warrants may be exercised and any restrictions on, or other special provisions relating to, the exercise of such Index Warrants; (vi) the minimum number, if any, of such Index Warrants exercisable at any one time; (vii) the maximum number, if any, of such Index Warrants that may, subject to the Company's election, be exercised by all Index Warrantholders (or by any person or entity) on any day; (viii) any provisions permitting an Index Warrantholder to condition an exercise notice on the absence of certain specified changes in the level of the applicable Index after the exercise date, any provisions permitting the Company to suspend exercise of such Index Warrants based on market conditions or other circumstances and any other special provision relating to the exercise of such Index Warrants; (ix) any provisions for the automatic exercise of such Index Warrants other than at expiration; (x) any provisions permitting the Company to cancel such Index Warrants upon the occurrence of certain events; (xi) any additional circumstances which would constitute an Event of Default with respect to such Index Warrants; (xii) the method of determining (a) the amount (the "Cash Settlement Value") payable in connection with the exercise or deemed exercise of such Index Warrants, (b) the minimum value, if any, payable upon expiration of such Index Warrants (the "Minimum Expiration Value"), (c) the 13 amount payable upon the exercise of any right which the Company may have to cancel such Index Warrants and (d) the value of the Index; (xiii) in the case of Index Warrants relating to an Index for which the trading prices of Underlying Securities are expressed in a foreign currency, the method of converting amounts in the relevant foreign currency or currencies into U.S. dollars (or such other currency or composite currency in which the Index Warrants are payable); (xiv) the method of providing for a substitute index or otherwise determining the amount payable in connection with the exercise of such Index Warrants if the Index changes or ceases to be made available by its publisher; (xv) the time or times at which amounts will be payable in respect of such Index Warrants following exercise or deemed exercise; (xvi) the national securities exchange on which such Index Warrants will be listed, if any; (xvii) any provisions for issuing such Index Warrants in other than global form; (xviii) if such Index Warrants are not issued in book-entry form, the place or places at which payment of the Cash Settlement Value, amount payable on cancellation, if any, and the Minimum Expiration Value, if any, of such Index Warrants is to be made by the Company; (xix) certain U.S. federal income tax consequences relating to such Index Warrants; and (xx) other specific provisions. Except as otherwise provided in the applicable Prospectus Supplement, each issue of Index Warrants will contain the terms set forth below. The Index Warrants which are issued without a Minimum Expiration Value will be issued under one or more index warrant agreements (each, an "Index Warrant Agreement") to be entered into between the Company and a bank or trust company, as warrant agent (the "Index Warrant Agent"), all as described in the Prospectus Supplement relating to such Index Warrants. The Index Warrant Agent will act solely as the agent of the Company under the applicable Index Warrant Agreement and will not assume any obligation or relationship of agency or trust for or with any Index Warrantholders. A single bank or trust company may act as Index Warrant Agent for more than one issue of Index Warrants. The Index Warrants which are issued with a Minimum Expiration Value will be issued under one or more index warrant trust indentures (each an "Index Warrant Trust Indenture") to be entered into between the Company and a corporation (or other person permitted to so act by the Trust Indenture Act of 1939, as amended from time to time (the "Trust Indenture Act")), to act as trustee (the "Index Warrant Trustee"), all as described in the Prospectus Supplement relative to such Index Warrants. Any Index Warrant Trust Indenture will be qualified under the Trust Indenture Act. To the extent allowed by the Trust Indenture Act, a single qualified corporation may act as Index Warrant Trustee for more than one issue of Index Warrants. Forms of Index Warrant Agreement and Index Warrant Trust Indenture and the respective global Index Warrant Certificates related thereto are filed as exhibits to the Registration Statement. The summaries herein of certain provisions of the Index Warrant Agreement, the Index Warrant Trust Indenture and global Index Warrant Certificates do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all the provisions of the Index Warrant Agreement, the Index Warrant Trust Indenture and global Index Warrant Certificates, respectively. The Company will have the right to "reopen" a previous issue of Index Warrants and to issue additional Index Warrants of such issue without the consent of any Index Warrantholder. The Index Warrants involve a high degree of risk, including the risk that the Index Warrants will expire worthless except for the Minimum Expiration Value, if any, of such Index Warrants. Investors should therefore be prepared to sustain a total loss of the purchase price of the Index Warrants (except for the Minimum Expiration Value, if applicable). Investors who consider purchasing Index Warrants should be experienced with respect to options and option transactions and reach an investment decision only after carefully considering, with their advisers, the suitability of the Index Warrants in light of their particular circumstances and the information set forth below and under "Description of Index Warrants" as well as additional information contained in the Prospectus Supplement relating to such Index Warrants. 14 Unless otherwise provided in the Prospectus Supplement, each Index Warrant will entitle Index Warrantholders to receive from the Company upon exercise the Cash Settlement Value of such Index Warrant. Certain Index Warrants issued pursuant to an Index Warrant Trust Indenture will, if specified in the Prospectus Supplement, entitle the Index Warrantholder to receive from the Company, under certain circumstances specified in the Prospectus Supplement, an amount equal to the greater of the applicable Cash Settlement Value and a Minimum Expiration Value of such Index Warrants. In addition, certain Index Warrants will, if specified in the Prospectus Supplement, entitle Index Warrantholders to receive from the Company a certain amount upon cancellation of the Index Warrants by the Company, upon the occurrence of specified events. In addition, if so specified in the Prospectus Supplement, following the occurrence of an extraordinary event, the Cash Settlement Value of an Index Warrant may, at the option of the Company, be determined on a different basis, including in connection with automatic exercise at expiration. Unless otherwise specified in the Prospectus Supplement, the Index will be an established, broadly-based index related to a major domestic or foreign equity or security trading market or based upon a portfolio of specified stocks or other securities, and the Cash Settlement Value (and, if applicable, the Minimum Expiration Value or amount payable on cancellation) of the Index Warrants will be payable in U.S. dollars. An Index Warrant will be settled only in cash, and accordingly, will not require or entitle an Index Warrantholder to sell, make delivery, purchase or take delivery of any shares of any Underlying Securities or any other securities, nor will the Company be under any obligation to, nor will it, purchase or take delivery of or sell or make delivery of any securities (including Underlying Securities) from or to Index Warrantholders pursuant to the Index Warrants. The Index Warrantholders will not receive any interest on any Cash Settlement Value, Minimum Expiration Value or amount payable on cancellation of the Index Warrants and the Index Warrants will not entitle the Index Warrantholders to any of the rights of holders of any Underlying Securities. Unless otherwise specified in the related Prospectus Supplement, the Index Warrants will be deemed to be automatically exercised upon expiration. Upon such automatic exercise, Index Warrantholders will be entitled to receive the Cash Settlement Value of the Index Warrants, except that holders of Index Warrants having a Minimum Expiration Value will be entitled to receive an amount equal to the greater of such Cash Settlement Value and the applicable Minimum Expiration Value. The Minimum Expiration Value may be either a fixed amount or an amount that varies during the term of the Index Warrants in accordance with a schedule or formula. Any Minimum Expiration Value applicable to an issue of Index Warrants, as well as any additional circumstances resulting in the automatic exercise of such Index Warrants, will be specified in the related Prospectus Supplement. If so specified in the Prospectus Supplement, the Index Warrants may be canceled by the Company, or the exercise or valuation of, or payment for, such Index Warrants may be delayed or postponed upon the occurrence of an extraordinary event. Any extraordinary events relating to an issue of Index Warrants will be set forth in the related Prospectus Supplement. Upon cancellation, the related Index Warrantholders will be entitled to receive only the applicable amount payable on cancellation specified in such Prospectus Supplement. The amount payable on cancellation may be either a fixed amount or an amount that varies during the term of the Index Warrants in accordance with a schedule or formula. If the Company defaults with respect to any of its obligations under Index Warrants which are issued with a Minimum Expiration Value pursuant to an Index Warrant Trust Indenture, such default may be waived by the Index Warrantholders of a majority in interest of all outstanding Index Warrants, except a default in the payment of the Cash Settlement Value, Minimum Expiration Value or cancellation amount (if applicable) on such Index Warrants or in respect of a covenant or provision of the applicable Index Warrant Trust Indenture which cannot be modified or amended without the consent of the Index Warrantholder of each outstanding Index Warrant affected. 15 The Index Warrants are unsecured contractual obligations of the Company and will rank pari passu with the Company's other unsecured contractual obligations and with the Company's unsecured and unsubordinated debt. Certain special United States federal income tax considerations may be applicable to instruments such as the Index Warrants. The related Prospectus Supplement will describe such tax considerations. The summary of United Stated federal income tax considerations contained in the Prospectus Supplement will be presented for informational purposes only, however, and will not be intended as legal or tax advice to prospective purchasers. Prospective purchasers of Index Warrants are urged to consult their own tax advisors prior to any acquisition of Index Warrants. BOOK-ENTRY PROCEDURES AND SETTLEMENT Except as may otherwise be provided in an applicable Prospectus Supplement, Index Warrants will be issued in book-entry form and represented by global Index Warrants, registered in the name of a depository or its nominee. Except as may otherwise be provided in an applicable Prospectus Supplement, Index Warrantholders will not be entitled to receive definitive certificates representing Index Warrants, unless the depository is unwilling or unable to continue as depository or the Company decides to have the Index Warrants represented by definitive certificates. A beneficial owner's interest in an Index Warrant represented by a global Index Warrant will be recorded on or through the records of the brokerage firm or other entity that maintains such beneficial owner's account. In turn, the total number of Index Warrants held by an individual brokerage firm or other entity for its clients will be maintained on the records of the depository in the name of such brokerage firm or other entity or its agent. LISTING Unless otherwise indicated in the Prospectus Supplement, the Index Warrants will be listed on a national securities exchange as specified in the Prospectus Supplement. It is expected that such exchange will cease trading an issue of Index Warrants at the close of business on the related expiration date of such Index Warrants. MODIFICATION Any Index Warrant Agreement or Index Warrant Trust Indenture and the terms of the related Index Warrants may be amended by the Company and the Index Warrant Agent or Index Warrant Trustee, as the case may be (which amendment shall take the form of a supplemental index warrant agreement or supplemental index warrant trust indenture (collectively referred to as "Supplemental Agreements")), without the consent of the holders of any Index Warrants, for the purpose of (i) curing any ambiguity, or of curing, correcting or supplementing any defective or inconsistent provision contained therein, or of making any other provisions with respect to matters or questions arising under the Index Warrant Agreement or Index Warrant Trust Indenture, as the case may be, which shall not be inconsistent with the provisions thereof or of the Index Warrants, (ii) evidencing the succession of another corporation to the Company and the assumption by any such successor of the covenants of the Company contained in the Index Warrant Agreement or the Index Warrant Trust Indenture, as the case may be, and the Index Warrants, (iii) appointing a successor depository, (iv) evidencing and providing for the acceptance of appointment by a successor Index Warrant Agent or Index Warrant Trustee with respect to the Index Warrants, as the case may be, (v) adding to the covenants of the Company, for the benefit of the Index Warrantholders or surrendering any right or power conferred upon the Company under the Index Warrant Agreement or Index Warrant Trust Indenture, as the case may be, (vi) issuing Index Warrants in definitive form, or (vii) amending 16 the Index Warrant Agreement or Index Warrant Trust Indenture, as the case may be, in any manner which the Company may deem to be necessary or desirable and which will not materially and adversely affect the interests of the Index Warrantholders. The Company and the Index Warrant Agent may also amend any Index Warrant Agreement or Index Warrant Trust Indenture, as the case may be, and the terms of the related Index Warrants (which amendment shall take the form of a Supplemental Agreement) with the consent of the Index Warrantholders holding not less than 66 2/3 in number of the then outstanding unexercised Index Warrants affected by such amendment, for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Index Warrant Agreement or Index Warrant Trust Indenture, as the case may be, or of modifying in any manner the rights of the Index Warrantholders; provided that no such amendment that (i) changes the determination of the Cash Settlement Value or amount payable on cancellation, if any, or Minimum Expiration Value, if any, of the Index Warrants (or any aspects of such determination) so as to reduce the amount receivable upon exercise or deemed exercise, (ii) shortens the period of time during which the Index Warrants may be exercised, or otherwise materially and adversely affects the exercise rights of the Index Warrantholders or (iii) reduces the number of outstanding Index Warrants, the consent of whose holders is required for amendment of the Index Warrant Agreement, the Index Warrant Trust Indenture or the terms of the related Index Warrants, may be made without the consent of each Index Warrantholder affected thereby. EVENT OF DEFAULT Certain events in bankruptcy, insolvency or reorganization of the Company will constitute an Event of Default with respect to Index Warrants having a Minimum Expiration Value which are issued under an Index Warrant Trust Indenture. Upon the occurrence of an Event of Default, the holders of 25% of unexercised Index Warrants may elect to receive a settlement payment for such unexercised Index Warrants, which will immediately become due to the Index Warrantholders upon such election in an amount equal to the market value of such Index Warrants (assuming the Company's ability to satisfy its obligations under such Index Warrants as they would become due) as of the date the Company is notified of the intended liquidation, as determined by a nationally recognized securities broker-dealer unaffiliated with the Company and mutually selected by the Company and the Index Warrant Trustee. MERGER, CONSOLIDATION, SALE, LEASE OR OTHER DISPOSITIONS 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 (i) 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 any Minimum Expiration Value or cancellation amount, if applicable) with respect to all the unexercised Index Warrants and the performance and observance of all of the covenants and conditions of the Index Warrant Agreement or Index Warrant Trust Indenture, as the case may be, to be performed or observed by the Company, and (ii) the Company or such successor corporation, as the case may be, shall not immediately be in default under the Index Warrant Agreement or Index Warrant Trust Indenture, as the case may be. ENFORCEABILITY OF RIGHTS BY INDEX WARRANTHOLDERS Any Index Warrantholder may, without the consent of the related Index Warrant Agent, enforce by appropriate legal action, in and for its own behalf, its right to exercise, and receive payment for, its Index Warrants. 17 PLAN OF DISTRIBUTION The Company may sell Securities (i) through MLPF&S as agent, (ii) to the public through, or through underwriting syndicates managed by, one or more of the firms named on the cover page of this Prospectus or (iii) directly to purchasers. The Prospectus Supplement with respect to the Securities of a particular series describes the terms of the offering of such Securities, including the name of the agent or the name or names of any underwriters, the public offering or purchase price, any discounts and commissions to be allowed or paid to the agent or underwriters, all other items constituting underwriting compensation, the discounts and commissions to be allowed or paid to dealers, if any, and the exchanges, if any, on which the Securities will be listed. Only the agents or underwriters so named in the Prospectus Supplement are agents or underwriters in connection with the Securities offered thereby. Under certain circumstances, the Company may repurchase Securities and reoffer them to the public as set forth above. The Company may also arrange for repurchases and resales of such Securities by dealers. If so indicated in the Prospectus Supplement, the Company will authorize underwriters to solicit offers by certain institutions to purchase Debt Securities from the Company pursuant to Delayed Delivery Contracts providing for payment and delivery on the date stated in the Prospectus Supplement. Each such contract will be for an amount not less than, and, unless the Company otherwise agrees, the aggregate principal amount of Debt Securities sold pursuant to such contracts shall not be more than, the respective amounts stated in the Prospectus Supplement. Institutions with whom such contracts, when authorized, may be made include commercial and savings banks, insurance companies, pension funds, investment companies, educational and charitable institutions, and other institutions, but shall in all cases be subject to the approval of the Company. Delayed Delivery Contracts will not be subject to any conditions except that the purchase by an institution of the Debt Securities covered thereby shall not at the time of delivery be prohibited under the laws of any jurisdiction in the United States to which such institution is subject. The Company has agreed to indemnify the agent and the several underwriters against certain civil liabilities, including liabilities under the Securities Act of 1933 (the "Act"), or contribute to payments the agent or the underwriters may be required to make in respect thereof. The distribution of Securities will conform to the requirements set forth in the applicable sections of Schedule E to the By-Laws of the National Association of Securities Dealers, Inc. EXPERTS The consolidated financial statements and related financial statement schedules of the Company and its subsidiaries included or incorporated by reference in the Company's 1992 Annual Report on Form 10-K and incorporated by reference in this Prospectus have been audited by Deloitte & Touche, independent auditors, as stated in their reports incorporated by reference herein. The information under the caption "Summary Financial Information" for each of the five years in the period ended December 25, 1992 included in this Prospectus and the Selected Financial Data under the captions "Operating Results", "Financial Position" and "Common Share Data" for each of the five years in the period ended December 25, 1992 included in the 1992 Annual Report to Stockholders of the Company and incorporated by reference herein have been derived from consolidated financial statements audited by Deloitte & Touche, as set forth in their reports incorporated by reference herein. The consolidated financial statements and related financial statement schedules, such Summary Financial Information and such Selected Financial Data appearing or incorporated by reference in this Prospectus and the Registration Statement of which this Prospectus is a part, have been included or incorporated herein by reference in reliance upon such reports of Deloitte & Touche given upon their authority as experts in accounting and auditing. With respect to unaudited interim financial information for the periods included in any of the Quarterly Reports on Form 10-Q which may be incorporated herein by reference, Deloitte & Touche have applied 18 limited procedures in accordance with professional standards for a review of such information. However, as stated in their report included in any such Quarterly Report on Form 10-Q and incorporated by reference herein, they did not audit and they do not express an opinion on such interim financial information. Accordingly, the degree of reliance on their reports on such information should be restricted in light of the limited nature of the review procedures applied. Deloitte & Touche are not subject to the liability provisions of Section 11 of the Act for any such report on unaudited interim financial information because any such report is not a "report" or a "part" of the registration statement prepared or certified by an accountant within the meaning of Sections 7 and 11 of the Act. 19 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY THE UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER AND THEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. --------------- TABLE OF CONTENTS PROSPECTUS SUPPLEMENT
PAGE ---- Prospectus Supplement Summary............................................ S-3 Certain Important Information Concerning the Warrants.................... S-6 Risk Factors Relating to the Warrants.................................... S-6 Recent Developments...................................................... S-9 Description of the Warrants.............................................. S-12 CMT Yield................................................................ S-16 Certain United States Federal Income Tax Considerations Concerning the Warrants................................................................ S-19 Use of Proceeds.......................................................... S-21 Underwriting............................................................. S-21 Validity of Securities................................................... S-21 PROSPECTUS Available Information.................................................... 2 Incorporation of Certain Documents by Reference.......................... 2 Merrill Lynch & Co., Inc................................................. 3 Use of Proceeds.......................................................... 3 Summary Financial Information............................................ 4 Description of Debt Securities........................................... 7 Description of Debt Warrants............................................. 11 Description of Currency Warrants......................................... 12 Description of Index Warrants............................................ 13 Plan of Distribution..................................................... 18 Experts.................................................................. 18
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- [LOGO OF MERRILL LYNCH & CO., INC. APPEARS HERE] MERRILL LYNCH & CO., INC. 1,000,000 CONSTANT MATURITY U.S. TREASURY YIELD INCREASE WARRANTS, EXPIRING AUGUST 25, 1995 --------------- PROSPECTUS SUPPLEMENT --------------- MERRILL LYNCH & CO. , 1994 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- GRAPHICS APPENDIX LIST - -------------------------------------------------------------------------------- Page Where Graphic Appears Description of Graphic or Cross-Reference - -------------------------------------------------------------------------------- Page S-19 The graph is entitled "CMT Yield--Historical Performance" "Monthly Averages from January 1989 through December 1993". The graph sets forth the monthly averages for the CMT Yield. The vetical axis specifies the values of the CMT Yield in a range from 4 to 10 percent in increments of 1; the horizontal axis specifies the time period in increments of three months beginning with January 1989 and ending with December 1993.