<PAGE>
RULE NO. 424(b)(5)
REGISTRATION NO. 333-59997
PROSPECTUS SUPPLEMENT
(To prospectus dated July 30, 1998)
[LOGO]MERRILL LYNCH
PROTECTED GROWTH(SM) INVESTING
"Pursuit of Growth, Protection of Principal"
5,100,000 Units
Merrill Lynch & Co., Inc.
Energy Select Sector SPDR(R) Fund
Market Index Target-Term Securities(R) due February 21, 2006
"MITTS(R) Securities"
$10 principal amount per unit
--------------
General: . 100% principal protection at maturity
. No payments prior to the maturity date
. Senior unsecured debt securities of Merrill Lynch & Co.,
Inc.
. The MITTS Securities have been approved for listing on the
American Stock Exchange under the trading symbol "ESM".
Payment at Maturity:
. Principal Amount + Supplemental Redemption Amount
. The Supplemental Redemption Amount will be based on the
percentage increase, if any, in the Net Asset Value per
share of the Energy Select Sector SPDR Fund, a registered
index fund (the "Energy SPDR Fund"), as reduced by an
annual Adjustment Factor of 0.85%. At maturity, as a result
of the application of the Adjustment Factor, the adjusted
Net Asset Value per share of the Energy SPDR Fund used to
calculate the Supplemental Redemption Amount will be
approximately 5.8% less than the actual Net Asset Value per
share of the Energy SPDR Fund. The Supplemental Redemption
Amount may be zero, but will not be less than zero.
. At maturity, you will receive a number of shares of the
Energy SPDR Fund (or cash with an equal value) equal in
value to the sum of the Principal Amount and the
Supplemental Redemption Amount, if any, based on the
average of the Net Asset Values per share of the Energy
SPDR Fund at the close of the market on certain days
shortly before maturity.
Investing in the MITTS Securities involves risk.
See "Risk Factors" beginning on page S-10 of this prospectus supplement.
--------------
<TABLE>
<CAPTION>
Proceeds, before
expenses, to
Public Offering Underwriting Merrill Lynch &
Price(1) Discount(1) Co., Inc.
--------------- ------------ ----------------
<S> <C> <C> <C>
Per unit..................... $10.00 $.30 $9.70
Total........................ $51,000,000 $1,530,000 $49,470,000
</TABLE>
(1) The public offering price and the underwriting discount for any
single transaction to purchase 100,000 units or more will be
$9.80 per unit and $.10 per unit, respectively.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus supplement or the accompanying prospectus of Merrill Lynch &
Co., Inc. is truthful or complete. Any representation to the contrary is a
criminal offense.
The MITTS Securities will be ready for delivery in book-entry form only
through The Depository Trust Company on or about February 18, 1999.
--------------
Merrill Lynch & Co.
--------------
The date of this prospectus supplement is February 12, 1999.
"MITTS" and "Market Index Target-Term Securities" are registered service marks
owned by Merrill Lynch & Co., Inc.
<PAGE>
TABLE OF CONTENTS
Prospectus Supplement
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Page
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<S> <C>
SUMMARY INFORMATION--Q&A.................................................. S-4
What are the MITTS Securities?.......................................... S-4
What will I receive at the stated maturity date of the MITTS
Securities?............................................................ S-4
How is the Net Asset Value determined?.................................. S-6
When will I receive cash instead of shares of the Energy SPDR Fund?..... S-6
Will I be charged any transaction fees or expenses with respect to the
shares of the Energy SPDR Fund?........................................ S-7
What is the Energy SPDR Fund?........................................... S-7
What about taxes?....................................................... S-8
Will the MITTS Securities be listed on a stock exchange?................ S-8
What is the role of MLPF&S?............................................. S-8
Who is ML&Co.?.......................................................... S-8
Are there any risks associated with my investment?...................... S-9
RISK FACTORS.............................................................. S-10
The MITTS Securities are unlike typical equity or debt securities....... S-10
You may not earn a return on your investment............................ S-10
Your return will not reflect the return of owning shares of the Energy
SPDR Fund or the securities and other assets comprising the Energy SPDR
Fund's investment portfolio............................................ S-10
Changes in the Net Asset Value per share of the Energy SPDR Fund will
not exactly mirror changes in the Energy Select Sector Index........... S-10
Your yield may be lower than the yield on a standard debt security of
comparable maturity.................................................... S-11
Uncertain trading market................................................ S-11
Factors affecting trading value of the MITTS Securities................. S-11
Absence of prior active market for shares of the Energy SPDR Fund....... S-12
Concentration in energy-related securities.............................. S-12
No affiliation between the ML&Co. and the Energy SPDR Fund.............. S-13
No shareholder's rights................................................. S-13
State law limits on interest paid....................................... S-13
Potential conflicts..................................................... S-13
Uncertain tax consequences.............................................. S-14
WHERE YOU CAN FIND MORE INFORMATION....................................... S-14
ML&Co................................................................... S-14
The Energy SPDR Fund.................................................... S-14
RATIO OF EARNINGS TO FIXED CHARGES OF ML&CO............................... S-15
DESCRIPTION OF THE MITTS SECURITIES....................................... S-15
Delivery at Maturity.................................................... S-15
Fractional Shares....................................................... S-17
Hypothetical Returns.................................................... S-17
Adjustments to the Net Asset Value; Market Disruption Events............ S-18
Termination of the Energy SPDR Fund..................................... S-18
Events of Default and Acceleration...................................... S-19
Depositary.............................................................. S-20
Same-Day Settlement and Delivery........................................ S-22
THE ENERGY SPDR FUND...................................................... S-22
License Agreement....................................................... S-24
UNITED STATES FEDERAL INCOME TAXATION..................................... S-25
General................................................................. S-26
U.S. Holders............................................................ S-26
</TABLE>
S-2
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<TABLE>
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Page
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Non-U.S. Holders....................................................... S-28
Backup Withholding..................................................... S-29
New Withholding Regulations............................................ S-29
USE OF PROCEEDS.......................................................... S-29
UNDERWRITING............................................................. S-30
VALIDITY OF THE MITTS SECURITIES......................................... S-30
INDEX OF CERTAIN DEFINED TERMS........................................... S-31
Prospectus
AVAILABLE INFORMATION.................................................... 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.......................... 2
MERRILL LYNCH & CO., INC................................................. 3
USE OF PROCEEDS.......................................................... 3
RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS............................. 4
DESCRIPTION OF DEBT SECURITIES........................................... 4
DESCRIPTION OF DEBT WARRANTS............................................. 9
DESCRIPTION OF CURRENCY WARRANTS......................................... 11
DESCRIPTION OF INDEX WARRANTS............................................ 12
DESCRIPTION OF PREFERRED STOCK........................................... 17
DESCRIPTION OF DEPOSITARY SHARES......................................... 21
DESCRIPTION OF PREFERRED STOCK WARRANTS.................................. 25
DESCRIPTION OF COMMON STOCK.............................................. 27
DESCRIPTION OF COMMON STOCK WARRANTS..................................... 30
PLAN OF DISTRIBUTION..................................................... 32
EXPERTS.................................................................. 33
</TABLE>
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References in this prospectus supplement to "ML&Co.", "we", "us" and
"our" are to Merrill Lynch & Co., Inc.
References in this prospectus supplement to "MLPF&S" are to Merrill
Lynch, Pierce, Fenner & Smith Incorporated.
S-3
<PAGE>
SUMMARY INFORMATION--Q&A
This summary includes questions and answers that highlight selected
information from the prospectus and prospectus supplement to help you
understand The Energy Select Sector SPDR(R) Fund Market Index Target-Term
Securities(R) due February 21, 2006 (the "MITTS Securities"). You should
carefully read our prospectus and this prospectus supplement to understand
fully the terms of the MITTS Securities as well as the tax and other
considerations that should be important to you in making a decision about
whether to invest in the MITTS Securities. You should carefully review the
"Risk Factors" section, which highlights certain risks associated with an
investment in the MITTS Securities, to determine whether an investment in the
MITTS Securities is appropriate for you.
We have attached the prospectus for the Energy SPDR Fund (the "Fund
Prospectus"). You should carefully read the Fund Prospectus to fully understand
the operation and management of the Energy SPDR Fund, particularly the fees and
expenses associated with shares of the Energy SPDR Fund which affect the Net
Asset Value per share of the Energy SPDR Fund and which will directly apply to
you if we choose to deliver such shares to you at maturity of the MITTS
Securities. Our affiliate, MLPF&S, is both a soliciting dealer in the shares of
the Energy SPDR Fund and the index compilation agent (the "Index Compilation
Agent") for the Energy Select Sector Index (the "Energy Select Sector Index").
However, we are not affiliated with the Energy SPDR Fund or the Energy Select
Sector Index. The Energy SPDR Fund will not receive any of the proceeds from
the sale of the MITTS Securities and will not have any obligations with respect
to the MITTS Securities. We have attached the Fund Prospectus and are
delivering it to you together with this prospectus supplement and the
accompanying prospectus of ML&Co. for the convenience of reference only. The
Fund Prospectus does not constitute a part of this prospectus supplement or the
accompanying prospectus of ML&Co., nor is it incorporated by reference in this
prospectus supplement or in the accompanying prospectus of ML&Co.
What are the MITTS Securities?
The MITTS Securities are a series of senior debt securities issued by
ML&Co. and are not secured by collateral. The MITTS Securities will rank
equally with all of our other unsecured and unsubordinated debt. The MITTS
Securities will mature on February 21, 2006 and cannot be redeemed at an
earlier date. You will not receive any shares of the Energy SPDR Fund or any
other payments on the MITTS Securities until maturity.
Each "unit" of MITTS Securities represents $10 principal amount (the
"Principal Amount") of MITTS Securities. You may transfer the MITTS Securities
only in whole units. You will not have the right to receive physical
certificates evidencing your ownership except under limited circumstances.
Instead, we will issue the MITTS Securities in the form of a global
certificate, which will be held by The Depository Trust Company (otherwise
known as DTC) or its nominee. Direct and indirect participants in DTC will
record beneficial ownership of the MITTS Securities by individual investors.
You should refer to the section "Description of the MITTS Securities--
Depositary" in this prospectus supplement.
What will I receive at the stated maturity date of the MITTS Securities?
We have designed the MITTS Securities for investors who want to protect
their investment by receiving at least the principal amount of their investment
at maturity and who also want to participate in the appreciation, if any, in
the Net Asset Value per share of the Energy SPDR Fund. At maturity, you will
receive a number of shares (and an amount of cash equal to the value of any
fractional shares) of the Energy SPDR Fund (or cash with an equal value) equal
in value to the sum of the Principal Amount and the Supplemental Redemption
Amount, if any. We will determine the number of shares to be delivered to you
based on the Ending Value.
S-4
<PAGE>
Principal Amount
The Principal Amount per unit is $10.
Supplemental Redemption Amount
The Supplemental Redemption Amount per unit will equal:
(Adjusted Ending Value - Starting Value)
$10 X (--------------------------------------)
( Starting Value )
but will not be less than zero.
"Starting Value" equals 22.4936, the Net Asset Value of one share of the
Energy SPDR Fund on February 11, 1999, the date the MITTS Securities are priced
for initial sale to the public (the "Pricing Date").
"Adjusted Ending Value" means the Ending Value, as reduced by the
application of the Adjustment Factor on each Calculation Day.
"Ending Value" means the average of the Net Assets Values per share of
the Energy SPDR Fund at the close of the market on five Calculation Days
shortly before the maturity of the MITTS Securities. We may calculate the
Ending Value by reference to fewer than five or even a single day's Net Asset
Value if, during the Calculation Period, there is a disruption in the trading
of a number of the component stocks of the Energy Select Sector Index or
options relating to the shares of the Energy SPDR Fund, the Energy SPDR Fund is
unable or otherwise fails to issue a Net Asset Value for the shares of the
Energy SPDR Fund or the Energy SPDR Fund suspends the creation or redemption of
its shares. Please see the section entitled "Description of the MITTS
Securities--Adjustments to the Net Asset Value; Market Disruption Events" in
this prospectus supplement.
The "Adjustment Factor" equals 0.85% per year and will reduce the Net
Asset Value per share of the Energy SPDR Fund used to calculate the
Supplemental Redemption Amount. As a result of the application of the
Adjustment Factor, the adjusted Net Asset Value per share of the Energy SPDR
Fund used to calculate your Supplemental Redemption Amount at the maturity of
the MITTS Securities will be approximately 5.8% less than the actual Net Asset
Value per share of the Energy SPDR Fund on any day during the Calculation
Period. For a detailed discussion of how the Adjustment Factor will affect the
Net Asset Value per share of the Energy SPDR Fund used to calculate your
Supplemental Redemption Amount (i.e., the Adjusted Ending Value), see
"Description of the MITTS Securities--Delivery at Maturity" and "--Hypothetical
Returns" in this prospectus supplement.
For more specific information about the Supplemental Redemption Amount,
please see the section "Description of the MITTS Securities" in this prospectus
supplement.
S-5
<PAGE>
Examples
Here are two examples of Supplemental Redemption Amount calculations
assuming an Adjustment Factor of 0.85% per year:
Example 1--Adjusted Ending Value is less than the Starting Value at the
maturity date:
Starting Value: 22.49
Hypothetical Ending Value: 23.62
Hypothetical Adjusted Ending Value: 22.25
<TABLE>
<S> <C>
(Supplemental
(22.25 - 22.49) Redemption
Supplemental Redemption Amount (per unit) = $10 X (-------------) = $0.00 Amount cannot be
( 22.49 ) less than zero)
</TABLE>
Total value of shares delivered at maturity (per unit) = $10 + $0 = $10
Example 2--Adjusted Ending Value is greater than the Starting Value at the
maturity date:
Starting Value: 22.49
Hypothetical Ending Value: 35.99
Hypothetical Adjusted Ending Value: 33.90
(33.90 - 22.49)
Supplemental Redemption Amount (per unit) = $10 X (-------------) = $5.07
( 22.49 )
Total value of shares delivered at maturity (per unit) = $10 + $5.07 = $15.07
How is the Net Asset Value determined?
The "Net Asset Value" means the net asset value per share of the Energy
SPDR Fund as determined by the Energy SPDR Fund. The Energy SPDR Fund
calculates its Net Asset Value per share by dividing the value of its net
assets (i.e., the value of its total assets less total liabilities) by its
total number of shares outstanding. Expenses and fees, including the
management, administration and distribution fees, of the Energy SPDR Fund are
accrued daily and taken into account for purposes of determining Net Asset
Value. The Net Asset Value per share of the Energy SPDR Fund is determined by
the Energy SPDR Fund each Business Day after the close of trading on the New
York Stock Exchange (ordinarily 4:00 p.m., New York time). Shares of the Energy
SPDR Fund are listed on the AMEX under the trading symbol "XLE".
When will I receive cash instead of shares of the Energy SPDR Fund?
If we choose to pay you the amount due to you at maturity in cash instead
of in shares of the Energy SPDR Fund which you would otherwise be entitled to
receive, we will pay you an amount of cash equal to the sum of the Principal
Amount and the Supplemental Redemption Amount, if any. In addition, if at any
time MLPF&S ceases to be a soliciting dealer in the shares of the Energy SPDR
Fund, we will pay the amount due to you in cash instead of shares. Please see
the section entitled "Description of the MITTS Securities--Delivery at
Maturity" in this prospectus supplement.
In addition, in the event that we choose to deliver shares of the Energy
SPDR Fund at maturity, we will not distribute any fractional shares to you. We
will aggregate all amounts due to you in respect of the total number of units
you hold on the stated maturity date, and in lieu of delivering to you any
fractional shares of the Energy SPDR Fund to which you would otherwise be
entitled, we will pay you the cash value of such fractional shares based on the
Net Asset Value per share of the Energy SPDR Fund shortly before maturity.
S-6
<PAGE>
Will I be charged any transaction fees or expenses with respect to the shares
of the Energy SPDR Fund?
Unless and until we deliver shares of the Energy SPDR Fund to you in
satisfaction of our obligations under the MITTS Securities, you will not be
directly charged any management, administration, distribution or other
transaction fees or other expenses with respect to the shares of the Energy
SPDR Fund. However, because the Energy SPDR Fund accrues such fees and expenses
daily for purposes of determining the Net Asset Value of its shares, the Net
Asset Values used to calculate your Supplemental Redemption Amount will reflect
the deduction of such fees and expenses as well as the reduction resulting from
the application of the Adjustment Factor.
If at maturity we deliver to you shares of the Energy SPDR Fund, you will
then become directly subject to ongoing account maintenance fees and certain
other transaction expenses with respect to your shares so long as you hold such
shares.
The accompanying Fund Prospectus describes the fees and expenses charged
by the Energy SPDR Fund in greater detail.
What is the Energy SPDR Fund?
The Energy SPDR Fund is an index fund whose stated investment objective
is to provide investment results that, before expenses, correspond generally to
the price and yield performance of the publicly traded equity securities
comprising the Energy Select Sector Index. The Energy Select Sector Index
consists of the equity securities of publicly traded companies that are
components of the S&P 500 Index and are involved in the development and
production of energy products. Companies in the Energy Select Sector Index
develop and produce crude oil and natural gas, and provide drilling and other
energy related services. As of February 11, 1999, the Energy Select Sector
Index included 31 component stocks. A list of these securities and their index
weightings as of such date is set forth under the section "The Energy SPDR
Fund" in this prospectus supplement. Our affiliate, MLPF&S, is both a
soliciting dealer in the shares of the Energy SPDR Fund and the Index
Compilation Agent for the Energy Select Sector Index. We are not affiliated
with the Energy SPDR Fund or the Energy Select Sector Index. The Energy SPDR
Fund will not receive any of the proceeds from the sale of, or have any
obligations under, the MITTS Securities. You should independently decide
whether an investment in the MITTS Securities and the Energy SPDR Fund is
appropriate for you.
The Energy SPDR Fund is one of nine investment funds comprising the
Select Sector SPDR Trust (the "Trust"), a management investment company
registered under the Investment Company Act of 1940, as amended. Each fund's
investment portfolio is comprised principally of constituent companies whose
equity securities are components of the S&P 500 Index, each representing one of
nine specified market sector indices. Each stock in the S&P 500 Index is
allocated to only one Select Sector Index. The combined companies of the nine
Select Sector Indices represent all of the companies whose stocks are
components of the S&P 500 Index.
You should carefully read the Fund Prospectus accompanying this
prospectus supplement and prospectus of ML&Co. to fully understand the
operation and management of the Energy SPDR Fund. In addition, because the
Trust is subject to the registration requirements of the Securities Act of
1933, as amended, and the Investment Company Act, the Trust is required to file
periodically certain information specified by the SEC. For more information
about the Energy SPDR Fund and the shares that you may receive at maturity,
information provided to or filed with the SEC by the Trust can be inspected at
the SEC's public reference facilities or accessed over the Internet through a
web site maintained by the SEC at http://www.sec.gov. You may also obtain
copies of such documents at no cost by calling the Trust at (800) 843-2639 or
by writing the Trust c/o ALPS Mutual Funds Services, Inc., at 370 17th Street,
Suite 3100, Denver, CO 80202. Neither the Fund Prospectus nor such other
documents are incorporated by reference in this prospectus supplement, and we
make no representation or warranty as to the accuracy or completeness of such
information.
S-7
<PAGE>
What about taxes?
Each year, even though you will not receive any payments from us until
maturity, you will be required to pay taxes on ordinary income from the MITTS
Securities over their term based upon an estimated yield for the MITTS
Securities. We have determined this estimated yield, in accordance with
regulations issued by the U.S. Treasury Department, solely in order for you to
figure the amount of taxes that you will owe each year as a result of owning a
MITTS Security. This amount is neither a prediction nor a guarantee of what the
actual Supplemental Redemption Amount will be, or that the actual Supplemental
Redemption Amount will even exceed zero. We have determined that this estimated
yield will equal 5.83% per annum (compounded semiannually).
Based upon this estimated yield, if you pay your taxes on a calendar year
basis and if you buy a MITTS Security for $10 and hold the MITTS Security until
maturity, you will be required to pay taxes on the following amounts of
ordinary income from the MITTS Securities each year: $0.5092 in 1999, $0.6216
in 2000, $0.6584 in 2001, $0.6974 in 2002, $0.7385 in 2003, $0.7823 in 2004,
$0.8285 in 2005 and $0.1197 in 2006. However, in 2006, the amount of ordinary
income that you will be required to pay taxes on from owning a MITTS Security
may be greater or less than $0.1197, depending upon the Supplemental Redemption
Amount, if any, you receive. Also, if the Supplemental Redemption Amount is
less than $4.9556, you may have a loss which you could deduct against other
income you may have in 2006; but under current tax regulations, you would
neither be required nor permitted to amend your tax returns for prior years. If
you receive shares of the Energy SPDR Fund on the stated maturity date, your
aggregate initial tax basis in such shares of the Energy SPDR Fund should be an
amount equal to the sum of $10 and the Supplemental Redemption Amount (less any
cash received by you). Your holding period for any shares of the Energy SPDR
Fund that you receive on the maturity date should begin on the day immediately
following the maturity date. For further information, see "United States
Federal Income Taxation" in this prospectus supplement.
Will the MITTS Securities be listed on a stock exchange?
The MITTS Securities have been approved for listing on the AMEX under the
symbol "ESM", subject to official notice of issuance. You should be aware that
the listing of the MITTS Securities on the AMEX will not necessarily ensure
that a liquid trading market will be available for the MITTS Securities. You
should review the section entitled "Risk Factors--Uncertain trading market" in
this prospectus supplement.
What is the role of MLPF&S?
Our subsidiary, MLPF&S, is the underwriter for the offering and sale of
the MITTS Securities. After the initial offering, MLPF&S intends to buy and
sell MITTS Securities to create a secondary market for holders of the MITTS
Securities, and may stabilize or maintain the market price of the MITTS
Securities during the initial distribution of the MITTS Securities. However,
MLPF&S will not be obligated to engage in any of these market activities, or
continue them once it has started.
MLPF&S will also be our agent for purposes of calculating the Adjusted
Ending Value and the Supplemental Redemption Amount. Under certain
circumstances, these duties could result in a conflict of interest between
MLPF&S's status as our subsidiary and its responsibilities as calculation
agent.
MLPF&S also is a soliciting dealer in the shares of the Energy SPDR Fund
and is the Index Compilation Agent for the Energy Select Sector Index. Under
certain circumstances, these duties could result in a conflict of interest
between MLPF&S's status as our subsidiary and its responsibilities to the
Energy SPDR Fund and the Energy Select Sector Index. Please see the section
entitled "Risk Factors--Potential conflicts" in this prospectus supplement.
Who is ML&Co.?
Merrill Lynch & Co., Inc. is a holding company with various subsidiary
and affiliated companies that provide investment, financing,
S-8
<PAGE>
insurance and related services on a global basis. For information about ML&Co.,
see the section entitled "Merrill Lynch & Co., Inc." in the accompanying
prospectus of ML&Co. You should also read the other documents we have filed
with the SEC, which you can find by referring to the section "Where You Can
Find More Information" in this prospectus supplement.
Are there any risks associated with my investment?
Yes, an investment in the MITTS Securities is subject to risks. Please
refer to the section "Risk Factors" in this prospectus supplement.
S-9
<PAGE>
RISK FACTORS
Your investment in the MITTS Securities will involve certain risks. For
example, there is the risk that you might not earn a return on your investment,
and the risk that you will be unable to sell your MITTS Securities before their
maturity. You should carefully consider the following discussion of risks
before deciding whether an investment in the MITTS Securities is suitable for
you.
The MITTS Securities are unlike typical equity or debt securities
The MITTS Securities combine features of equity and debt instruments. For
example, like an equity instrument, the Supplemental Redemption Amount will be
based on the increase, if any, in the Net Asset Value per share of the Energy
SPDR Fund. However, as a holder of the MITTS Securities, you will not be
entitled to receive distributions that would be payable on the shares of the
Energy SPDR Fund if you had made a direct investment in such shares. In
addition, like a debt instrument, you will receive the principal amount of your
MITTS Securities on the maturity date. However, the terms of the MITTS
Securities differ from the terms of ordinary debt securities in that the
Supplemental Redemption Amount payable at maturity is not a fixed amount, but
is based on the Net Asset Value per share of the Energy SPDR Fund (as reduced
by the Adjustment Factor) determined on five (or, under certain circumstances,
fewer than five) Trading Days shortly before the maturity date.
You may not earn a return on your investment
You should be aware that if the Adjusted Ending Value does not exceed the
Starting Value at the stated maturity date, the Supplemental Redemption Amount
will be zero. This will be true even if the Net Asset Value per share of the
Energy SPDR Fund, as reduced by the Adjustment Factor, was higher than the
Starting Value at some time during the life of the MITTS Securities but later
falls below the Starting Value. If the Supplemental Redemption Amount is zero,
we will pay you only the Principal Amount of your MITTS Securities.
Your return will not reflect the return of owning shares of the Energy SPDR
Fund or the securities and other assets comprising the Energy SPDR Fund's
investment portfolio
When determining the Supplemental Redemption Amount, if any, paid to you
at maturity, the Energy SPDR Fund's Net Asset Value per share, which reflects
the reduction of fund assets resulting from the accrual of the Energy SPDR
Fund's fees and expenses and any distributions made by the Energy SPDR Fund,
will also be reduced by the application of the Adjustment Factor. Consequently,
your return on the MITTS Securities will not reflect the return of owning the
shares of the Energy SPDR Fund or the securities and other assets comprising
the Energy SPDR Fund's investment portfolio.
Changes in the Net Asset Value per share of the Energy SPDR Fund will not
exactly mirror changes in the Energy Select Sector Index
As indicated in the Fund Prospectus, the Energy SPDR Fund's investment
objective is to provide investment results that, before expenses, correspond
generally to the price and yield performance of the publicly traded equity
securities comprising the Energy Select Sector Index. However, because the
Energy SPDR Fund's investment portfolio may not hold all of the stocks in the
Energy Select Sector Index or may not hold each stock in the same weighting as
the Energy Select Sector Index, because the Energy SPDR Fund may hold other
assets and because the Net Asset Value per share of the Energy SPDR Fund
reflects the reduction of fund assets resulting from the accrual of fees and
expenses and the payment of distributions, if any, changes in the value of the
Energy Select Sector Index and in the Net Asset Value per share of the Energy
SPDR Fund are not expected to be identical. As stated in the Fund Prospectus,
the investment adviser to the Energy SPDR Fund believes that "over time, the
"tracking error' of the Energy SPDR Fund relative to the performance of the
Energy Select Sector Index, adjusted for the effect of the Energy SPDR Fund's
expenses, will be less than 5%". There is no assurance that the tracking error
will not be greater than 5% at any time, including the time that you may wish
to sell your MITTS Securities before the maturity date or at the time the
calculation agent determines the Supplemental Redemption Amount, if any.
S-10
<PAGE>
Your yield may be lower than the yield on a standard debt security of
comparable maturity
The amount we pay you at maturity may be less than the return you could
earn on other investments. Your yield may be less than the yield you would earn
if you bought a standard senior non-callable Merrill Lynch & Co., Inc. debt
security with the same maturity date. Your investment may not reflect the full
opportunity cost to you when you take into account factors that affect the time
value of money.
Uncertain trading market
The MITTS Securities have been approved for listing on the AMEX under the
trading symbol "ESM", subject to official notice of issuance. While there have
been a number of issuances of different series of Market Index Target-Term
Securities, trading volumes have varied historically from one series to another
and it is therefore impossible to predict how the MITTS Securities will trade.
You cannot assume that a trading market will develop for the MITTS Securities.
If such a trading market does develop, there can be no assurance that there
will be liquidity in the trading market. The development of a trading market
for the MITTS Securities will depend on our financial performance, and other
factors such as the increase, if any, in the Net Asset Value per share of the
Energy SPDR Fund.
If the trading market for the MITTS Securities is limited, there may be a
limited number of buyers when you decide to sell your MITTS Securities if you
do not wish to hold your investment until maturity. This may affect the price
you receive.
Factors affecting the trading value of the MITTS Securities
We believe that the market value of the MITTS Securities will be affected
by the Net Asset Value per share of the Energy SPDR Fund 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
trading value of the MITTS Securities given a change in a specific factor,
assuming all other conditions remain constant.
. Net Asset Value. We expect that the market value of the MITTS Securities
will depend substantially on the amount by which the Net Asset Value per
share of the Energy SPDR Fund, as reduced by the Adjustment Factor,
exceeds the Starting Value. Even if you choose to sell your MITTS
Securities when the Net Asset Value per share of the Energy SPDR Fund, as
reduced by the Adjustment Factor, exceeds the Starting Value, you may
receive substantially less than the amount that would be payable at
maturity based on such value because of the expectation that the Net
Asset Value will continue to fluctuate until the Adjusted Ending Value is
determined. If you choose to sell your MITTS Securities before the
maturity date when the Net Asset Value per share of the Energy SPDR Fund
(as adjusted by the Adjustment Factor) is below or not sufficiently above
the Starting Value, you may receive less than the $10 Principal Amount
per unit of MITTS Securities.
. Interest Rates. Because the MITTS Securities repay, at a minimum, the
Principal Amount at the maturity date, we expect that the trading value
of the MITTS Securities will be affected by changes in interest rates. In
general, if U.S. interest rates increase, we expect that the trading
value of the MITTS Securities will decrease and, conversely, if U.S.
interest rates decrease, we expect that the trading value of the MITTS
Securities will increase. Interest rates may also affect the U.S. economy
and, in turn, the Net Asset Value of the Energy SPDR Fund. Rising
interest rates may lower the Net Asset Value per share of the Energy SPDR
Fund and, as a result, lower the trading value of the MITTS Securities
and, conversely, falling interest rates may increase the Net Asset Value
per share of the Energy SPDR Fund and, as a result, may increase the
trading value of the MITTS Securities.
. Volatility. Volatility is the term used to describe the size and
frequency of market fluctuations. Generally, if the volatility of the Net
Asset Value per share of the Energy SPDR Fund increases, we expect that
the trading value of the MITTS Securities will increase and, conversely,
if the volatility of the Net Asset Value per share of the Energy SPDR
Fund decreases, we expect that the trading value of the MITTS Securities
will decrease.
S-11
<PAGE>
. Time Remaining to Maturity. We anticipate that before their maturity the
MITTS Securities may trade at a value above that which would be expected
based on the level of interest rates and the Net Asset Value per share of
the Energy SPDR Fund. This difference will reflect a "time premium" due
to expectations concerning the Net Asset Value per share of the Energy
SPDR Fund during the period before the maturity of the MITTS Securities.
However, as the time remaining to the maturity of the MITTS Securities
decreases, we expect that this time premium will decrease, lowering the
trading value of the MITTS Securities.
. Dividend Yields. Generally, if dividend yields on the stocks comprising
the Energy SPDR Fund increase, we expect that the trading value of the
MITTS Securities will decrease, and conversely, if dividend yields on the
stocks comprising the Energy SPDR Fund's investment portfolio decrease,
we expect that the trading value of the MITTS Securities will increase.
. Changes in Our Credit Ratings. Our credit ratings are an assessment of
our ability to pay our obligations. Consequently, real or anticipated
changes in our credit ratings may affect the trading value of the MITTS
Securities. However, because the return on your MITTS Securities is
dependent upon factors in addition to our ability to pay our obligations
under the MITTS Securities, such as the percentage increase in the Net
Asset Value per share of the Energy SPDR Fund at maturity, an improvement
in our credit ratings will not reduce other investment risks related to
the MITTS Securities.
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 MITTS Securities
attributable to another factor, such as an increase in the Net Asset Value per
share of the Energy SPDR Fund.
In general, assuming all other relevant factors are held constant, we
expect that the effect on the trading value of the MITTS Securities of a given
change in any one of the factors listed above will be less if it occurs later
in the term of the MITTS Securities than if it occurs earlier in the term of
the MITTS Securities. However, we expect that the effect on the trading value
of the MITTS Securities of an increase or decrease in the Net Asset Value per
share of the Energy SPDR Fund will be greater if it occurs later in the term of
the MITTS Securities than if it occurs earlier in the term of the MITTS
Securities.
Absence of prior active market for shares of the Energy SPDR Fund
The Energy SPDR Fund is a recently organized investment company and there
is limited operating history available. Although such shares are listed for
trading on the AMEX and a number of similar products have been traded on the
AMEX for varying periods of time, there is no assurance that an active trading
market will develop for the shares of the Energy SPDR Fund. If such a trading
market does develop, there is no assurance that there will be liquidity in the
trading market.
Concentration in energy-related securities
Because the Energy SPDR Fund's investment portfolio is predominantly
comprised of securities of companies in the energy-producing field, the value
of the MITTS Securities may be adversely affected by an economic downturn in
the energy industry. The companies whose securities comprise the Energy SPDR
Fund's investment portfolio produce crude oil and natural gas and provide
drilling and other energy production and distribution related services. Stock
prices for these types of companies are affected by supply and demand both for
their specific product or service and for energy products in general. The price
of oil and gas, exploration and production spending, government regulation,
political events and economic conditions will likewise affect the performance
of these companies. Correspondingly, companies in the energy field are subject
to swift energy price and supply fluctuations caused by events relating to
international politics, energy conservation, the results of exploration
projects, and tax and other governmental policies. Weak demand for these
companies' products or services or for energy products and services in general,
as well as negative developments in these other areas, would adversely affect
the performance of the Energy SPDR Fund and in turn, the trading value of the
MITTS Securities.
S-12
<PAGE>
No affiliation between ML&Co. and the Energy SPDR Fund
Our affiliate MLPF&S is both a soliciting dealer in the shares of the
Energy SPDR Fund and the Index Compilation Agent for the Energy Select Sector
Index. However, we are not affiliated with the Energy SPDR Fund or the Energy
Select Sector Index. The Energy SPDR Fund has no obligations with respect to
the MITTS Securities or amounts to be paid to you, including any obligation to
take the needs of ML&Co. or of beneficial owners of the MITTS Securities into
consideration for any reason. The Energy SPDR Fund will not receive any of the
proceeds from this offering and is not responsible for, and has not
participated in, the determination or calculation of the amount you will
receive on your MITTS Securities at maturity. In addition, the Energy SPDR Fund
is not involved with the administration or trading of the MITTS Securities and
has no obligations with respect to any amounts due under the MITTS Securities.
No shareholder's rights
Unless and until we deliver shares of the Energy SPDR Fund to you at the
maturity of the MITTS Securities, you will not be entitled to any rights with
respect to such shares including, without limitation, the right to receive
distributions on, to vote or to redeem such shares. For example, if the Energy
SPDR Fund sets a record date for a matter to be voted on by shareholders before
our delivery of the shares of the Energy SPDR Fund to you, you will not be
entitled to vote on any such matter.
State law limits on interest paid
New York State law governs the indenture under which the MITTS Securities
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 MITTS Securities. 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 MITTS
Securities, to the extent permitted by law, not to voluntarily claim the
benefits of any laws concerning usurious rates of interest.
Potential conflicts
The calculation agent for the MITTS Securities is one of our
subsidiaries. Under certain circumstances, MLPF&S's role as our subsidiary and
its responsibilities as calculation agent for the MITTS Securities could give
rise to conflicts of interests between the calculation agent and the holders of
the MITTS Securities. Such conflicts could occur, for instance, in connection
with its determination as to whether a Market Disruption Event (as defined
below) has occurred.
MLPF&S is a soliciting dealer in the shares of the Energy SPDR Fund.
Under certain circumstances, MLPF&S's role as calculation agent for the MITTS
Securities and its role as a soliciting dealer in such shares could give rise
to conflicts of interests between the calculation agent and holders of the
MITTS Securities. Such conflicts could occur in connection with its
determination as to the Adjusted Ending Value and the number of shares to be
delivered at maturity.
Additionally, MLPF&S serves as Index Compilation Agent for the Energy
Select Sector Index. In its capacity as Index Compilation Agent, MLPF&S
determines, in consultation with S&P, which securities of the S&P 500 are to be
included in the Energy Select Sector Index. Under certain circumstances,
MLPF&S's role as calculation agent for the MITTS Securities and its role as
Index Compilation Agent could give rise to conflicts of interests between the
calculation agent and holders of the MITTS Securities.
S-13
<PAGE>
MLPF&S is required to carry out its duties as calculation agent in good
faith and using its reasonable judgment. However, you should be aware that
because we control MLPF&S, potential conflicts of interest could arise.
We anticipate entering into an arrangement with one of our subsidiaries
to hedge the market risks associated with our obligation to pay amounts due
under the MITTS Securities. Such subsidiary expects to make a profit in
connection with such arrangement. We did not seek competitive bids for such an
arrangement from unaffiliated parties.
Uncertain tax consequences
You should also consider the tax consequences of investing in the MITTS
Securities, certain aspects of which are uncertain. See "United States Federal
Income Taxation" below.
WHERE YOU CAN FIND MORE INFORMATION
ML&Co.
We file reports, proxy statements and other information with the SEC. Our
SEC filings are also available over the Internet at the SEC's web site at
http://www.sec.gov. You may also read and copy any document we file at the
SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for more information
on the public reference rooms and their copy charges. You may also inspect our
SEC reports and other information at the New York Stock Exchange, Inc., 20
Broad Street, New York, New York 10005.
We have filed a registration statement on Form S-3 with the SEC covering
the MITTS Securities and other securities. For further information on ML&Co.
and the MITTS Securities, you should refer to our registration statement and
its exhibits. The prospectus of ML&Co. accompanying this prospectus supplement
summarizes material provisions of contracts and other documents that we refer
you to. Because the prospectus of ML&Co. may not contain all the information
that you may find important, you should review the full text of these
documents. We have included copies of these documents as exhibits to our
registration statement.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement. We have not authorized any other
person to provide you with different information. If anyone provides you with
different or inconsistent information, you should not rely on it. We are not
making an offer to sell these securities in any jurisdiction where the offer or
sale is not permitted.
You should assume that the information appearing in this prospectus
supplement is accurate as of the date hereof only. Our business, financial
condition, results of operations and prospects may have changed since that
date.
The Energy SPDR Fund
The Trust is subject to the registration requirements of the Securities
Act and the Investment Company Act and is required to file periodically certain
information specified by the SEC. For more information about the Energy SPDR
Fund and the shares that you may receive at maturity, information provided to
or filed with the SEC by the Trust can be inspected at the SEC's public
reference facilities or accessed over the Internet through its web site. You
may also obtain copies of such documents at no cost by calling the Trust at
(800) 843-2639 or by writing the Trust c/o ALPS Mutual Funds Services, Inc., at
370 17th Street, Suite 3100, Denver, CO 80202. Neither the Fund Prospectus nor
such other documents are incorporated by reference in this prospectus
supplement, and we make no representation or warranty as to the accuracy or
completeness of such information.
S-14
<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES OF ML&CO.
In 1998, we acquired the outstanding shares of Midland Walwyn Inc.
("Midland"), in a transaction accounted for as a pooling-of-interests. The
following information, excluding the 1993 ratio, has been restated as if the
two entities had always been combined.
The following table sets forth our historical ratios of earnings to fixed
charges for the periods indicated:
<TABLE>
<CAPTION>
Nine Months
Year Ended Last Friday in December Ended
-------------------------------------- September 25,
1993 1994 1995 1996 1997 1998
------ ------ ------ ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to
fixed charges(a)....... 1.4 1.2 1.2 1.2 1.2 1.1
</TABLE>
- --------
(a) The effect of combining Midland did not change the ratios reported for the
fiscal years 1994 through 1997 and the effect would not be material for the
1993 fiscal year.
For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" consist of earnings from continuing operations before income taxes
and fixed charges. "Fixed charges" consist of interest costs, amortization of
debt expense, preferred stock dividend requirements of majority-owned
subsidiaries, and that portion of rentals estimated to be representative of the
interest factor.
DESCRIPTION OF THE MITTS SECURITIES
The MITTS Securities are to be issued as a series of Senior Debt
Securities under the Senior Indenture, referred to as the "1983 Indenture",
which is more fully described in the accompanying prospectus of ML&Co. The
MITTS Securities will mature on February 21, 2006.
While at maturity a beneficial owner of a MITTS Security will receive the
number of shares of the Energy SPDR Fund (or cash with an equal value) equal in
value (determined based on the Ending Value) to the sum of the Principal Amount
of such MITTS Security plus the Supplemental Redemption Amount, if any, there
will be no other payment of interest, periodic or otherwise. See "Delivery at
Maturity".
The MITTS Securities are not subject to redemption by ML&Co. or at the
option of any beneficial owner prior to maturity. Upon the occurrence of an
Event of Default with respect to the MITTS Securities, beneficial owners of the
MITTS Securities may accelerate the maturity of the MITTS Securities, as
described under "Description of the MITTS Securities--Events of Default and
Acceleration" in this prospectus supplement and "Description of Debt
Securities--General--Events of Default" in the accompanying prospectus.
The MITTS Securities are to be issued in denominations of whole units.
The MITTS Securities do not have the benefit of any sinking fund.
Delivery at Maturity
At maturity, a beneficial owner of a MITTS Security will be entitled to
receive the number of shares of the Energy SPDR Fund (or cash with an equal
value) equal in value (determined based on the Ending Value) to the Principal
Amount of such MITTS Security plus the Supplemental Redemption Amount, if any,
all as provided below. The amount to be paid by ML&Co. to any holder of the
MITTS Securities on the maturity date will be aggregated based on the total
number of units then held by such holder and rounded to the nearest
S-15
<PAGE>
cent. If the Adjusted Ending Value does not exceed the Starting Value, a
beneficial owner of a MITTS Security will be entitled to receive only the
number of shares of the Energy SPDR Fund (or cash with an equal value) equal in
value (determined based on the Ending Value) to the Principal Amount of such
MITTS Security.
If ML&Co. chooses to deliver shares of the Energy SPDR Fund to holders of
the MITTS Securities at the maturity date, ML&Co. or one of its affiliates will
deliver shares of the Energy SPDR Fund that are then newly issued by the Energy
SPDR Fund.
ML&Co. may, at its option, in lieu of delivering shares of the Energy
SPDR Fund, pay cash in an amount equal to the sum of the Principal Amount of
the MITTS Securities and the Supplemental Redemption Amount, if any. In
addition, if at any time MLPF&S ceases to be a soliciting dealer in the shares
of the Energy SPDR Fund, ML&Co. will pay the amount due to holders of the MITTS
Securities in cash instead of shares.
Determination of the Supplemental Redemption Amount
The Supplemental Redemption Amount for a MITTS Security will be
determined by the calculation agent and will equal:
<TABLE>
<S> <C>
( Adjusted Ending Value - Starting Value)
Principal Amount of such MITTS Security ($10 per unit) X ( --------------------------------------)
( Starting Value )
</TABLE>
provided, however, that in no event will the Supplemental Redemption Amount be
less than zero.
The "Starting Value" equals 22.4936, the Net Asset Value of one share of
the Energy SPDR Fund on the Pricing Date.
"Net Asset Value" means the net asset value per share of the Energy SPDR
Fund as determined by the Energy SPDR Fund. The Energy SPDR Fund calculates its
Net Asset Value per share by dividing the value of its net assets (i.e., the
value of its total assets less total liabilities) by its total number of shares
outstanding. Expenses and fees, including the management, administration and
distribution fees, of the Energy SPDR Fund are accrued daily and taken into
account for purposes of determining its Net Asset Value. The Net Asset Value
per share of the Energy SPDR Fund is determined by the Energy SPDR Fund each
Business Day after the close of trading on the New York Stock Exchange
(ordinarily 4:00 p.m., New York time). Shares of the Energy SPDR Fund are
listed on the AMEX under the trading symbol "XLE".
The "Adjusted Ending Value" will be determined by the calculation agent
and will equal the Ending Value, as reduced by the application of the
Adjustment Factor on each Calculation Day.
The "Ending Value" will equal the average (arithmetic mean) of the Net
Asset Values per share of the Energy SPDR Fund on each of the first five
Calculation Days during the Calculation Period. If there are fewer than five
Calculation Days in the Calculation Period, the Ending Value will equal the
average (arithmetic mean) of the Net Asset Values of the Energy SPDR Fund on
each of such Calculation Days, and if there is only one Calculation Day, then
the Ending Value will be equal to the Net Asset Value per share of the Energy
SPDR Fund on such Calculation Day. If no Calculation Days occur during the
Calculation Period because of Market Disruption Events, then the Ending Value
shall mean the Net Asset Value per share of the Energy SPDR Fund on the last
Trading Day prior to the Calculation Period for which a Net Asset Value per
share of the Energy SPDR Fund was determined.
The Adjustment Factor equals 0.85% per year and will be prorated based on
a 365-day year and applied each calendar day to reduce the Ending Value used to
calculate the Supplemental Redemption Amount. As a result of the application of
the Adjustment Factor, the adjusted Net Asset Value of one share of the Energy
SPDR Fund used to calculate the Supplemental Redemption Amount at the maturity
of the MITTS Securities will be approximately 5.8% less than the actual Net
Asset Value per share of the Energy SPDR Fund on any day during the Calculation
Period.
S-16
<PAGE>
The "Calculation Period" means the period from and including the seventh
scheduled Calculation Day prior to the Maturity Date to and including the
second scheduled Calculation Day prior to maturity.
"Calculation Day" means any Trading Day on which a Market Disruption
Event has not occurred.
"Trading Day" is a day on which the shares of the Energy SPDR Fund (A)
are not suspended from trading on any national or regional securities exchange
or association or over-the-counter market at the close of business and (B)
have traded at least once on a national or regional securities exchange or
association or over-the-counter market that is the primary market for the
trading of the shares of the Energy SPDR Fund.
Fractional Shares
No fractional shares of the Energy SPDR Fund will be distributed by
ML&Co. at maturity. In the event ML&Co. elects to pay holders of the MITTS
Securities in shares of the Energy SPDR Fund, all amounts due to any holder of
the MITTS Securities in respect of the total number of units held by such
holder will be aggregated, and in lieu of delivering any fractional share to
such holder, such holder will receive the cash value of such fractional share
based on the Ending Value.
Hypothetical Returns
The following table illustrates, for a range of hypothetical Ending
Values, (i) the Adjusted Ending Value used to calculate the Supplemental
Redemption Amount, (ii) the percentage change from the Starting Value to the
Adjusted Ending Value, (iii) the Principal Amount and Supplemental Redemption
Amount, if any, paid at maturity for each unit, (iv) the total rate of return
to beneficial owners of the MITTS Securities, (v) the pretax annualized rate
of return to beneficial owners of MITTS Securities, and (vi) the pretax
annualized rate of return of an investment in shares of the Energy SPDR Fund.
This table assumes an Adjustment Factor of 0.85% per annum.
<TABLE>
<CAPTION>
Pretax
Percentage Principal Amount Pretax Annualized
Hypothetical Change of and Supplemental Total Rate of Annualized Rate of Return
Ending Value Hypothetical Adjusted Ending Redemption Return on the Rate of Return of Shares of the
During the Adjusted Ending Value Over the Amount Paid at MITTS on the MITTS Energy SPDR
Calculation Period Value Starting Value Maturity per Unit Securities Securities(1) Fund(1)(2)
- ------------------ --------------- --------------- ----------------- ------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
4.50 4.24 -81.16% $10.00 0.00% 0.00% -18.69%
9.00 8.48 -62.32% $10.00 0.00% 0.00% -9.93%
13.50 12.71 -43.48% $10.00 0.00% 0.00% -4.50%
17.99 16.95 -24.64% $10.00 0.00% 0.00% -0.51%
22.49(3) 21.19 -5.80% $10.00 0.00% 0.00% 2.67%
26.99 25.43 13.04% $11.30 13.04% 1.75% 5.32%
31.49 29.66 31.88% $13.19 31.88% 3.97% 7.60%
35.99 33.90 50.72% $15.07 50.72% 5.92% 9.60%
40.49 38.14 69.55% $16.96 69.55% 7.65% 11.40%
44.99 42.38 88.39% $18.84 88.39% 9.21% 13.02%
49.49 46.61 107.23% $20.72 107.23% 10.63% 14.50%
53.98 50.85 126.07% $22.61 126.07% 11.94% 15.87%
58.48 55.09 144.91% $24.49 144.91% 13.15% 17.14%
62.98 59.33 163.75% $26.38 163.75% 14.28% 18.32%
67.48 63.56 182.59% $28.26 182.59% 15.33% 19.43%
</TABLE>
- --------
(1) The annualized rates of return specified in the preceding table are
calculated on a semiannual bond equivalent basis.
(2) This rate of return assumes, (i) a constant dividend yield of 2.67% per
annum, paid quarterly from the date of the initial delivery of the MITTS
Securities, applied to the Net Asset Value per share of the Energy SPDR
Fund at the end of each such quarter, assuming the Net Asset Value per
share of the Energy SPDR
S-17
<PAGE>
Fund increases or decreases linearly from the Starting Value to the
hypothetical Ending Value during the Calculation Period; (ii) no
transaction fees or expenses in connection with the purchase of the MITTS
Securities; (iii) a term from February 11, 1999 to February 21, 2006; and
(iv) a Net Asset Value per share of the Energy SPDR Fund on the maturity
date equal to the Ending Value.
(3) The Starting Value equals 22.4936, the Net Asset Value per share of the
Energy SPDR Fund on the Pricing Date.
The figures on the previous page are for purposes of illustration only.
The actual Supplemental Redemption Amount and the total and pretax annualized
rate of return resulting therefrom will depend entirely on the Starting Value
and the actual Adjusted Ending Value determined by the calculation agent as
provided in this prospectus supplement.
Adjustments to the Net Asset Value; Market Disruption Events
If at any time the shares of the Energy SPDR Fund are subject to a split
or reverse split, the calculation agent shall adjust the Net Asset Value per
share of the Energy SPDR Fund used to calculate the Ending Value in order to
arrive at a Net Asset Value per share of the Energy SPDR Fund as if such split
or reverse split, as the case may be, had not occurred.
"Market Disruption Event" means any of the following events, as
determined by the calculation agent:
(a) the suspension or material limitation on trading (limitations
pursuant to NYSE Rule 80A (or any applicable rule or regulation
enacted or promulgated by the NYSE or any other self regulatory
organization or the SEC of similar scope as determined by the
calculation agent) on trading during significant market fluctuations
shall be considered "material" for purposes of this definition), in
each case, for more than two hours of trading, or during the one-
half hour period preceding the close of trading on the applicable
exchange, in 20% or more of the stocks which then comprise the
Energy Select Sector Index;
(b) the suspension or material limitation on trading, in each case, for
more than two hours of trading (whether by reason of movements in
price otherwise exceeding levels permitted by the relevant exchange
or otherwise) in option contracts related to the shares of the
Energy SPDR Fund which are traded on any major U.S. exchange; or
(c) the Energy SPDR Fund (1) is unable or otherwise fails to issue a Net
Asset Value for any shares of the Energy SPDR Fund after the close
of business on the NYSE or (2) suspends the creation or redemption
of shares of the Energy SPDR Fund.
For the purposes of paragraphs (a) and (b) of this definition, a
limitation on the hours in a trading day and/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.
Termination of the Energy SPDR Fund
If the Energy SPDR Fund is liquidated or otherwise terminated, for
purposes of calculating the Supplemental Redemption Amount payable at the
maturity of the MITTS Securities, the "Net Asset Value" will be calculated by
the calculation agent as follows: The Net Asset Value per share of the Energy
SPDR Fund on the Trading Day occurring immediately before any liquidating
distribution will equal the Net Asset Value for such day (the "Pre-liquidation
Date"). The calculation agent will then calculate the Net Asset Value after
the close of trading on each Trading Day (each such date, a "Determination
Date") after the Pre-liquidation Date by increasing or decreasing, as the case
may be, the Net Asset Value as of the immediately preceding Trading Day by the
percentage by which the closing value of the Energy Select Sector Index
increases or decreases from such immediately preceding Trading Day to such
Determination Date and further decreasing such Net Asset Value by fees,
expenses and non-liquidating distributions (together, "Fund
S-18
<PAGE>
Expenses") that the calculation agent, in its sole judgment but with reference
to the Fund Expenses actually incurred by the Energy SPDR Fund before its
liquidation or termination, deems would reasonably have been accrued and
included in the calculation of the Net Asset Value per share of the Energy SPDR
Fund had it not been liquidated or terminated, from such immediately preceding
Trading Day to such Determination Date. The calculation agent will cause notice
of each such value to be published not less often than once each month in "The
Wall Street Journal" (or another newspaper of general circulation) and arrange
for information with respect to such values to be made available by telephone.
If the Energy SPDR Fund is liquidated or otherwise terminated and the
Energy Select Sector Index is no longer calculated or published (an "Index
Termination Event"), the calculation agent will select a successor index that
it determines, in its sole discretion, to be comparable to the Energy Select
Sector Index, and, upon the calculation agent's notification of such
determination to the Trustee and ML&Co., the calculation agent will substitute
the successor index for the Energy Select Sector Index and calculate the Net
Asset Value in accordance with the procedures referred to in the immediately
preceding paragraph with reference to such successor index. Upon any selection
by the calculation agent of a successor index, ML&Co. shall cause notice
thereof to be given to holders of the MITTS Securities.
In the event that an Index Termination Event occurs and a successor index
to the Energy Select Sector Index is not selected by the calculation agent or
is no longer published on any of the Calculation Days, the calculation agent
shall compute a substitute index for the Energy Select Sector Index for any
such Calculation Day in accordance with the procedures last used to calculate
the Energy Select Sector Index prior to any such discontinuance. The
calculation agent will calculate the Net Asset Value in accordance with the
procedures referred to in the first paragraph of this section with reference to
such substitute index. Upon any selection by the calculation agent of such
substitute index, ML&Co. shall cause notice thereof to be given to holders of
the MITTS Securities.
If S&P discontinues publication of the S&P 500 Index subsequent to an
Index Termination Event and (i) a successor index to the Energy Select Sector
Index is not selected by the calculation agent or is no longer published on any
of the Calculation Days and (ii) the calculation agent is unable to calculate a
substitute index for the Energy Select Sector Index, the calculation agent will
compute a substitute index for the S&P 500 Index for any such Calculation Day
in accordance with the procedures last used to calculate the S&P 500 Index
prior to any such discontinuance. If the calculation agent calculates such
substitute index for the S&P 500 Index, the calculation agent will use such
substitute index to calculate the substitute index for the Energy Select Sector
Index.
Notwithstanding these alternative arrangements, liquidation or
termination of the Energy SPDR Fund or the discontinuance of the publication of
the Energy Select Sector Index or the S&P 500 Index may adversely affect
trading in the MITTS Securities.
Events of Default and Acceleration
In case an Event of Default with respect to any MITTS Securities shall
have occurred and be continuing, the amount payable to a beneficial owner of a
MITTS Security upon any acceleration permitted by the MITTS Securities, with
respect to each $10 principal amount thereof, will be equal to the Principal
Amount and the Supplemental Redemption Amount, if any, calculated assuming (i)
the date of early repayment is the maturity date of the MITTS Securities and
(ii) the Adjustment Factor is prorated based on a 365-day year and applied each
calendar day to reduce the Net Asset Value per share of the Energy SPDR Fund
used to calculate such Supplemental Redemption Amount. See "Delivery at
Maturity" in this prospectus supplement. If a bankruptcy proceeding is
commenced in respect of ML&Co., the claim of the beneficial owner of a MITTS
Security may be limited, under Section 502(b)(2) of Title 11 of the United
States Code, to the Principal Amount of the MITTS Security plus an additional
amount of contingent interest calculated as though the date of the commencement
of the proceeding were the maturity date of the MITTS Securities.
S-19
<PAGE>
In case of default in payment at the maturity date of the MITTS
Securities (whether at their stated maturity or upon acceleration), from and
after the maturity date the MITTS Securities shall bear interest, payable upon
demand of the beneficial owners thereof, at the rate of 5.83% per annum (to the
extent that payment of such interest shall be legally enforceable) on the
unpaid amount due and payable on such date in accordance with the terms of the
MITTS Securities to the date payment of such amount has been made or duly
provided for.
Depositary
Upon issuance, all MITTS Securities will be represented by one or more
fully registered global securities. Each such global security will be deposited
with, or on behalf of, DTC (DTC, together with any successor thereto, being a
"Depositary"), as Depositary, registered in the name of Cede & Co. (DTC's
partnership nominee). Unless and until it is exchanged in whole or in part for
MITTS Securities in definitive form, no global security may be transferred
except as a whole by the Depositary to a nominee of such Depositary or by a
nominee of such Depositary to such Depositary or another nominee of such
Depositary or by such Depositary or any such nominee to a successor of such
Depositary or a nominee of such successor.
So long as DTC, or its nominee, is a registered owner of a global
security, DTC or its nominee, as the case may be, will be considered the sole
owner or holder of the MITTS Securities represented by such global security for
all purposes under the 1983 Indenture. Except as provided below, the beneficial
owners of the MITTS Securities represented by a global security will not be
entitled to have the MITTS Securities represented by such global security
registered in their names, will not receive or be entitled to receive physical
delivery of the MITTS Securities in definitive form and will not be considered
the owners or Holders of the MITTS Securities (as defined in the 1983
Indenture), including for purposes of receiving any reports delivered by ML&Co.
or the Trustee under the 1983 Indenture. Accordingly, each person owning a
beneficial interest in a global security must rely on the procedures of DTC
and, if such person is not a participant of DTC, on the procedures of the
participant through which such person owns its interest, to exercise any rights
of a Holder under the 1983 Indenture. ML&Co. understands that under existing
industry practices, in the event that ML&Co. requests any action of Holders or
that an owner of a beneficial interest in such a global security desires to
give or take any action which a Holder is entitled to give or take under the
1983 Indenture, DTC would authorize the participants holding the relevant
beneficial interests to give or take such action, and such participants would
authorize beneficial owners owning through such participants to give or take
such action or would otherwise act upon the instructions of beneficial owners.
Conveyance of notices and other communications by DTC to participants, by
participants to indirect participants and by participants and indirect
participants to beneficial owners will be governed by arrangements among them,
subject to any statutory or regulatory requirements as may be in effect from
time to time.
If (x) the Depositary is at any time unwilling or unable to continue as
Depositary and a successor depositary is not appointed by ML&Co. within 60
days, (y) ML&Co. executes and delivers to the Trustee a company order to the
effect that the global securities shall be exchangeable or (z) an Event of
Default has occurred and is continuing with respect to the MITTS Securities,
the global securities will be exchangeable for MITTS Securities in definitive
form of like tenor and of an equal aggregate principal amount, in denominations
of $10 and integral multiples thereof. Such definitive MITTS Securities will be
registered in such name or names as the Depositary shall instruct the Trustee.
It is expected that such instructions may be based upon directions received by
the Depositary from participants with respect to ownership of beneficial
interests in such global securities.
The following is based on information furnished by DTC:
DTC will act as securities depositary for the MITTS Securities. The MITTS
Securities will be issued as fully registered securities registered in the name
of Cede & Co. (DTC's partnership nominee). One or more fully registered global
securities will be issued for the MITTS Securities in the aggregate principal
amount of such issue, and will be deposited with DTC.
S-20
<PAGE>
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended. DTC holds securities that its participants
deposit with DTC. DTC also facilitates the settlement among participants of
securities transactions, such as transfers and pledges, in deposited securities
through electronic computerized book-entry changes in participants' accounts,
thereby eliminating the need for physical movement of securities certificates.
Direct participants of DTC include securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations. DTC is owned
by a number of its direct participants and by the NYSE, the AMEX, and the
National Association of Securities Dealers, Inc. Access to the DTC's system is
also available to others such as securities brokers and dealers, banks and
trust companies that clear through or maintain a custodial relationship with a
direct participant, either directly or indirectly. The rules applicable to DTC
and its participants are on file with the SEC.
Purchases of MITTS Securities under DTC's system must be made by or
through direct participants, which will receive a credit for the MITTS
Securities on DTC's records. The ownership interest of each beneficial owner is
in turn to be recorded on the records of direct and indirect participants.
Beneficial owners will not receive written confirmation from DTC of their
purchase, but beneficial owners are expected to receive written confirmations
providing details of the transaction, as well as periodic statements of their
holdings, from the direct or indirect participants through which such
beneficial owner entered into the transaction. Transfers of ownership interests
in the MITTS Securities are to be accomplished by entries made on the books of
participants acting on behalf of beneficial owners.
To facilitate subsequent transfers, all MITTS Securities deposited with
DTC are registered in the name of DTC's partnership nominee, Cede & Co. The
deposit of MITTS Securities with DTC and their registration in the name of Cede
& Co. effect no change in beneficial ownership. DTC has no knowledge of the
actual beneficial owners of the MITTS Securities; DTC's records reflect only
the identity of the direct participants to whose accounts such MITTS Securities
are credited, which may or may not be the beneficial owners. The participants
will remain responsible for keeping account of their holdings on behalf of
their customers.
Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants, and by direct
participants and indirect participants to beneficial owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Neither DTC nor Cede & Co. will consent or vote with respect to the MITTS
Securities. Under its usual procedures, DTC mails an omnibus proxy to ML&Co. as
soon as possible after the applicable record date. The omnibus proxy assigns
Cede & Co.'s consenting or voting rights to those direct participants
identified in a listing attached to the omnibus proxy to whose accounts the
MITTS Securities are credited on the record date.
Principal, premium, if any, and/or interest, if any, payments to be made
in cash on the MITTS Securities will be made in immediately available funds to
DTC. DTC's practice is to credit direct participants' accounts on the
applicable payment date in accordance with their respective holdings shown on
the Depositary's records unless DTC has reason to believe that it will not
receive payment on such date. Payments by participants to beneficial owners
will be governed by standing instructions and customary practices, as is 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 participant
and not of DTC, the Trustee or ML&Co., subject to any statutory or regulatory
requirements as may be in effect from time to time. Payment of principal,
premium, if any, and/or interest, if any, to DTC is the responsibility of
ML&Co. or the Trustee, disbursement of such payments to direct participants
shall be the responsibility of DTC, and disbursement of such payments to the
beneficial owners shall be the responsibility of direct and indirect
participants.
S-21
<PAGE>
DTC has advised ML&Co. that management of DTC is aware that some computer
applications, systems, and the like for processing data ("Systems") that are
dependent upon calendar dates, including dates before, on, and after January 1,
2000, may encounter "Year 2000 problems". DTC has informed its direct and
indirect participants and other members of the financial community (the
"Industry") that it has developed and is implementing a program so that its
Systems, as the same relate to the timely payment of distributions (including
principal and interest payments) to securityholders, book-entry deliveries, and
settlement of trades within DTC ("Depositary Services"), continue to function
appropriately. This program includes a technical assessment and a remediation
plan, each of which is complete. Additionally, DTC's plan includes a testing
phase, which is expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including, but not limited to, issuers and their agents, as
well as DTC's direct and indirect participants, and third party vendors from
whom DTC licenses software and hardware, and third party vendors on whom DTC
relies for information or the provision of services, including
telecommunication and electrical utility service providers, among others. DTC
has informed the Industry that it is contacting (and will continue to contact)
third party vendors from whom DTC acquires services to: (i) impress upon them
the importance of such services being Year 2000 compliant; and (ii) determine
the extent of their efforts for Year 2000 remediation (and, as appropriate,
testing) of their services. In addition, DTC is in the process of developing
such contingency plans as it deems appropriate.
According to DTC, the information in the preceding two paragraphs with
respect to DTC has been provided to the Industry for informational purposes
only and is not intended to serve as a representation, warranty, or contract
modification of any kind.
DTC may discontinue providing its services as securities depositary with
respect to the MITTS Securities at any time by giving reasonable notice to
ML&Co. or the Trustee. Under such circumstances, in the event that a successor
securities depositary is not obtained, MITTS Security certificates are required
to be printed and delivered.
ML&Co. may decide to discontinue use of the system of book-entry
transfers through DTC (or a successor securities depositary). In that event,
MITTS Security certificates will be printed and delivered.
The information in this section concerning DTC and DTC's system has been
obtained from sources that ML&Co. believes to be reliable, but ML&Co. takes no
responsibility for the accuracy of this information.
Same-Day Settlement and Delivery
Settlement for the MITTS Securities will be made by the underwriter in
immediately available funds. All payments of principal and the Supplemental
Redemption Amount, if any, will be made by ML&Co., by delivery of shares of the
Energy SPDR Fund in an equivalent value. In the event ML&Co. elects, at its
option, to pay cash in lieu of delivering shares of the Energy SPDR Fund,
ML&Co. will make such payment in immediately available funds so long as the
MITTS Securities are maintained in book-entry form.
THE ENERGY SPDR FUND
ML&Co. has attached the Fund Prospectus describing the Energy SPDR Fund
and is delivering it to purchasers of the MITTS Securities together with this
prospectus supplement and the accompanying prospectus of ML&Co. for the
convenience of reference only. The Fund Prospectus does not constitute a part
of this prospectus supplement or the accompanying prospectus of ML&Co., nor is
it incorporated by reference in this prospectus supplement or the accompanying
prospectus of ML&Co. The summary description below is qualified in its entirety
by the information describing the Energy SPDR Fund and the Energy Select Sector
Index included in the attached Fund Prospectus.
S-22
<PAGE>
As stated in the Fund Prospectus, the Energy SPDR Fund is an index fund
whose investment objective is to provide investment results that, before
expenses, correspond generally to the price and yield performance of the
publicly traded equity securities included in the Energy Select Sector Index.
The Energy Select Sector Index consists of the equity securities of publicly
traded companies that are components of the S&P 500 Index and are involved in
the development and production of energy products. Companies in the Energy
Select Sector Index develop and produce crude oil and natural gas, and provide
drilling and other energy related services. As of February 11, 1999, the Energy
Select Sector Index included 31 component stocks.
The components of the Energy Select Sector Index by index weight as of
February 11, 1999 are listed below.
<TABLE>
<CAPTION>
Company Name Trading Symbol Index Weight
- ------------ -------------- ------------
<S> <C> <C>
Exxon Corp. ........................................ XON 24.036%
Royal Dutch Petroleum Company....................... RD 15.604%
Mobil Corp.......................................... MOB 11.504%
Schlumberger Ltd.................................... SLB 5.115%
Chevron Corp........................................ CHV 4.782%
Texaco Inc.......................................... TX 4.099%
Enron Corp.......................................... ENE 3.925%
Atlantic Richfield Co............................... ARC 3.533%
Williams Companies Inc.............................. WMB 3.051%
Halliburton Co...................................... HAL 2.737%
Phillips Petroleum Co............................... P 2.026%
Unocal Corporation.................................. UCL 1.561%
Coastal Corp........................................ CGP 1.520%
USX-Marathon Group.................................. MRO 1.502%
Burlington Resources Inc............................ BR 1.360%
Baker Hughes Inc.................................... BHI 1.332%
Consolidated Natural Gas Co......................... CNG 1.220%
Occidental Petroleum Corp........................... OXY 1.197%
Amerada Hess Corp................................... AHC 1.106%
Ashland Inc......................................... ASH 1.032%
Columbia Energy Group............................... CG 0.985%
Sunoco Inc.......................................... SUN 0.973%
Anadarko Petroleum Corp............................. APC 0.913%
Sonat Inc........................................... SNT 0.844%
Union Pacific Resources Group Inc................... UPR 0.724%
Apache Corp......................................... APA 0.647%
McDermott International Inc......................... MDR 0.579%
Oryx Energy Co...................................... ORX 0.570%
Kerr-McGee Corp..................................... KMG 0.541%
Helmerich & Payne................................... HP 0.497%
Rowan Companies Inc................................. RDC 0.484%
------
100%
</TABLE>
Percentages may not add to 100% due to rounding.
Holdings and weightings are subject to change subsequent to February 11,
1999.
Although ML&Co.'s subsidiary, MLPF&S, provides certain services to the
Energy SPDR Fund and the Energy Select Sector Index, ML&Co. is not affiliated
with the Energy SPDR Fund or the Energy Select Sector Index, and the Energy
SPDR Fund will not receive any of the proceeds from the sale of, or have any
obligations under, the MITTS Securities. A prospective purchaser of the MITTS
Securities should independently decide whether an investment in the MITTS
Securities and the Energy SPDR Fund is appropriate.
S-23
<PAGE>
The Energy SPDR Fund is one of nine investment funds comprising the
Trust. Each fund's investment portfolio is comprised principally of constituent
companies whose equity securities are components of the S&P 500 Index, each
representing one of nine specified market sector indices. Each stock in the S&P
500 Index is allocated to only one Select Sector Index. The combined companies
of the nine indices represent all of the companies whose stocks are components
of the S&P 500 Index. The Energy SPDR Fund's initial public offering occurred
on December 16, 1998 and therefore it has limited operating history.
Because the Trust is subject to the registration requirements of the
Securities Act and the Investment Company Act, the Trust is required to file
periodically certain information specified by the SEC. For more information
about the Energy SPDR Fund and the shares that a holder of the MITTS Securities
may receive at maturity, information provided to or filed with the SEC by the
Trust can be inspected at the SEC's public reference facilities or accessed
over the Internet through a web site maintained by the SEC at
http://www.sec.gov. Copies of these documents may also be obtained at no cost
by calling the Trust at (800) 843-2639 or by writing the Trust c/o ALPS Mutual
Funds Services, Inc., at 370 17th Street, Suite 3100, Denver, CO 80202. Neither
the Fund Prospectus nor such other documents are incorporated by reference in
this prospectus supplement, and ML&Co. makes no representation or warranty as
to the accuracy or completeness of any such documents.
ML&Co. is not affiliated with the Energy SPDR Fund, and the Energy SPDR
Fund has no obligations with respect to the MITTS Securities. This prospectus
supplement relates only to the MITTS Securities offered hereby and does not
relate to the shares of the Energy SPDR Fund or any other securities relating
to the Energy SPDR Fund. The information contained in this prospectus
supplement regarding the Energy SPDR Fund has been derived from the publicly
available documents described in the preceding paragraph. ML&Co. makes no
representation that these publicly available documents or any other publicly
available information regarding the Energy SPDR Fund are accurate or complete.
Furthermore, there can be no assurance that all events occurring prior to the
date of this prospectus supplement (including events that would affect the
accuracy or completeness of the publicly available documents described in the
preceding paragraph) that would affect the trading price of the shares of the
Energy SPDR Fund, and therefore the trading price of the MITTS Securities, have
been publicly disclosed. Subsequent disclosure of any such events or the
disclosure of or failure to disclose material future events concerning the
Energy SPDR Fund could affect the Supplemental Redemption Amount, if any, to be
received at maturity and therefore the trading value of the MITTS Securities.
MLPF&S, a subsidiary of ML&Co., is a soliciting dealer in the shares of
the Energy SPDR Fund. Additionally, MLPF&S serves as Index Compilation Agent
for the Energy Select Sector Index. In its capacity as Index Compilation Agent,
MLPF&S determines, in consultation with S&P, the composition of the securities
measured by the Energy Select Sector Index.
License Agreement
S&P, the AMEX and MLPF&S have entered into a non-exclusive license
agreement providing for the license to MLPF&S, in exchange for a fee, of the
right to use indices owned and published by S&P in connection with certain
securities, including the MITTS Securities, and ML&Co. is an authorized
sublicensee of MLPF&S.
The license agreement among S&P, the AMEX and MLPF&S provides that the
following language must be stated in this prospectus supplement:
" "Standard & Poor's(R)", "Standard & Poor's 500", "S&P 500(R)",
"S&P(R)", "500", "Standard & Poor's Depositary Receipts", "SPDRs", "Select
Sector SPDR" and "Select Sector Standard & Poor's Depositary Receipts" are
trademarks of Standard & Poor's, a division of The McGraw-Hill Companies, Inc.,
and have been licensed for use by MLPF&S. ML&Co., is an authorized sublicensee
of MLPF&S. The stocks comprising the Energy Select Sector Index were selected
by MLPF&S, as Index Compilation Agent, in consultation with S&P from the
universe of companies represented by the S&P 500 Index. The composition
S-24
<PAGE>
and weightings of the stocks included in the Energy Select Sector Index can be
expected to differ from the composition and weighting of stocks included in any
similar S&P 500 sector index published and disseminated by S&P.
The MITTS Securities, the Energy SPDR Fund and the Energy Select Sector
Index are not sponsored, endorsed, sold or promoted by S&P. S&P makes no
representation or warranty, express or implied, to the holders of the MITTS
Securities or any member of the public regarding the advisability of investing
in securities generally or in the MITTS Securities particularly or in the
ability of the Energy SPDR Fund to track the performance and yield of the
Energy Select Sector Index or in the ability of the Energy Select Sector Index
to track the performance of the energy sector represented in the stock market.
The stocks included in the Energy Select Sector Index were selected by MLPF&S
as the Index Compilation Agent in consultation with S&P from a universe of
companies involved in the development and production of energy products and
represented by the S&P 500 Index. The composition and weightings of the stocks
included in the Energy Select Sector Index can be expected to differ from the
composition and weighting of stocks included in any corresponding S&P 500
sector index that is published and disseminated by S&P. S&P's only relationship
to the Index Compilation Agent is the licensing of certain trademarks and trade
names of S&P and of the S&P 500 Index which is determined, composed and
calculated by S&P without regard to the index compilation agent or the MITTS
Securities. S&P has no obligation to take the needs of the Index Compilation
Agent, ML&Co. or the holders of the MITTS Securities into consideration in
determining, composing or calculating the S&P 500 Index. S&P is not responsible
for and has not participated in any determination of the timing of the sale of
the MITTS Securities, prices at which the MITTS Securities are initially to be
sold, or quantities of the MITTS Securities to be issued or in the
determination or calculation of the equation by which the MITTS Securities are
to be converted into shares of the Energy SPDR Fund or cash. S&P has no
obligation or liability in connection with the administration, marketing or
trading of the MITTS Securities.
S&P does not guarantee the accuracy and/or the completeness of the S&P
500 Index, the Energy Select Sector Index or any data included therein. S&P
makes no warranty, express or implied, as to results to be obtained by ML&Co.,
MLPF&S, the holders of the MITTS Securities, or any other person or entity from
the use of the S&P 500 Index, the Energy Select Sector Index or any data
included therein in connection with the rights licensed under the license
agreement described herein or for any other use. S&P makes no express or
implied warranties, and expressly disclaims all warranties of merchantability
or fitness for a particular purpose with respect to the S&P 500 Index, the
Energy Select Sector Index or any data included therein. Without limiting the
generality of the foregoing, in no event shall S&P have any liability for any
special, punitive, indirect or consequential damages (including lost profits),
even if notified of the possibility of such damages."
All disclosures contained in this prospectus supplement regarding the S&P
500 Index or the Energy Select Sector Index, including its respective make-up,
method of calculation and changes in its components, are derived from publicly
available information prepared by S&P and the Trust, respectively. ML&Co. and
MLPF&S do not assume any responsibility for the accuracy or completeness of
such information.
UNITED STATES FEDERAL INCOME TAXATION
Set forth in full below is the opinion of Brown & Wood LLP, counsel to
ML&Co., as to certain United States Federal income tax consequences of the
purchase, ownership and disposition of the MITTS Securities. This opinion is
based upon laws, regulations, rulings and decisions now in effect, all of which
are subject to change (including retroactive changes in effective dates) or
possible differing interpretations. The discussion below deals only with MITTS
Securities held as capital assets and does not purport to deal with persons in
special tax situations, such as financial institutions, insurance companies,
regulated investment companies, dealers in securities or currencies, tax-exempt
entities, persons holding MITTS Securities in a tax-deferred or tax-advantaged
account, or persons holding MITTS Securities as a hedge against currency risks,
as a position in a "straddle" or as part of a "hedging" or "conversion"
transaction for tax purposes. It also does not deal with holders other than
original purchasers (except where otherwise specifically noted herein). The
following
S-25
<PAGE>
discussion also assumes that the issue price of the MITTS Securities, as
determined for United States Federal income tax purposes, equals the principal
amount thereof. Persons considering the purchase of the MITTS Securities should
consult their own tax advisors concerning 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 MITTS Securities
arising under the laws of any other taxing jurisdiction.
As used herein, the term "U.S. Holder" means a beneficial owner of a
MITTS Security that is for United States Federal income tax purposes (a) a
citizen or resident of the United States, (b) a corporation, partnership or
other entity treated as a corporation or a partnership created or organized in
or under the laws of the United States, any state thereof or the District of
Columbia (other than a partnership that is not treated as a United States
person under any applicable Treasury regulations), (c) an estate the income of
which is subject to United States Federal income taxation regardless of its
source, (d) a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more United
States persons have the authority to control all substantial decisions of the
trust, or (e) any other person whose income or gain in respect of a MITTS
Security is effectively connected with the conduct of a United States trade or
business. Notwithstanding clause (d) of the preceding sentence, to the extent
provided in Treasury regulations, certain trusts in existence on August 20,
1996, and treated as United States persons prior to such date that elect to
continue to be treated as United States persons also will be a U.S. Holder. As
used herein, the term "Non-U.S. Holder" means a beneficial owner of a MITTS
Security that is not a U.S. Holder.
General
There are no statutory provisions, regulations, published rulings or
judicial decisions addressing or involving the characterization, for United
States Federal income tax purposes, of the MITTS Securities or securities with
terms substantially the same as the MITTS Securities. However, although the
matter is not free from doubt, under current law, each MITTS Security should be
treated as a debt instrument of ML&Co. for United States Federal income tax
purposes. ML&Co. currently intends to treat each MITTS Security as a debt
instrument of ML&Co. for United States Federal income tax purposes and, where
required, intends to file information returns with the Internal Revenue Service
in accordance with such treatment, in the absence of any change or
clarification in the law, by regulation or otherwise, requiring a different
characterization of the MITTS Securities. Prospective investors in the MITTS
Securities should be aware, however, that the IRS is not bound by ML&Co.'s
characterization of the MITTS Securities as indebtedness, and the IRS could
possibly take a different position as to the proper characterization of the
MITTS Securities for United States Federal income tax purposes. The following
discussion of the principal United States Federal income tax consequences of
the purchase, ownership and disposition of the MITTS Securities is based upon
the assumption that each MITTS Security will be treated as a debt instrument of
ML&Co. for United States Federal income tax purposes. If the MITTS Securities
are not in fact treated as debt instruments of ML&Co. for United States Federal
income tax purposes, then the United States Federal income tax treatment of the
purchase, ownership and disposition of the MITTS Securities could differ from
the treatment discussed below with the result that the timing and character of
income, gain or loss recognized in respect of a MITTS Security could differ
from the timing and character of income, gain or loss recognized in respect of
a MITTS Security had the MITTS Securities in fact been treated as debt
instruments of ML&Co. for United States Federal income tax purposes.
U.S. Holders
On June 11, 1996, the Treasury Department issued final regulations (the
"Final Regulations") concerning the proper United States Federal income tax
treatment of contingent payment debt instruments such as the MITTS Securities,
which apply to debt instruments issued on or after August 13, 1996 and,
accordingly, will apply to the MITTS Securities. In general, the Final
Regulations cause the timing and character of income, gain or loss reported on
a contingent payment debt instrument to substantially differ from the timing
and character of income, gain or loss reported on a contingent payment debt
instrument under general principles of prior United States Federal income tax
law. Specifically, the Final Regulations generally require a U.S. Holder of
such an instrument to include future contingent and noncontingent interest
payments in income as such
S-26
<PAGE>
interest accrues based upon a projected payment schedule. Moreover, in general,
under the Final Regulations, any gain recognized by a U.S. Holder on the sale,
exchange, or retirement of a contingent payment debt instrument is treated as
ordinary income, and all or a portion of any loss realized could be treated as
ordinary loss as opposed to capital loss (depending upon the circumstances).
The Final Regulations provide no definitive guidance as to whether or not an
instrument is properly characterized as a debt instrument for United States
Federal income tax purposes.
In particular, solely for purposes of applying the Final Regulations to
the MITTS Securities, ML&Co. has determined that the projected payment schedule
for the MITTS Securities will consist of payment on the maturity date of the
principal amount thereof and a projected Supplemental Redemption Amount equal
to $4.9556 per unit (the "Projected Supplemental Redemption Amount"). This
represents an estimated yield on the MITTS Securities equal to 5.83% per annum
(compounded semiannually). Accordingly, during the term of the MITTS
Securities, a U.S. Holder of a MITTS Security will be required to include in
income as ordinary interest an amount equal to the sum of the daily portions of
interest on the MITTS Security that are deemed to accrue at this estimated
yield for each day during the taxable year (or portion of the taxable year) on
which the U.S. Holder holds such MITTS Security. The amount of interest that
will be deemed to accrue in any accrual period (i.e., generally each six-month
period during which the MITTS Securities are outstanding) will equal the
product of this estimated yield (properly adjusted for the length of the
accrual period) and the MITTS Security's adjusted issue price (as defined
below) at the beginning of the accrual period. The daily portions of interest
will be determined by allocating to each day in the accrual period the ratable
portion of the interest that is deemed to accrue during the accrual period. In
general, for these purposes a MITTS Security's adjusted issue price will equal
the MITTS Security's issue price (i.e., $10), increased by the interest
previously accrued on the MITTS Security. At maturity of a MITTS Security, in
the event that the actual Supplemental Redemption Amount, if any, exceeds
$4.9556 per unit (i.e., the Projected Supplemental Redemption Amount), a U.S.
Holder will be required to include the excess of the actual Supplemental
Redemption Amount over $4.9556 per unit (i.e., the Projected Supplemental
Redemption Amount) in income as ordinary interest on the stated maturity date.
Alternatively, in the event that the actual Supplemental Redemption Amount, if
any, is less than $4.9556 per unit (i.e., the Projected Supplemental Redemption
Amount), the amount by which the Projected Supplemental Redemption Amount
(i.e., $4.9556 per unit) exceeds the actual Supplemental Redemption Amount will
be treated first as an offset to any interest otherwise includible in income by
the U.S. Holder with respect to the MITTS Security for the taxable year in
which the stated maturity date occurs to the extent of the amount of such
includible interest. Further, a U.S. Holder will be permitted to recognize and
deduct, as an ordinary loss that is not subject to the limitations applicable
to miscellaneous itemized deductions, any remaining portion of the Projected
Supplemental Redemption Amount (i.e., $4.9556 per unit) in excess of the actual
Supplemental Redemption Amount that is not treated as an interest offset
pursuant to the foregoing rules. In general, if a U.S. Holder receives shares
of the Energy SPDR Fund on the maturity date, such U.S. Holder's initial
aggregate tax basis in the shares of the Energy SPDR Fund received by the U.S.
Holder should equal the sum of the principal amount of the MITTS Security and
the actual Supplemental Redemption Amount (less any cash received in lieu of
fractional shares of the Energy SPDR Fund). This aggregate tax basis should be
allocated among the shares of the Energy SPDR Fund received by the U.S. Holder
in accordance with the relative fair market value of such shares of the Energy
SPDR Fund. Moreover, such U.S. Holder's holding period for any shares of the
Energy SPDR Fund received by the U.S. Holder should begin on the day
immediately following the maturity date.
Upon the sale, exchange or redemption of a MITTS Security prior to the
stated maturity date, a U.S. Holder will be required to recognize taxable gain
or loss in an amount equal to the difference, if any, between the amount
realized by the U.S. Holder upon such sale, exchange or redemption and the U.S.
Holder's adjusted tax basis in the MITTS Security as of the date of
disposition. A U.S. Holder's adjusted tax basis in a MITTS Security generally
will equal such U.S. Holder's initial investment in the MITTS Security
increased by any interest previously included in income with respect to the
MITTS Security by the U.S. Holder. Any such taxable gain will be treated as
ordinary income. Any such taxable loss will be treated as ordinary loss to the
extent of the U.S. Holder's total interest inclusions on the MITTS Security.
Any remaining loss generally will
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<PAGE>
be treated as long-term or short-term capital loss (depending upon the U.S.
Holder's holding period for the MITTS Security). All amounts includible in
income by a U.S. Holder as ordinary interest pursuant to the Final Regulations
will be treated as original issue discount.
All prospective investors in the MITTS Securities should consult their
own tax advisors concerning the application of the Final Regulations to their
investment in the MITTS Securities. Investors in the MITTS Securities may also
obtain the projected payment schedule, as determined by ML&Co. for purposes of
the application of the Final Regulations to the MITTS Securities, by submitting
a written request for such information to Merrill Lynch & Co., Inc., Attn:
Darryl W. Colletti, Corporate Secretary's Office, 100 Church Street, 12th
Floor, New York, New York 10080-6512.
The projected payment schedule (including both the Projected Supplemental
Redemption Amount and the estimated yield on the MITTS Securities) has been
determined solely for United States Federal income tax purposes (i.e., for
purposes of applying the Final Regulations to the MITTS Securities), and is
neither a prediction nor a guarantee of what the actual Supplemental Redemption
Amount will be, or that the actual Supplemental Redemption Amount will even
exceed zero.
The following table sets forth the amount of interest that will be deemed
to have accrued with respect to each unit of the MITTS Securities during each
accrual period over an assumed term of approximately seven years for the MITTS
Securities based upon a projected payment schedule for the MITTS Securities
(including both the Projected Supplemental Redemption Amount and the estimated
yield equal to 5.83% per annum (compounded semiannually)) as determined by
ML&Co. for purposes of illustrating the application of the Final Regulations to
the MITTS Securities:
<TABLE>
<CAPTION>
Total Interest
Deemed to Have
Interest Deemed to Accrued on MITTS
Accrue During Securities as of End
Accrual Period of Accrual Period
Accrual Period (per Unit) (per Unit)
-------------- ------------------ --------------------
<S> <C> <C>
February 18, 1999 through August 21,
1999.................................. $0.2939 $0.2939
August 22, 1999 through February 21,
2000.................................. $0.3001 $0.5940
February 22, 2000 through August 21,
2000.................................. $0.3088 $0.9028
August 22, 2000 through February 21,
2001.................................. $0.3178 $1.2206
February 22, 2001 through August 21,
2001.................................. $0.3271 $1.5477
August 22, 2001 through February 21,
2002.................................. $0.3366 $1.8843
February 22, 2002 through August 21,
2002.................................. $0.3465 $2.2308
August 22, 2002 through February 21,
2003.................................. $0.3565 $2.5873
February 22, 2003 through August 21,
2003.................................. $0.3669 $2.9542
August 22, 2003 through February 21,
2004.................................. $0.3776 $3.3318
February 22, 2004 through August 21,
2004.................................. $0.3886 $3.7204
August 22, 2004 through February 21,
2005.................................. $0.4000 $4.1204
February 22, 2005 through August 21,
2005.................................. $0.4116 $4.5320
August 22, 2005 through February 21,
2006.................................. $0.4236 $4.9556
</TABLE>
- --------
Projected Supplemental Redemption Amount=$4.9556 per unit.
Non-U.S. Holders
A non-U.S. Holder will not be subject to United States Federal income
taxes on payments of principal, premium (if any) or interest (including
original issue discount, if any) on a MITTS Security, unless such non-U.S.
Holder is a direct or indirect 10% or greater shareholder of ML&Co., a
controlled foreign corporation related to ML&Co. or a bank receiving interest
described in section 881(c)(3)(A) of the Internal Revenue Code of 1986, as
amended. However, income allocable to non-U.S. Holders will generally be
subject to annual tax reporting on IRS Form 1042S. For a non-U.S. Holder to
qualify for the exemption from taxation, the last
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<PAGE>
United States payor in the chain of payment prior to payment to a non-U.S.
Holder (the "Withholding Agent") must have received in the year in which a
payment of interest or principal occurs, or in either of the two preceding
calendar years, a statement that (a) is signed by the beneficial owner of the
MITTS Security under penalties of perjury, (b) certifies that such owner is not
a U.S. Holder and (c) provides the name and address of the beneficial owner.
The statement may be made on an IRS Form W-8 or a substantially similar form,
and the beneficial owner must inform the Withholding Agent of any change in the
information on the statement within 30 days of such change. If a MITTS Security
is held through a securities clearing organization or certain other financial
institutions, the organization or institution may provide a signed statement to
the Withholding Agent. However, in such case, the signed statement must be
accompanied by a copy of the IRS Form W-8 or the substitute form provided by
the beneficial owner to the organization or institution. The Treasury
Department is considering implementation of further certification requirements.
Under current law, a MITTS Security will not be includible in the estate
of a non-U.S. Holder unless the individual is a direct or indirect 10% or
greater shareholder of ML&Co. or, at the time of such individual's death,
payments in respect of such MITTS Security would have been effectively
connected with the conduct by such individual of a trade or business in the
United States.
Backup Withholding
Backup withholding of United States Federal income tax at a rate of 31%
may apply to payments made in respect of the MITTS Securities to registered
owners who are not "exempt recipients" and who fail to provide certain
identifying information (such as the registered owner's taxpayer identification
number) in the required manner. Generally, individuals are not exempt
recipients, whereas corporations and certain other entities generally are
exempt recipients. Payments made in respect of the MITTS Securities to a U.S.
Holder must be reported to the IRS, unless the U.S. Holder is an exempt
recipient or establishes an exemption. Compliance with the identification
procedures described in the preceding section would establish an exemption from
backup withholding for those non-U.S. Holders who are not exempt recipients.
In addition, upon the sale of a MITTS Security to (or through) a broker,
the broker must withhold 31% of the entire purchase price, unless either (a)
the broker determines that the seller is a corporation or other exempt
recipient or (b) the seller provides, in the required manner, certain
identifying information and, in the case of a non-U.S. Holder, certifies that
such seller is a non-U.S. Holder (and certain other conditions are met). Such a
sale must also be reported by the broker to the IRS, unless either (a) the
broker determines that the seller is an exempt recipient or (b) the seller
certifies its non-U.S. status (and certain other conditions are met).
Certification of the registered owner's non-U.S. status would be made normally
on an IRS Form W-8 under penalties of perjury, although in certain cases it may
be possible to submit other documentary evidence.
Any amounts withheld under the backup withholding rules from a payment to
a beneficial owner would be allowed as a refund or a credit against such
beneficial owner's United States Federal income tax provided that the required
information is furnished to the IRS.
New Withholding Regulations
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations") which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New
Regulations attempt to unify certification requirements and modify reliance
standards. The New Regulations will generally be effective for payments made
after December 31, 1999, subject to certain transition rules. Prospective
investors are urged to consult their own tax advisors regarding the New
Regulations.
USE OF PROCEEDS
The net proceeds from the sale of the MITTS Securities will be used as
described under "Use of Proceeds" in the accompanying prospectus of ML&Co. and
to hedge market risks of ML&Co. associated with its obligation to pay the
Principal Amount and the Supplemental Redemption Amount.
S-29
<PAGE>
UNDERWRITING
MLPF&S, the underwriter of the offering, has agreed, subject to the terms
and conditions of the Underwriting Agreement and a Terms Agreement, to purchase
from ML&Co. $51,000,000 aggregate principal amount of MITTS Securities. The
Underwriting Agreement provides that the obligations of the underwriter are
subject to certain conditions precedent and that the underwriter will be
obligated to purchase all of the MITTS Securities if any are purchased.
The underwriter has advised ML&Co. that it proposes initially to offer
all or part of the MITTS Securities directly to the public at the offering
price set forth on the cover page of this Prospectus Supplement. After the
initial public offering, the public offering price may be changed. The
underwriter is offering the MITTS Securities subject to receipt and acceptance
and subject to the underwriter's right to reject any order in whole or in part.
In addition to the commissions payable at the time of the original sale
of the MITTS Securities, the underwriter will pay a commission on each of up to
six anniversary dates of the issuance of the MITTS Securities to brokers whose
clients purchased the units in the initial distribution and who continue to
hold their MITTS Securities.
The underwriting of the MITTS Securities will conform to the requirements
set forth in the applicable sections of Rule 2720 of the Conduct Rules of the
NASD.
The underwriter is permitted to engage in certain transactions that
stabilize the price of the MITTS Securities. Such transactions consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
MITTS Securities.
If the underwriter creates a short position in the MITTS Securities in
connection with the offering, i.e., if it sells more units of the MITTS
Securities than are set forth on the cover page of this prospectus supplement,
the underwriter may reduce that short position by purchasing units of the MITTS
Securities in the open market. In general, purchases of a security for the
purpose of stabilization or to reduce a short position could cause the price of
the security to be higher than it might be in the absence of such purchases.
Neither ML&Co. nor the underwriter makes any representation or prediction as to
the direction or magnitude of any effect that the transactions described above
may have on the price of the MITTS Securities. In addition, neither ML&Co. nor
the underwriter makes any representation that the underwriter will engage in
such transactions or that such transactions, once commenced, will not be
discontinued without notice.
The underwriter may use this prospectus supplement, the accompanying
prospectus of ML&Co. and the Fund Prospectus for offers and sales related to
market-making transactions in the MITTS Securities. The underwriter may act as
principal or agent in these transactions, and the sales will be made at prices
related to prevailing market prices at the time of sale.
VALIDITY OF THE MITTS SECURITIES
The validity of the MITTS Securities will be passed upon for ML&Co. and
for the underwriter by Brown & Wood LLP, New York, New York.
S-30
<PAGE>
INDEX OF CERTAIN DEFINED TERMS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Adjusted Ending Value...................................................... S-5
Adjustment Factor.......................................................... S-5
Calculation Day............................................................ S-17
Calculation Period......................................................... S-17
Depositary................................................................. S-20
Determination Date......................................................... S-18
Ending Value............................................................... S-5
Energy SPDR Fund........................................................... S-1
Energy Select Sector Index................................................. S-4
Fund Expenses.............................................................. S-18
Fund Prospectus............................................................ S-4
Index Compilation Agent.................................................... S-4
Index Termination Event.................................................... S-19
Market Disruption Event.................................................... S-18
ML&Co...................................................................... S-3
MLPF&S..................................................................... S-3
Net Asset Value............................................................ S-6
Pre-liquidation Date....................................................... S-18
Pricing Date............................................................... S-5
Principal Amount........................................................... S-4
Projected Supplemental Redemption Amount................................... S-27
Starting Value............................................................. S-5
Supplemental Redemption Amount............................................. S-5
Trading Day................................................................ S-17
Trust...................................................................... S-7
</TABLE>
S-31
<PAGE>
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[LOGO]
5,100,000 Units
Merrill Lynch & Co., Inc.
Energy Select Sector SPDR(R) Fund
Market Index Target-Term Securities(R)
due February 21, 2006
"MITTS(R) Securities"
------------------------------
PROSPECTUS SUPPLEMENT
------------------------------
Merrill Lynch & Co.
February 12, 1999
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