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RULE 424(B)(3)
REGISTRATION NO. 333-5997
PRICING SUPPLEMENT
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(To Prospectus Supplement and Prospectus dated July 30, 1998)
$10,000,000
Merrill Lynch & Co., Inc.
Medium-Term Notes, Series B
7% Stock Portfolio Linked Notes due August 18, 2000
(Linked to the performance of the Common Stock of Intuit Inc., CKS Group, Inc.
and CNET, Inc.)
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Aggregate Principal Amount: $10,000,000.
Initial Public Offering Price: $1,000 per Note, plus accrued interest, if
any, from August 18, 1998.
Coupon: 7% per annum.
Interest Payment Dates: February 18 and August 18 of each year,
commencing February 18, 1999.
Stated Maturity Date: August 18, 2000.
Redemption: The Notes are not redeemable prior to maturity.
Other Provisions:
The 7% Stock Portfolio Linked Notes due August 18, 2000 (Linked to the
performance of the Common Stock of Intuit Inc., CKS Group, Inc. and CNET, Inc.)
(the "Notes") are Fixed Rate Notes as described in the accompanying Prospectus
Supplement dated July 30, 1998, with other provisions as described herein.
The principal amount of each Note being offered hereby will be $1,000 (the
"Issue Price"). The Notes will mature on August 18, 2000. Interest on the
Notes, at the rate of 7% of the principal amount per annum, is payable
semiannually in arrears on each February 18 and August 18, commencing February
18, 1999.
At maturity (whether as a result of acceleration or otherwise), the Company
will, with respect to each $1,000 principal amount of any Note, pay to the
holder thereof an amount in U.S. Dollars (the "Cash Amount") determined in
accordance with the following formula, subject to certain adjustments: (i) if
the Final Portfolio Value (as defined herein) is greater than or equal to $1,600
(the "Portfolio Value Cap"), each Note will be redeemed for an amount equal to
the Portfolio Value Cap or (ii) if the Final Portfolio Value is less than the
Portfolio Value Cap, each $1,000 Note will be redeemed for the Final Portfolio
Value. At the option of the holder of any Note, in lieu of delivery of the Cash
Amount, the Company will deliver Portfolio Securities (as defined herein) having
a value equal to the Cash Amount as of the Determination Date (as defined
herein) (the "Equivalent Share Amount"). The Final Portfolio Value will be
based on the Closing Price (as defined herein) of the Portfolio Securities on
the Determination Date. "Portfolio Securities" will consist of common stock of
Intuit Inc., par value $0.01 (the "Intuit Stock"), common stock of CKS Group,
Inc., par value $0.001 (the "CKS Stock") and common stock of CNET, Inc., par
value $0.0001 (the "CNET Stock"), all as more fully described herein. The
Determination Date will be the fifth Trading Day (as defined herein) preceding
the Maturity Date, subject to certain Market Disruption Events (as defined
herein). Each of the Portfolio Securities is currently traded on the Nasdaq
National Market System (the "NASDAQ") under the following symbols: "INTU" for
Intuit Inc., "CKSG" for CKS Group, Inc. and "CNWK" for CNET, Inc. For purposes
of establishing the Initial Portfolio Value and the Multipliers (as defined
herein) related thereto, the price per share of the Intuit Stock, the CKS Stock
and the CNET Stock were deemed to be equal to $47.2530, $19.1039 and $47.4141,
respectively. See "Dilution and Reorganization Adjustments" and "The Portfolio"
in this Pricing Supplement. On August 11, 1998, the Closing Prices (as defined
herein) of the Intuit Stock, the CKS Stock and the CNET Stock were $47.25,
$18.50 and $47.375 per share, respectively.
The Notes will be issued and sold in denominations of $1,000, and integral
multiples thereof.
AS A RESULT OF THE FORMULA FOR DETERMINING THE AMOUNT PAYABLE AT THE MATURITY
OF THE NOTES, A HOLDER MAY RECEIVE AT MATURITY MORE OR LESS THAN THE ISSUE PRICE
PER NOTE. IF THE FINAL PORTFOLIO VALUE IS LESS THAN THE ISSUE PRICE, THE AMOUNT
PAYABLE AT MATURITY OF THE NOTES WILL BE LESS THAN THE ISSUE PRICE PER NOTE, IN
WHICH CASE AN INVESTMENT IN THE NOTES WILL RESULT IN A LOSS. IF THE FINAL
PORTFOLIO VALUE IS GREATER THAN $1,600, EACH NOTE WILL BE REDEEMED FOR AN AMOUNT
EQUAL TO $1,600. AN INVESTMENT IN THE NOTES ENTAILS CERTAIN OTHER RISKS NOT
ASSOCIATED WITH SIMILAR INVESTMENTS IN A CONVENTIONAL DEBT SECURITY.
Before you decide to invest in the Notes, carefully read this Pricing
Supplement and the accompanying Prospectus Supplement and Prospectus, including
the risk factors beginning on page PS-7 of this Pricing Supplement.
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We expect that the Notes will be ready for delivery in book-entry form only
through the facilities of DTC on or about August 18, 1998.
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MERRILL LYNCH & CO.
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The date of this Pricing Supplement is August 11, 1998.
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Capitalized terms not defined herein have the meanings given to such terms
in the accompanying Prospectus Supplement.
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Aggregate Principal Amount............. $10,000,000
Issuer................................. Merrill Lynch & Co., Inc. (the "Company")
Maturity Date.......................... August 18, 2000
Coupon................................. 7% per annum
Interest Payment Dates................. February 18 and August 18, commencing February 18, 1999
Specified Currency..................... U.S. Dollars
Issue Price............................ $1,000 per Note
Pricing Date........................... August 11, 1998
Original Issue Date (Settlement Date).. August 18, 1998
CUSIP.................................. 590188 JG4
Book-Entry Note or Certificated Note... Book-Entry
Denominations.......................... The Notes will be issued and sold in denominations of $1,000,
and integral multiples thereof.
Trustee................................ The Chase Manhattan Bank
Agent.................................. Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S")
Portfolio Securities................... The Intuit Stock, the CKS Stock and the CNET Stock
(collectively the "Portfolio"). See "The
Portfolio".
Amount Payable at Maturity............. At maturity (whether as a result of acceleration
or otherwise), the Company will, with respect to
the principal amount of each Note, upon delivery
of such Note to the Trustee, deliver, or cause the
delivery of, either (i) the Cash Amount, or (ii)
if the holder has so elected, the Equivalent Share
Amount. References to payment "per Note" refer to
each $1,000 principal amount of any Note.
Cash Amount............................ An amount in U.S. Dollars determined in accordance with the
following formula, subject to certain adjustments:
(i) if the Final Portfolio Value is greater than
or equal to the Portfolio Value Cap, each Note
will be redeemed for an amount equal to the
Portfolio Value Cap and (ii) if the Final
Portfolio Value is less than the Portfolio Value
Cap, each Note will be redeemed for the Final
Portfolio Value.
Portfolio Value Cap.................... $1,600 per Note.
Initial Portfolio Value................ $1,000 per Note.
Final Portfolio Value.................. As determined by the Calculation Agent, an amount equal
to the sum of the Closing Prices of the Portfolio
Securities on the Determination Date, each as
multiplied by the Multiplier for such Portfolio
Security; provided, however, that in the event of
the occurrence of certain corporate events
affecting any Portfolio Security, the method of
calculating the Final Portfolio Value may be
adjusted by the Calculation Agent. See "Dilution
and Reorganization Adjustments".
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PS-2
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Portfolio Value........................ At any time, an amount equal to the sum of the Market Prices
of each Portfolio Security, as multiplied by the
applicable Multiplier for such Portfolio Security,
in each case as determined by the Calculation
Agent. See "The Portfolio". In the event of the
occurrence of certain corporate events affecting
any Portfolio Security, the method of calculating
the Portfolio Value may be adjusted by the
Calculation Agent. See "Dilution and
Reorganization Adjustments".
Multipliers............................ Initially, 7.0541 in the case of the Intuit Stock, 17.4483 in the
case of the CKS Stock and 7.0304 in the case of
the CNET Stock. The Multiplier for each Portfolio
Security was initially set by the Calculation
Agent so that, on the Pricing Date, the Portfolio
Securities were equally dollar-weighted in the
Portfolio, and the Portfolio Value equaled the
Initial Portfolio Value. See "The Portfolio".
The Multiplier for each Portfolio Security is
subject to adjustment by the Calculation Agent.
See "Dilution and Reorganization Adjustments".
Determination Date..................... The fifth Trading Day preceding the Maturity Date or, if
there is a Market Disruption Event with respect to
any Portfolio Security on such day, the
Determination Date will be the immediately
succeeding Trading Day on which no Market
Disruption Event with respect to any Portfolio
Security shall have occurred; provided that the
Determination Date will be no later than the third
Trading Day preceding the Maturity Date,
notwithstanding the occurrence of a Market
Disruption Event with respect to any Portfolio
Security on such Trading Day (each, an "Affected
Portfolio Security"); and provided further that,
with respect to each such Affected Portfolio
Security, (i) the Calculation Agent will determine
its good faith estimate of the Closing Price for
each such Affected Portfolio Security that would
have prevailed on such Trading Day but for such
Market Disruption Event and (ii) for holders of
Notes that have not otherwise elected to receive
the Equivalent Share Amount, the Company may, in
its sole discretion, deliver to such holders on
the Maturity Date the Equivalent Share Amount
attributable to such Affected Portfolio Security
per Note in lieu of delivering the portion of the
Cash Amount attributable to such Affected
Portfolio Security per Note.
Right to Receive the Equivalent
Share Amount.......................... Holders of Notes will be
entitled, upon completion by the holder and
delivery to the Company and the Calculation Agent
of an Official Notice of Exercise of Right to
Receive the Equivalent Share Amount (attached as
Annex A to the Pricing Supplement) prior to 11:00
a.m., New York City time, on or prior to the
fifteenth Business Day preceding the Maturity
Date, to elect to receive the Equivalent Share
Amount at maturity, in lieu of the Cash Amount,
unless it is not practicable, in the opinion of
the Calculation Agent, to deliver such Equivalent
Share Amount on the Maturity Date for all Notes
with respect to which holders have elected to
receive the Equivalent Share Amount at maturity,
in which case the Cash Amount will be paid.
Because the Notes will be issued as Book-Entry
Notes, an Official Notice of Exercise of Right to
Receive the Equivalent Share Amount may only be
submitted by the Depository. Therefore,
beneficial owners of Notes must rely upon the
procedures of the Depository and, if such person
is not a Participant, on the procedures of the
Participant through which such person owns its
interest, to submit
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PS-3
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such Official Notice. See
"Description of Notes Book-Entry Notes" in the
accompanying Prospectus Supplement.
Equivalent Share Amount................. As determined by the Calculation Agent on the
relevant date, the Equivalent Share Amount shall
mean: (i) if the Final Portfolio Value is less
than or equal to the Portfolio Value Cap, the
number of shares of each Portfolio Security equal
to the Multiplier for such Portfolio
Security on such date; or (ii) if the Final
Portfolio Value is greater than the Portfolio
Value Cap, the number of shares of each Portfolio
Security equal to the Multiplier for such
Portfolio Security on such date multiplied by a
fraction, the numerator of which is the Portfolio
Value Cap and the denominator of which is the
Final Portfolio Value;
provided, however, that the Company will pay cash in
lieu of delivering fractional shares, in an amount
as determined by the Calculation Agent. Unless
the Calculation Agent otherwise determines that it
is not practicable to deliver the Equivalent Share
Amount, the Equivalent Share Amount will be
delivered to the holder on the Maturity Date;
provided that in the event of certain Market
Disruption Events, the delivery of the Portfolio
Securities may be delayed until after the Maturity
Date.
Market Price............................. For any Trading Day, the Market Price for any security listed on
a national securities exchange or traded on NASDAQ
means (i) at any time prior to the availability of
a Closing Price for such security on such day, the
last reported sale price at such time as reported
by the principal trading market and (ii) at any
time after the availability of a Closing Price for
such security on such day, the Closing Price. If
for any reason the last reported sale price is not
available at any time prior to the availability of
a Closing Price for any security, the applicable
Market Price for such security on such day shall
be the mean, as determined by the Calculation
Agent, of the bid prices for such security
obtained from as many dealers in such security,
but not exceeding three, as will make such bid
prices available to the Calculation Agent.
Closing Price........................... For any Trading Day, the Closing Price for any security listed
on a national securities exchange or traded on
NASDAQ means, as applicable, the official closing
price or the last reported sale price (as of 4:00
p.m. in the City of New York) on such day as
reported by the principal trading market. If for
any reason neither the official closing price nor
the last reported sale price is available for any
security, the applicable Closing Price for such
security on such day shall be the mean, as
determined by the Calculation Agent, of the bid
prices for such security obtained from as many
dealers in such security, but not exceeding three,
as will make such bid prices available to the
Calculation Agent.
Trading Day.............................. A day on which the New York Stock Exchange, the American Stock
Exchange and NASDAQ are open for trading, as
determined by the Calculation Agent.
Business Day.............................. Any day other than a Saturday or Sunday that is neither a legal
holiday nor a day on which banking institutions
are authorized or required by law or regulation to
close in The City of New York and that is a
Trading Day.
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PS-4
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Calculation Agent......................... MLPF&S
For potential conflicts of interest that may exist between the Calculation Agent
and the holders of the Notes, see "Risk Factors"
below. All determinations made by the Calculation
` Agent shall be at the sole discretion of the
Calculation Agent and, absent manifest error,
shall be conclusive for all purposes and binding
on the Company and beneficial owners of the Notes.
All percentages resulting from any calculation on
the Notes will be rounded to the nearest one
hundred-thousandth of a percentage point, with
five one-millionths of a percentage point rounded
upwards (e.g., 9.876545% (or .09876545) would be
rounded to 9.87655% (or .0987655)), and all dollar
amounts used in or resulting from such calculation
will be rounded to the nearest cent with one-half
cent being rounded upwards.
Market Disruption Event.................. Market Disruption Event means either of the following events:
(i) a suspension, absence (including the absence
of an official closing price, if applicable) or
material limitation of trading of any Portfolio
Security on NASDAQ or other relevant securities
exchanges for more than two hours of trading or
during the one-half hour period preceding or at
the close of trading in such market; or the
suspension or material limitation on the primary
market for trading in options contracts related to
any Portfolio Security, if available, during the
one-half hour period preceding or at the close of
trading in the applicable market in each case as
determined by the Calculation Agent in its sole
discretion; and
(ii) a determination by the Calculation Agent in
its sole discretion that the event described in
clause (i) above materially interfered with the
ability of the Company or any of its affiliates to
unwind all or a material portion of the hedge with
respect to the Notes or to purchase any Portfolio
Security for the purposes of delivering the
Equivalent Share Amount.
For the purposes of determining whether a Market
Disruption Event has occurred: (1) a limitation
on the hours or number of days of trading will not
constitute a Market Disruption Event if it results
from an announced change in the regular business
hours of the relevant exchange, (2) a decision to
permanently discontinue trading in any relevant
option contract will not constitute a Market
Disruption Event, (3) limitations pursuant to any
rule or regulation enacted or promulgated by
NASDAQ or other relevant securities exchanges (or
other regulatory organization with jurisdiction
over NASDAQ or other relevant securities
exchanges, as applicable) on trading during
significant market fluctuations will constitute a
suspension or material limitation of trading in
any Portfolio Security, (4) a suspension of
trading in an options contract on any Portfolio
Security by the primary securities market trading
in such options, if available, by reason of (x) a
price change exceeding limits set by such
securities exchange or market, (y) an imbalance of
orders relating to such contracts or (z) a
disparity in bid and ask quotes relating to such
contracts will constitute a suspension or material
limitation of trading in options contracts related
to such
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PS-5
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Portfolio Security and (5) a suspension,
absence or material limitation of trading on the
primary securities market on which options
contracts related to any Portfolio Security are
traded will not include any time when such
securities market is itself closed for trading
under ordinary circumstances.
Events of Default and Acceleration........ In case an Event of Default with respect
to any Notes shall have occurred and be
continuing, the amount payable to a beneficial
owner of a Note upon any acceleration permitted by
the Notes, with respect to each $1,000 principal
amount thereof, will be equal to the Cash Amount
that would be payable with respect to such Note,
calculated as though the date of early repayment
were the stated maturity date of the Notes. If a
bankruptcy proceeding is commenced in respect of
the Company, the claim of the beneficial owner of
a Note may be limited, under Section 502(b)(2) of
Title 11 of the United States Code, to the
principal amount of the Note plus an additional
amount of contingent interest calculated as though
the date of the commencement of the proceeding
were the maturity date of the Notes.
Upon the occurrence of an Event of Default with
respect to the Notes, beneficial owners of the
Notes may accelerate the maturity of the Notes, as
described under "Description of Debt Securities
Events of Default" in the accompanying Prospectus.
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PS-6
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RISK FACTORS
Your investment in the Notes will involve certain risks. As a result of the
formula for determining the amount payable at the maturity of the Notes, you may
receive at maturity more or less than the Issue Price per Note. If the Final
Portfolio Value is less than the Initial Portfolio Value, the amount payable at
the maturity of the Notes will be less than the Issue Price per Note, in which
case an investment in the Notes will result in a loss. If the Final Portfolio
Value is greater than $1,600, each Note will be redeemed for an amount equal to
$1,600. An investment in the Notes entails certain other risks not associated
with similar investments in a conventional debt security. You should carefully
consider the following discussion of risks before deciding whether an investment
in the Notes is suitable for you.
GENERAL
The Notes combine features of equity and debt instruments. For example,
holders of Notes, unlike holders of the Portfolio Securities, will not have any
voting rights in respect of the Portfolio Securities and will not be entitled to
receive dividends, if any, that may be payable on the Portfolio Securities. The
payment of dividends on the Portfolio Securities may decrease the Portfolio
Value, and therefore the value of the Notes. In addition, the terms of the
Notes differ from those of ordinary debt securities in that the amount due at
maturity is not fixed, but is based on the Market Prices of the Portfolio
Securities, subject to the Portfolio Value Cap on the Determination Date.
Because the market value of each of the Portfolio Securities is subject to
fluctuations discussed in "Factors Affecting Trading Value of the Notes" below,
the amount of cash or the value of the Portfolio Securities received by a holder
of Notes at maturity, determined as described herein, may be more or less than
the principal amount of the Notes.
The opportunity for equity appreciation afforded by an investment in the
Notes is less than the opportunity for equity appreciation afforded by a direct
investment in each of the Portfolio Securities in the proportion attributable to
each Note because the Final Portfolio Value is capped at $1,600 (which
represents a maximum appreciation of 60% over the Issue Price). If the Final
Portfolio Value is less than the Initial Portfolio Value (which is equivalent to
the Issue Price), holders will realize the entire decline in value of the
Portfolio Securities and the amount of cash or the value of the Portfolio
Securities receivable upon maturity will be less than the principal amount of
the Notes, in which case an investment in the Notes will result in a loss.
Although the Multipliers used in connection with any determination of the
Portfolio Value are subject to adjustment for certain corporate events, such
adjustments do not cover all events that could affect the market value of the
Portfolio Securities, including, without limitation, the occurrence of a partial
tender or exchange offer for any Portfolio Security by the issuer thereof or any
third party. Such other events may adversely affect the trading value of the
Notes, the Cash Amount payable at maturity, or the number of any Portfolio
Securities allocated on the Determination Date (but not received by the holder
until maturity) pursuant to such holder's election to receive the Equivalent
Share Amount.
While the Portfolio consists of the common stock issued by three companies
involved in the high technology industry, the Portfolio is not intended to
provide an indication of the pattern of price movements of common stocks of high
technology corporations generally.
COMPARABLE YIELD ON NOTES
The amount holders of Notes receive at maturity may, in addition to the
payments of the fixed interest, be less than the return they could earn on other
investments. The yield on the Notes may be less than the yield that could be
earned on a standard senior debt security of the Company with the same maturity
date. An investment in the Notes may not reflect the full opportunity cost
considering the effect of factors that affect the time value of money.
RETURN ON THE NOTES WILL NOT REFLECT THE PAYMENT OF DIVIDENDS
The calculation of neither the Portfolio Value nor the Final Portfolio
Value will include the value of dividends paid on the Portfolio Securities, if
any. Therefore, the return earned on the Notes, if any, will not be the same as
the return that could be earned by owning the Portfolio Securities directly and
receiving the dividends paid on such securities, if any.
PS-7
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UNCERTAIN TRADING MARKET
The Notes have not been and will not be listed on any securities exchange.
There is no precedent to indicate how the Notes will trade in the secondary
market. You cannot assume that a trading market will develop for the Notes. If
such a trading market does develop, there can be no assurance that there will be
liquidity in the trading market. If the trading market for the Notes is limited,
there may be a limited number of buyers when you decide to sell your Notes if
you do not wish to hold your investment until maturity. This may adversely
affect the price you receive.
FACTORS AFFECTING TRADING VALUE OF THE NOTES
We believe that the market value of the Notes will be affected by the
Portfolio Value and by a number of other factors. Some of these factors are
interrelated in complex ways. As a result, the effect of any one factor may be
offset or magnified by the effect of another factor. The following paragraphs
describe the expected impact on the market value of the Notes given a change in
a specific factor, assuming all other conditions remain constant.
. PORTFOLIO VALUE. We expect that the market value of the Notes will
depend substantially on the amount by which the Portfolio Value exceeds or
falls below the Initial Portfolio Value. If you choose to sell your Notes
when the Portfolio Value exceeds the Initial Portfolio Value, you may
receive substantially less than the amount that would be payable at
maturity based on the then current Portfolio Value because of the
expectation that the Portfolio Value will continue to fluctuate until the
Final Portfolio Value is determined. If you choose to sell your Notes when
the Portfolio Value is below or not sufficiently above the Initial
Portfolio Value, you may receive less than the principal amount of your
Note. Political, economic and other developments may also affect the
Portfolio Securities and the value of the Notes.
. INTEREST RATES. We expect that the trading value of the Notes will be
affected by changes in interest rates. In general, because interest is
payable on the Notes at a fixed rate, if U.S. interest rates increase, we
expect that the trading value of the Notes will decrease. If U.S. interest
rates decrease, we expect the trading value of the Notes will increase. In
addition, interest rates may also affect the economy and, in turn, the
Portfolio Value. Rising interest rates may lower the Portfolio Value and
the trading value of the Notes. Falling interest rates may increase the
value of the Portfolio Value and the trading value of the Notes.
. VOLATILITY OF THE PORTFOLIO. Volatility is the term used to describe
the size and frequency of fluctuations in the price of individual
securities and in markets generally . The volatility of the Portfolio
Value will depend upon the volatility of each of the Portfolio Securities
as well as of the technology sector and the stock market generally. If the
volatility of the Portfolio Value increases, we expect that the trading
value of the Notes will decrease. If the volatility of the Portfolio Value
decreases, we expect that the trading value of the Notes will increase.
. TIME REMAINING TO MATURITY. The Notes may trade at a value above that
which would be expected based on the level of interest rates and the
Portfolio. This difference will reflect a "time premium" due to
expectations concerning the Index Value during the period prior to maturity
of the Notes. However, as the time remaining to maturity of the Notes
decreases, we expect that this time premium will increase, raising the
trading value of the Notes, so long as the Portfolio Value is less than the
Portfolio Value Cap.
. COMPANY CREDIT RATINGS. Actual or anticipated changes in the Company's
credit ratings may affect the market value of the Notes.
It is important for you to understand that the impact of one of the factors
specified above, such as an increase in interest rates, may offset some or all
of any increase in the trading value of the Notes attributable to another
factor, such as an increase in the Portfolio Value.
In general, assuming all relevant factors are held constant, we expect that
the effect on the trading value of the Notes of a given change in most of the
factors listed above will be less if it occurs later in the term of the Notes
than if it occurs earlier in the term of the Notes.
PS-8
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NO AFFILIATION BETWEEN THE COMPANY AND THE ISSUERS OF PORTFOLIO SECURITIES
The Company has no affiliation with the issuers of the Portfolio
Securities, and the issuers of Portfolio Securities have no obligations with
respect to the Notes or amounts to be paid to beneficial owners thereof,
including any obligation to take the needs of the Company or of beneficial
owners of the Notes into consideration for any reason. Issuers of the Portfolio
Securities will not receive any of the proceeds of the offering of the Notes
made hereby and is not responsible for, and has not participated in, the
determination or calculation of the amount receivable by beneficial owners of
the Notes at maturity. In addition, the issuers of the Portfolio Securities are
not involved with the administration or trading of the Notes and have no
obligations with respect to the amount receivable by beneficial owners of the
Notes.
NO STOCKHOLDER'S RIGHTS
Holders of the Notes will not be entitled to any rights with respect to the
Portfolio Securities (including, without limitation, the right to receive
dividends or other distributions, voting rights and the right to tender or
exchange any Portfolio Security in any partial tender or exchange offer by
issuers of the Portfolio Securities or any third party).
PURCHASES AND SALES OF PORTFOLIO SECURITIES
In connection with the Company's obligations under the Notes, the Company
has entered into hedging arrangements related to the Portfolio Securities with
an affiliate of the Company. In connection therewith, such affiliate has
purchased shares of the Portfolio Securities in secondary market transactions at
or before the time of the pricing of the Notes. The Company, MLPF&S and other
affiliates of the Company may from time to time buy or sell the Portfolio
Securities for their own accounts for business reasons or in connection with
hedging the Company's obligations under the Notes. These transactions could
affect the price of the Portfolio Securities.
STATE LAW LIMITS ON INTEREST PAID
New York State laws govern the Indenture pursuant to which the Notes will
be issued. New York has certain usury laws that limit the amount of interest
that can be charged and paid on loans, which includes debt securities like the
Notes. Under present New York law, the maximum rate of interest is 25% per annum
on a simple interest basis. This limit may not apply to debt securities in which
$2,500,000 or more has been invested.
While we believe that New York law would be given effect by a state or
Federal court sitting outside of New York, many other states also have laws that
regulate the amount of interest that may be charged to and paid by a borrower.
We will promise, for the benefit of the holders of the Notes, to the extent
permitted by law, not to voluntarily claim the benefits of any laws concerning
usurious rates of interest.
POTENTIAL CONFLICTS
MLPF&S or its affiliates may from time to time engage in transactions
involving one or more of the Portfolio Securities for their proprietary accounts
and for other accounts under their management, which may influence the value of
such stocks and therefore the value of the Notes. MLPF&S and its affiliates will
also be the counterparties to the hedge of the Company's obligations under the
Notes. See "Use of Proceeds and Hedging" in this Pricing Supplement.
Accordingly, under certain circumstances, conflicts of interest may arise
between MLPF&S's responsibilities as Calculation Agent with respect to the Notes
and its obligations under its hedge and its status as a subsidiary of the
Company. Under certain circumstances, the duties of MLPF&S as Calculation Agent
in determining the existence of Market Disruption Events could conflict with the
interests of MLPF&S as an affiliate of the issuer of the Notes, Merrill Lynch &
Co., Inc., and with the interests of the holders of the Notes.
PS-9
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DILUTION AND REORGANIZATION ADJUSTMENTS
The Multiplier with respect to any Portfolio Security will be adjusted by
the Calculation Agent as follows:
1. If a Portfolio Security is subject to a stock split or reverse
stock split, then once such split has become effective, the Multiplier
relating to such Portfolio Security will be adjusted to equal the product
of the prior Multiplier and the number of shares issued in such stock split
or reverse stock split with respect to one share of such Portfolio
Security.
2. If a Portfolio Security is subject to a stock dividend (issuance
of additional shares of the Portfolio Security) that is given ratably to
all holders of shares of common stock of the issuer of such Portfolio
Security, then once such Portfolio Security is trading ex-dividend, the
Multiplier will be adjusted so that the new Multiplier shall equal the
prior Multiplier plus the product of (i) the number of shares of such
Portfolio Security issued with respect to one share of such Portfolio
Security and (ii) the prior Multiplier.
3. There will be no adjustments to the Multipliers to reflect cash
dividends or distributions paid with respect to a Portfolio Security other
than distributions described in clause (v) of paragraph 5 below and
Extraordinary Dividends as described below. A cash dividend or other
distribution with respect to a Portfolio Security will be deemed to be an
"Extraordinary Dividend" if such dividend or other distribution exceeds the
immediately preceding non-Extraordinary Dividend for such Portfolio
Security by an amount equal to at least 10% of the Closing Price of such
Portfolio Security on the Trading Day preceding the day for the payment of
such Extraordinary Dividend (the "ex-dividend date"). If an Extraordinary
Dividend occurs with respect to a Portfolio Security, the Multiplier with
respect to such Portfolio Security will be adjusted on the ex-dividend date
with respect to such Extraordinary Dividend so that the new Multiplier will
equal the product of (i) the then current Multiplier, and (ii) a fraction,
the numerator of which is the Closing Price on the Trading Day preceding
the ex-dividend date, and the denominator of which is the amount by which
the Closing Price on the Trading Day preceding the ex-dividend date exceeds
the Extraordinary Dividend Amount. The "Extraordinary Dividend Amount"
with respect to an Extraordinary Dividend for a Portfolio Security will
equal (i) in the case of cash dividends or other distributions that
constitute quarterly dividends, the amount per share of such Extraordinary
Dividend minus the amount per share of the immediately preceding non-
Extraordinary Dividend for any Portfolio Security or (ii) in the case of
cash dividends or other distributions that do not constitute quarterly
dividends, the amount per share of such Extraordinary Dividend. To the
extent an Extraordinary Dividend is not paid in cash, the value of the non-
cash component will be determined by the Calculation Agent, whose
determination shall be conclusive. A distribution on any Portfolio
Security described in clause (v) of paragraph 5 below that also constitutes
an Extraordinary Dividend shall cause an adjustment to the Multiplier
pursuant only to clause (v) of paragraph 5.
4. If an issuer of one of the Portfolio Securities issues
transferable rights or warrants to all holders of such Portfolio Security
to subscribe for or purchase such Portfolio Security (including new or
existing rights to purchase such Portfolio Security pursuant to a
shareholders rights plan or arrangement, once a triggering event shall have
occurred thereunder), then the method of determining the amount payable at
maturity for each Note will be adjusted to provide that each holder of
Notes will receive at maturity, in respect of the principal amount of each
Note, in addition to the Cash Amount or Equivalent Share Amount, cash in an
amount equal to the Rights Value (as defined below) of such Portfolio
Security plus accrued interest thereon from the Trading Day immediately
following receipt by holders of such Portfolio Security of such rights or
warrants to the maturity date at LIBOR (as defined below), reset monthly on
the first Trading Day of each month. The "Rights Value" shall be the
Closing Prices of such rights or warrants on the Trading Day immediately
following receipt by holders of such Portfolio Security of such rights or
warrants. "LIBOR" shall be the rate for deposits in U.S. Dollars for a
period of one month which appears on the Reuters Screen ISDA Page as of
11:00 a.m., London time, on the day that is two Trading Days preceding the
reset date, or in the case of the initial determination of LIBOR, on the
Trading Day immediately preceding the date on which the holders of such
Portfolio Security received such rights, warrants, cash or other property.
5. If (i) there occurs any reclassification or change of any
Portfolio Security, (ii) the issuer of such Portfolio Security, or any
surviving entity or subsequent surviving entity of the issuer of such
Portfolio Security (a "Successor Entity") has been subject to a merger,
combination or consolidation and is not the surviving entity,
PS-10
<PAGE>
(iii) any statutory exchange of securities of any issuer of the Portfolio
Securities or any Successor Entity with another corporation occurs (other
than pursuant to clause (ii) above), (iv) any issuer of the Portfolio
Securities is liquidated, (v) any issuer of the Portfolio Securities issues
to all of its shareholders equity securities of an issuer other than such
issuer of the Portfolio Securities (other than in a transaction described
in clauses (ii), (iii) or (iv) above) (a "Spin-off Event") or (vi) a tender
or exchange offer is consummated for all the outstanding shares of any
issuer of the Portfolio Securities (any such event in clauses (i) through
(vi) a "Reorganization Event"), the method of determining the amount
payable at maturity for each Note will be adjusted to provide that each
holder of Notes will receive at maturity, in respect of the principal
amount of each Note and in lieu of the Cash Amount, cash in an amount equal
to the Transaction Value (as defined below). "Exchange Property" means the
securities, cash or any other assets distributed in any such Reorganization
Event, including, in the case of a Spin-off Event, the share of such
Portfolio Securities with respect to which the spun-off security was
issued. "Transaction Value" means (i) for any cash received in any such
Reorganization Event, an amount equal to (a) the amount of cash received
per share of such Portfolio Security plus accrued interest thereon at LIBOR
reset monthly for the period beginning on the date such cash is distributed
to the holders of such Portfolio Security to but excluding the Maturity
Date, multiplied by (b) the Multiplier in effect on the date all of the
holders of shares of the relevant issuer of the Portfolio Securities have
agreed or have become irrevocably obligated to exchange such shares, (ii)
for any property other than cash or securities received in any such
Reorganization Event, the market value (as determined by the Calculation
Agent) of such Exchange Property received for each share of such Portfolio
Security at the date of the receipt of such Exchange Property multiplied by
the then current Multiplier and (iii) for any security received in any such
Reorganization Event, an amount equal to the Closing Price per share of
such security on the Determination Date multiplied by the quantity of such
security received for each share of such Portfolio Security multiplied by
the then current Multiplier.
6. If there occurs a cash tender offer for at least 25% but less than
all of any Portfolio Security then outstanding at a price per share in
excess of the Closing Price of such Portfolio Security on the date such
offer is announced (the "Announcement Date"), then the method of
determining the amount payable at maturity for each Note will be adjusted
to provide that each holder of Notes will receive at maturity, in respect
of the applicable Portfolio Security, in lieu of the Cash Amount or
Equivalent Share Amount attributable to such Portfolio Security, cash in an
amount equal to the Tender Value. "Tender Value" means an amount equal to
the product of (a) the sum of Closing Price of such Portfolio Security on
the Trading Day immediately following the Announcement Date plus accrued
interest thereon at LIBOR reset monthly for the period beginning on the
fourth Trading Day following the Announcement Date to but excluding the
Maturity Date, multiplied by (b) the Multiplier for such Portfolio Security
in effect on the Announcement Date.
For purposes of paragraph 5 above, in the case of a consummated tender or
exchange offer for all Exchange Property of a particular type, Exchange Property
shall be deemed to include the amount of cash or other property paid by the
offeror in the tender or exchange offer with respect to such Exchange Property
(in an amount determined on the basis of the rate of exchange in such tender or
exchange offer). In the event of a tender or exchange offer with respect to
Exchange Property in which an offeree may elect to receive cash or other
property, Exchange Property shall be deemed to include the kind and amount of
cash and other property received by offerees who elect to receive cash.
No adjustments to the Multiplier will be required unless such Multiplier
adjustment would require a change of at least 0.1% in the Multiplier then in
effect. The Multiplier resulting from any of the adjustments specified above
will be rounded to the nearest one thousandth with five ten-thousandths being
rounded upward.
No adjustments to the Multiplier or to the amount payable at maturity of
the Notes will be required other than those specified above. However, the
Company may, at its sole discretion, cause the Calculation Agent to make
additional adjustments to the Multiplier to reflect changes occurring in
relation to any Portfolio Security or any other Exchange Property in other
circumstances where the Company determines that it is appropriate to reflect
such changes. The required adjustments specified above do not cover all events
that could affect the Market Price or Closing Price, as applicable, of such
Portfolio Security, including, without limitation, a partial tender or exchange
offer for such Portfolio Security.
The Calculation Agent shall be solely responsible for the determination and
calculation of any adjustments to the Multiplier and of any related
determinations and calculations with respect to any distributions of stock,
other securities or other property or assets (including cash) in connection with
any corporate event described in paragraph 5 above, and its determinations and
calculations with respect thereto shall be conclusive.
PS-11
<PAGE>
The Calculation Agent will provide information as to any adjustments to the
Multiplier upon written request by any holder of the Notes.
THE PORTFOLIO
GENERAL
Intuit Inc. ("Intuit"), a Delaware Corporation, develops, sells and
supports small business accounting, tax preparation and consumer finance
software products, financial supplies (such as computer checks, invoices and
envelopes), and Internet-based products and services for individuals and small
businesses. Intuit's products and services are designed to automate commonly
performed financial tasks and to simplify the way individuals and small
businesses manage their finances.
CKS Group, Inc. ("CKS"), a Delaware Corporation, is an international
integrated marketing services and technology company headquartered in
California. CKS specializes in offering a wide range of integrated marketing
communication services and technology solutions that help companies market their
products, services and messages.
CNET, Inc. ("CNET"), a Delaware Corporation, is a media company focused on
providing original Internet content and television programming relating to
information technology and the Internet. CNET also operates Snap!, a free
online service that aggregates Internet content and offers Internet directory
and searching capabilities.
While the Portfolio consists of the common stock issued by three companies
involved in the high technology industry, the Portfolio is not intended to
provide an indication of the pattern of price movements of common stocks of high
technology corporations generally. See "Risk Factors General" in this Pricing
Supplement. Each of the Portfolio Securities is presently registered under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Companies
with securities registered under the Exchange Act are required to file
periodically certain financial and other information specified by the Securities
and Exchange Commission (the "Commission"). Information provided to or filed
with the Commission is available at the offices of the Commission and at the Web
site specified under "Available Information" in the accompanying Prospectus.
Neither the Company nor MLPF&S makes any representation or warranty as to the
accuracy or completeness of such reports. THE INCLUSION OF A PORTFOLIO SECURITY
IN THE PORTFOLIO IS NOT A RECOMMENDATION TO BUY OR SELL SUCH PORTFOLIO SECURITY
AND NEITHER THE COMPANY NOR ANY OF ITS AFFILIATES MAKE ANY REPRESENTATION TO ANY
PURCHASER OF NOTES AS TO THE PERFORMANCE OF THE PORTFOLIO.
THE COMPANY IS NOT AFFILIATED WITH ANY OF THE ISSUERS OF THE PORTFOLIO
SECURITIES, AND THE ISSUERS OF THE PORTFOLIO SECURITIES HAVE NO OBLIGATIONS WITH
RESPECT TO THE NOTES. THIS PRICING SUPPLEMENT RELATES ONLY TO THE NOTES OFFERED
HEREBY AND DOES NOT RELATE TO THE PORTFOLIO SECURITIES OR OTHER SECURITIES OF
THE ISSUERS OF THE PORTFOLIO SECURITIES. ALL DISCLOSURES CONTAINED IN THIS
PRICING SUPPLEMENT REGARDING THE ISSUERS OF THE PORTFOLIO SECURITIES ARE DERIVED
FROM THE PUBLICLY AVAILABLE DOCUMENTS DESCRIBED IN THE PRECEDING PARAGRAPH.
NEITHER THE COMPANY NOR THE AGENT HAS PARTICIPATED IN THE PREPARATION OF SUCH
DOCUMENTS OR MADE ANY DUE DILIGENCE INQUIRY WITH RESPECT TO THE ISSUERS OF THE
PORTFOLIO SECURITIES IN CONNECTION WITH THE OFFERING OF THE NOTES. NEITHER THE
COMPANY NOR THE AGENT MAKES ANY REPRESENTATION THAT SUCH PUBLICLY AVAILABLE
DOCUMENTS OR ANY OTHER PUBLICLY AVAILABLE INFORMATION REGARDING THE ISSUERS OF
THE PORTFOLIO SECURITIES ARE ACCURATE OR COMPLETE. FURTHERMORE, THERE CAN BE NO
ASSURANCE THAT ALL EVENTS OCCURRING PRIOR TO THE DATE HEREOF (INCLUDING EVENTS
THAT WOULD AFFECT THE ACCURACY OF COMPLETENESS OF THE PUBLICLY AVAILABLE
DOCUMENTS DESCRIBED IN THE PRECEDING PARAGRAPH) THAT WOULD AFFECT THE TRADING
PRICES OF THE PORTFOLIO SECURITIES (AND THEREFORE THE ISSUE PRICE) HAVE BEEN
PUBLICLY DISCLOSED. SUBSEQUENT DISCLOSURE OF ANY SUCH EVENTS OR THE DISCLOSURE
OF OR FAILURE TO DISCLOSE MATERIAL FUTURE EVENTS CONCERNING THE ISSUERS OF THE
PORTFOLIO SECURITIES COULD AFFECT THE VALUE RECEIVED AT MATURITY WITH RESPECT TO
THE NOTES AND THEREFORE THE TRADING PRICES OF THE NOTES. NEITHER THE COMPANY
NOR ANY OF ITS AFFILIATES MAKE ANY REPRESENTATION TO ANY PURCHASER OF NOTES AS
TO THE PERFORMANCE OF THE PORTFOLIO SECURITIES.
PS-12
<PAGE>
The Company or its affiliates may presently or from time to time engage in
business with one or more of the issuers of the Portfolio Securities, including
extending loans to, or making equity investments in, such issuers or providing
advisory services to such issuers, including merger and acquisition advisory
services. In the course of such business, the Company or its affiliates may
acquire non-public information with respect to such issuers and, in addition,
one or more affiliates of the Company may publish research reports with respect
to such issuers. The Company does not make any representation to any purchaser
of Notes with respect to any matters whatsoever relating to such issuers.
ANY PROSPECTIVE PURCHASER OF A NOTE SHOULD UNDERTAKE AN INDEPENDENT
INVESTIGATION OF THE ISSUERS OF THE PORTFOLIO SECURITIES AS IN ITS JUDGMENT IS
APPROPRIATE TO MAKE AN INFORMED DECISION WITH RESPECT TO AN INVESTMENT IN THE
NOTES.
COMPUTATION OF THE PORTFOLIO VALUE
The Portfolio Value, at any time, will equal the sum of the Market Prices
of each Portfolio Security, as multiplied by the applicable Multiplier for such
Portfolio Security, in each case as determined by the Calculation Agent. The
securities listed in the following table are the Portfolio Securities and will
be used to calculate the Portfolio Value.
<TABLE>
<CAPTION>
APPROXIMATE
MARKET CAPITALIZATION % OF STARTING
ISSUER OF THE PRIMARY AS OF PORTFOLIO INITIAL
PORTFOLIO SECURITY MARKET AUGUST 11, 1998 VALUE INITIAL PRICE MULTIPLIER
-------------------------- ------------ -------------------------- ---------------- ---------------- -----------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Intuit Inc................... NASDAQ $2,776.50 33.33 $47.2530 7.0541
CKS Group, Inc............... NASDAQ $ 283.27 33.33 $19.1039 17.4483
CNET, Inc.................... NASDAQ $ 802.25 33.34 $47.4141 7.0304
</TABLE>
The initial Multiplier relating to each Portfolio Security indicates the
number of shares of such Portfolio Security, based on the initial price of such
Portfolio Security, required to be included in the calculation of the Initial
Portfolio Value so that each Portfolio Security represents an approximately
equal percentage of the Initial Portfolio Value. The initial price of each
Portfolio Security used to calculate the initial Multiplier relating to each
such Portfolio Security was determined by the Company. The respective
Multipliers will remain constant for the term of the Notes unless adjusted for
certain corporate events as described in "Dilution and Reorganization
Adjustments".
PS-13
<PAGE>
DATA ON THE PORTFOLIO SECURITIES
The following table sets forth the high and low Closing Price for each
Portfolio Security in each quarterly period for the years ended December 31,
1996, 1997 and 1998 through August 11, 1998. All Closing Prices are rounded to
the nearest one-thirty-second dollar. The Closing Prices listed below were
obtained from Bloomberg Financial Markets. The historical prices of the
Portfolio Securities should not be taken as an indication of future performance,
and no assurance can be given that the price of the Portfolio Securities will
not decrease so that the beneficial owners of the Notes will receive at maturity
cash in an amount that is less than the principal amount of the Notes. Nor can
assurance be given that the price of the Portfolio Securities will increase
above the Initial Portfolio Value so that at maturity the beneficial owners of
the Notes will receive cash in an amount in excess of the principal amount of
the Notes.
<TABLE>
<CAPTION>
PORTFOLIO SECURITIES High (US$) Low (US$)
- --------------------------------------------------------------------- --------------------- ---------
Intuit Inc.
1996
<S> <C> <C>
First Quarter 75 43
Second Quarter 55 1/2 45 1/4
Third Quarter 49 28 1/2
Fourth Quarter 39 3/4 26
1997
First Quarter 36 1/4 21 3/4
Second Quarter 28 1/2 21 1/2
Third Quarter 33 7/8 22 15/16
Fourth Quarter 41 1/4 27 5/16
1998
First Quarter 52 1/8 35 1/16
Second Quarter 62 1/8 45
Third Quarter (through August 11, 1998) 66 1/2 44 1/32
CKS GROUP, INC.
1996
First Quarter 37 1/4 24 7/8
Second Quarter 43 3/4 24 1/2
Third Quarter 31 1/2 23 5/8
Fourth Quarter 29 5/8 18
1997
First Quarter 35 1/2 21
Second Quarter 34 1/4 21
Third Quarter 44 1/4 29 5/8
Fourth Quarter 43 1/2 11 3/8
1998
First Quarter 23 1/4 13 13/16
Second Quarter 26 1/4 17 5/8
Third Quarter (through August 11, 1998) 22 3/4 17 1/2
CNET, INC.(1)
1996
First Quarter N/A N/A
Second Quarter N/A N/A
Third Quarter 20 3/8 12
Fourth Quarter 29 14 5/8
1997
First Quarter 32 3/4 20 1/8
Second Quarter 34 1/4 15 3/4
Third Quarter 44 5/16 24 7/8
Fourth Quarter 39 9/16 20
1998
First Quarter 39 1/16 23 7/8
Second Quarter 68 1/4 26 1/2
Third Quarter (through August 11, 1998) 70 3/8 40 3/8
</TABLE>
________________________
(1) CNET, Inc. effected its initial public offering on July 2, 1996.
PS-14
<PAGE>
USE OF PROCEEDS AND HEDGING
The net proceeds to be received by the Company from the sale of the Notes
will be used for general corporate purposes and, in part, by the Company or one
or more of its affiliates in connection with hedging the Company's obligations
under the Notes. See also "Use of Proceeds" in the accompanying Prospectus.
The Company has entered into hedging arrangements related to the Portfolio
Securities with an affiliate of the Company, in connection with the Company's
obligations under the Notes. In connection therewith, such affiliate has
purchased shares of the Portfolio Securities in secondary market transactions at
or before the time of the pricing of the Notes. The Company, MLPF&S and other
affiliates of the Company may from time to time buy or sell the Portfolio
Securities for their own accounts for business reasons or in connection with
hedging the Company's obligations under the Notes. These transactions could
affect the price of the Portfolio Securities.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion, which is based on the advice of Brown & Wood llp,
counsel to the Company ("Tax Counsel"), supplements, and to the extent
inconsistent with, replaces the discussion contained in the accompanying
Prospectus Supplement under the heading "Certain United States Federal Income
Tax Considerations." As the law applicable to the U.S. federal income taxation
of instruments such as the Notes is technical and complex, the discussion below
necessarily represents only a general summary. The following discussion also
only addresses initial purchasers of the Notes. Moreover, the effect of any
applicable state, local or foreign tax laws in not discussed.
GENERAL
There are no statutory provisions, regulations, published rulings or
judicial decisions addressing or involving the characterization and treatment,
for U.S. federal income tax purposes, of the Notes or securities with terms
substantially the same as the Notes. Accordingly, the proper U.S. federal
income tax characterization and treatment of the Notes is uncertain. Pursuant
to the terms of the Notes, the Company and every holder of a Note agree (in the
absence of an administrative determination or judicial ruling to the contrary)
to characterize a Note for all tax purposes as an investment unit consisting of
the following components (the "Components"): (i) a debt instrument of the
Company (the "Debt Instrument") with a fixed principal amount unconditionally
payable on the Stated Maturity Date equal to the Principal Amount of the Notes
and bearing stated interest at the Coupon rate and (ii) a contract (the "Forward
Contract") pursuant to which the holder agrees to use the principal payment due
on the Debt Instrument to make a payment to the Company in exchange for the
right to receive the Cash Amount payable at maturity or the Equivalent Share
Amount. Furthermore, based on the Company's determination of the relative fair
market values of the Components at the time of issuance of the Notes, the
Company will assign an amount equal to 102.24% of the Issue Price of the Notes
to the Debt Instrument (as the amount deemed to have been paid by a Holder to
purchase the Debt Instrument) and an amount equal to 2.24% of the Issue Price to
the Forward Contract (as an amount deemed to have been received by a Holder
under the Forward Contract). In the opinion of Brown & Wood llp, counsel to the
Company, such characterization and tax treatment of the Notes, although not the
only reasonable characterization and tax treatment, is based on reasonable
interpretations of law currently in effect and, even if successfully challenged
by the Internal Revenue Service ("IRS"), will not result in the imposition of
penalties. The Company's allocation of the Issue Price among the Components
will be binding on a U.S. Holder (as defined in the accompanying Prospectus
Supplement) of a Note, unless such U.S. Holder timely and explicitly discloses
to the IRS that its allocation is different from the Company's. The treatment
of the Notes described above and the Company's allocation are not, however,
binding on the IRS or the courts. No statutory, judicial or administrative
authority directly addresses the characterization of the Notes or instruments
similar to the Notes for U.S. federal income tax purposes, and no ruling is
being requested from the IRS with respect to the Notes. Due to the absence of
authorities that directly address instruments that are similar to the Notes,
significant aspects of the U.S. federal income tax consequences of an investment
in the Notes are not certain, and no assurance can be given that the IRS or the
courts will agree with the characterization described above. accordingly,
prospective purchasers are urged to consult their tax advisors regarding the
U.S. federal income tax consequences of an investment in a Note (including
alternative characterizations of a Note) and with respect to any tax
consequences arising under the laws of any state, local or foreign taxing
jurisdiction. unless otherwise stated, the following discussion is based on the
assumption that the treatment and the allocation described above are accepted
for U.S. federal income tax purposes.
PS-15
<PAGE>
TAX TREATMENT OF A NOTE
As described above, the Debt Instrument is treated as bearing interest at a
stated rate of 7% per annum, and an amount equal to 102.24% of the Issue Price
has been assigned by the Company to the Debt Instrument. Accordingly, the
Debt Instrument will be treated as having been issued at a premium. A U.S.
Holder generally will include "qualified stated interest" equal to the stated
interest on the Notes in income in accordance with the U.S. Holder's method of
accounting for U.S. federal income tax purposes. However, each U.S. Holder will
be permitted to elect to amortize the premium on the Debt Instrument over the
term of the Debt Instrument. U.S. Holders should review the accompanying
Prospectus Supplement regarding the proper method and consequences of amortizing
such premium.
TAX BASIS
The Debt Instrument. Based on the Company's determination set forth above,
the U.S. Holder's tax basis in the Debt Instrument would initially be 102.24% of
the Issue Price. The U.S. Holder's tax basis in the Debt Instrument will be
subsequently reduced by any premium amortization taken with respect thereto.
Settlement of the Forward Contract. Upon the final settlement of the
Forward Contract, a U.S. Holder receiving cash would, pursuant to the Forward
Contract, be deemed to have applied an amount (the "Forward Contract Payment
Amount") equal to the principal amount of the Debt Instrument less 2.24% of the
Issue Price (which has been assigned to the Forward Contract) toward the
exchange for the cash payment at maturity, and a U.S. Holder would recognize
gain or loss. The amount of such gain or loss would be the extent to which the
amount of such cash received differs from the Forward Contract Payment Amount.
U.S. Holders should note that it is uncertain whether any gain or loss
recognized upon the final settlement of the Forward Contract for cash would be
capital gain or loss or ordinary income or loss. The distinction between
capital gain or loss and ordinary income or loss is potentially significant in
several respects. For example, limitations apply to a U.S. Holder's ability to
offset capital losses against ordinary income, and certain U.S. Holders may be
subject to lower U.S. federal income tax rates with resect to long-term capital
gain than with respect to ordinary income. U.S. Holders should consult their tax
advisors with respect to the treatment of gain or loss on a Note.
A U.S. Holder receiving the Equivalent Share Amount pursuant to the Forward
Contract would be deemed to have applied the Forward Contract Payment Amount
toward the purchase of such Equivalent Share Amount, and such U.S. Holder should
not recognize any gain or loss with respect to the Equivalent Share Amount
received upon the final settlement of the Forward Contract. A U.S. Holder's tax
basis in the Equivalent Share Amount so received would be equal to the Forward
Contract Payment Amount allocable thereto. Such U.S. Holder's holding period of
the Equivalent Share Amount would start on the day after the Stated Maturity
Date.
SALE OR EXCHANGE OF THE NOTES
Upon a sale or exchange of a Note prior to the maturity of the Notes, a
U.S. Holder would recognize taxable gain or loss equal to the difference between
(or the sum of) the amount realized on such sale or exchange (as allocated among
the Components in accordance with their relative fair market values) and such
U.S. Holder's tax basis in the Components (or the amount deemed to have
previously been received by the U.S. Holder with respect to the Components)
deemed so sold or exchanged. Any such gain or loss would generally be capital
gain or loss, as the case may be. For these purposes, the amount realized does
not include any amount attributable to accrued interest on the Debt Instrument,
which would be taxed as described under "--Tax Treatment of a Note" above.
POSSIBLE ALTERNATIVE TAX TREATMENTS OF AN INVESTMENT IN A NOTE
Due to the absence of authorities that directly address the proper
characterization of the Notes, no assurance can be given that the IRS will
accept, or that a court will uphold, the characterization and tax treatment
described above. In particular, the IRS could seek to analyze the U.S. federal
income tax consequences of owning a Note under Treasury regulations governing
contingent payment debt instruments (the "Contingent Payment Regulations").
The Company will take the position that the Contingent Payment Regulations
do not apply to the Notes. If the IRS were successful in asserting that the
Contingent Payment Regulations applied to the Notes, the timing and character of
PS-16
<PAGE>
income thereon would be significantly affected. Among other things, a U.S.
Holder would be required to accrue as OID, subject to the adjustments described
below, income at a "comparable yield" on the Issue Price, regardless of the U.S.
Holder's usual method of accounting for U.S. federal income tax purposes. In
addition, the Contingent Payment Regulations require that a projected payment
schedule, which results in such a "comparable yield," be determined, and that
adjustments to income accruals be made to account for differences between actual
payments and projected amounts (including upon receipt of the Equivalent Share
Amount at maturity). Furthermore, any gain realized with respect to a Note would
generally be treated as ordinary income, and any loss realized would generally
be treated as ordinary loss to the extent of the U.S. Holder's prior ordinary
income inclusions (which were not previously reversed) with respect to the
Notes.
Even if the Contingent Payment Regulations do not apply to the Notes, other
alternative U.S. federal income characterizations or treatments of the Notes are
also possible, which may also affect the timing and the character of the income
or loss with respect to the Notes. Accordingly, prospective purchasers are
urged to consult their tax advisors regarding the U.S. federal income tax
consequences of an investment in a Note.
PROPOSED LEGISLATION
On February 4, 1998, Representative Barbara Kennelly released H.R. 3170
(the "Kennelly Bill"), which, if enacted, would treat a taxpayer owning certain
types of derivative positions in property as having "constructive ownership" in
that property, with the result that all or a portion of any long-term capital
gain recognized by such taxpayer with respect to the derivative position would
be recharacterized as short-term capital gain. It is unclear whether, if
enacted in its present form, the Kennelly Bill would apply to a Note. If the
Kennelly Bill were to apply to a Note, the effect on a U.S. Holder of a Note
would be to treat all or a portion of any long-term capital gain recognized by
such U.S. Holder on sale or maturity of the Notes (or the Equivalent Share
Amount received thereon) as short-term capital gain, but only to the extent such
long-term capital gain exceeds the long-term capital gain that would have been
recognized by such U.S. Holder if the U.S. Holder had acquired a proportionate
amount of the Portfolio Securities directly on the issue date of the Notes and
disposed of such Portfolio Securities upon disposition of the Notes (or, where
the U.S. Holder elects to receive the Equivalent Share Amount, upon disposition
of the Equivalent Share Amount). In addition, the Kennelly Bill would impose an
interest charge on the gain that was recharacterized on the sale or maturity of
the Notes (or the Equivalent Share Amount received thereon). As proposed, the
Kennelly Bill would be effective for gains recognized after the date of
enactment. U.S. Holders should consult their tax advisors regarding the
potential application of the Kennelly Bill to the purchase, ownership and
disposition of a Note.
PS-17
<PAGE>
ANNEX A
OFFICIAL NOTICE OF EXERCISE OF RIGHT
TO RECEIVE EQUIVALENT SHARE AMOUNT
7% STOCK PORTFOLIO LINKED MEDIUM-TERM NOTES DUE AUGUST 18, 2000
(LINKED TO THE PERFORMANCE OF THE COMMON STOCK OF INTUIT INC., CKS GROUP, INC.
AND CNET, INC.)
Dated: [On or prior to the fifteenth Business Day prior to August 18, 2000]
Merrill Lynch & Co., Inc.
World Financial Center
South Tower, 5th Floor
New York, New York 10080-6105
Fax No.: (212) 236-3865
(Attn: Treasury)
Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Calculation Agent
World Financial Center
North Tower, 5th Floor
New York, New York 10281-1305
Fax No.: (212) 449-2697
(Attn: Operations (Matthew Pomeranz))
The Chase Manhattan Bank
450 West 33rd Street
15th Floor
New York, New York 10001
Fax No.: (212) 946-8161
(Attn: Corporate Trust Department)
Dear Sirs:
The undersigned holder of the 7% Stock Portfolio Linked Medium-Term Notes
due August 18, 2000 (Linked to the performance of the Common Stock of Intuit
Inc., CKS Group, Inc. and CNET, Inc.) of Merrill Lynch & Co., Inc. (the "Notes")
hereby irrevocably elects to exercise with respect to the number of Notes
indicated below, as of the date hereof, provided that such day is prior to the
fifteenth Business Day prior to August 18, 2000, the Right to Receive the
Equivalent Share Amount as described in Pricing Supplement dated August 11, 1998
(the "Pricing Supplement") to the Prospectus Supplement and Prospectus dated
July 30, 1998. Capitalized terms not defined herein have the meanings given to
such terms in the Pricing Supplement. Please date and acknowledge receipt of
this notice in the place provided below on the date of receipt, and fax a copy
to the fax number indicated, whereupon the Company will deliver Portfolio
Securities, in accordance with the terms of the Notes described in the Pricing
Supplement.
Very truly yours,
_____________________________
[Name of Holder]
By:_________________________________________
[Title]
A-1
<PAGE>
_____________________________________________
[Fax No.]
$___________________________________________
Number of Notes surrendered for exercise of the Right to Receive the
Equivalent Share Amount
If you want the Portfolio Securities made out in another person's name,
fill in the form below:
________________________________________
(Insert person's soc. sec. or tax ID no.)
________________________________________
(Print or type person's name, address and zip code)
Date: _______________________________
Your Signature:______________________________________
Receipt of the above Official Notice of
Exchange is hereby acknowledged.
MERRILL LYNCH & CO., INC., as Issuer
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED,
as Calculation Agent
By: THE CHASE MANHATTAN BANK,
as Trustee
By:_________________________________________________
Name:
Title:
Date and time of acknowledgment ____________________
A-2
