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RULE NO. 424(b)(5)
REGISTRATION NO. 333-68747
Subject to Completion
Preliminary Prospectus Supplement dated June 22, 1999
PROSPECTUS SUPPLEMENT
(To prospectus dated May 6, 1999)
[LOGO] Merrill Lynch
Protected Growth/SM/ Investing
Pursuit of Growth, Protection of Principal
2,500,000 Units
Merrill Lynch & Co., Inc.
Nikkei 225 Market Index Target-Term Securities(R)
due July , 2006
"MITTS(R) Securities"
$10 principal amount per unit
--------------
The MITTS Securities: Payment at maturity:
. 100% principal protection at . On the maturity date, for each unit
maturity. of the MITTS Securities you own, we
. No payments before the maturity will pay you an amount equal to the
date. sum of the principal amount of each
. Senior unsecured debt securities of unit and an additional amount based
Merrill Lynch & Co., Inc. on the percentage increase, if any,
. Linked to the value of the Nikkei in the value of the Nikkei 225
225 Index. Index, increased by a participation
. The MITTS Securities have been rate expected to be between 110% and
approved for listing on the American 120%.
Stock Exchange under the trading . At maturity, you will receive no
symbol "NKM". less than the principal amount of
. Closing date: July , 1999. your MITTS Securities.
Investing in the MITTS Securities involves risk.
See "Risk Factors" beginning on page S-7 of this prospectus supplement.
--------------
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 is truthful or
complete. Any representation to the contrary is a criminal offense.
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Per unit Total
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Public offering price............................... $10.00 $25,000,000
Underwriting discount............................... $ $
Proceeds, before expenses, to Merrill Lynch & Co.,
Inc. .............................................. $ $
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The public offering price and the underwriting discount for any single
transaction to purchase:
(a) between 100,000 units and 499,999 units will be $ per unit and
$ per unit, respectively;
and
(b) 500,000 units or more will be $ per unit and $ per unit,
respectively.
--------------
Merrill Lynch & Co.
--------------
The date of this prospectus supplement is July , 1999.
"MITTS" and "Market Index Target-Term Securities" are registered service marks
of Merrill Lynch & Co., Inc.
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TABLE OF CONTENTS
Prospectus Supplement
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Page
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SUMMARY INFORMATION--Q&A.................................................. S-4
What are the MITTS Securities?.......................................... S-4
What will I receive on the stated maturity date of the MITTS
Securities?............................................................ S-4
Who publishes the Nikkei 225 Index and what does the Nikkei 225 Index
measure?............................................................... S-5
How has the Nikkei 225 Index performed historically?.................... S-5
What about taxes?....................................................... S-6
Will the MITTS Securities be listed on a stock exchange?................ S-6
What is the role of MLPF&S?............................................. S-6
Can you tell me more about ML&Co.?...................................... S-6
Are there any risks associated with my investment?...................... S-6
RISK FACTORS.............................................................. S-7
You may not earn a return on your investment............................ S-7
Your yield may be lower than the yield on a standard debt security of
comparable maturity.................................................... S-7
Your return will not reflect the return of owning the stocks included in
the Nikkei 225 Index................................................... S-7
Your return will not be adjusted for changes in currency exchange rate.. S-7
There may be an uncertain trading market for the MITTS Securities....... S-7
Many factors affect the trading value of the MITTS Securities; these
factors interrelate in complex ways and the effect of any one factor
may offset or magnify the effect of another factor..................... S-8
Amounts payable on the MITTS Securities may be limited by state law..... S-9
Risks associated with the Japanese securities markets................... S-10
Purchases and sales by us and our affiliates may affect your return..... S-10
Potential conflicts..................................................... S-10
Uncertain tax consequences.............................................. S-10
DESCRIPTION OF THE MITTS SECURITIES....................................... S-11
Payment at maturity..................................................... S-11
Adjustments to the Nikkei 225 Index; Market Disruption Events........... S-13
Discontinuance of the Nikkei 225 Index.................................. S-14
Events of Default and Acceleration...................................... S-15
Depositary.............................................................. S-15
Same-Day Settlement and Payment......................................... S-17
THE NIKKEI 225 INDEX...................................................... S-18
The Tokyo Stock Exchange................................................ S-19
Historical Data on the Nikkei 225 Index................................. S-19
UNITED STATES FEDERAL INCOME TAXATION..................................... S-21
General................................................................. S-22
U.S. Holders............................................................ S-22
Hypothetical table...................................................... S-24
Non-U.S. Holders........................................................ S-25
Backup Withholding...................................................... S-25
New Withholding Regulations............................................. S-26
USE OF PROCEEDS AND HEDGING............................................... S-26
WHERE YOU CAN FIND MORE INFORMATION....................................... S-26
UNDERWRITING.............................................................. S-27
VALIDITY OF THE MITTS SECURITIES.......................................... S-28
INDEX OF DEFINED TERMS.................................................... S-29
</TABLE>
S-2
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Prospectus
<TABLE>
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Page
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MERRILL LYNCH & CO., INC................................................. 2
USE OF PROCEEDS.......................................................... 2
RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS............................. 3
THE SECURITIES........................................................... 3
DESCRIPTION OF DEBT SECURITIES........................................... 4
DESCRIPTION OF DEBT WARRANTS............................................. 10
DESCRIPTION OF CURRENCY WARRANTS......................................... 12
DESCRIPTION OF INDEX WARRANTS............................................ 14
DESCRIPTION OF PREFERRED STOCK........................................... 19
DESCRIPTION OF DEPOSITARY SHARES......................................... 24
DESCRIPTION OF PREFERRED STOCK WARRANTS.................................. 28
DESCRIPTION OF COMMON STOCK.............................................. 30
DESCRIPTION OF COMMON STOCK WARRANTS..................................... 33
PLAN OF DISTRIBUTION..................................................... 35
WHERE YOU CAN FIND MORE INFORMATION...................................... 36
INCORPORATION OF INFORMATION WE FILE WITH THE SEC........................ 36
EXPERTS.................................................................. 37
</TABLE>
S-3
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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 Nikkei 225 Market Index Target-Term Securities(R) due July ,
2006. You should carefully read this prospectus supplement and the accompanying
prospectus to fully understand the terms of the MITTS Securities, the Nikkei
Stock Average (the "Nikkei 225 Index"), and the tax and other considerations
that are 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.
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.
What are the MITTS Securities?
The MITTS Securities will be a series of senior debt securities issued by
ML&Co. and will not be secured by collateral. The MITTS Securities will rank
equally with all of our other unsecured and unsubordinated debt. The MITTS
Securities will mature on July , 2006. We cannot redeem the MITTS Securities
at any earlier date. We will not make any payments on the MITTS Securities
until maturity.
Each unit of MITTS Securities represents $10 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, also known as DTC, or its nominee. Direct and indirect participants in
DTC will record your ownership of the MITTS Securities. You should refer to the
section "Description of the MITTS Securities--Depositary" in this prospectus
supplement.
What will I receive on 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 possible increases in the
Nikkei 225 Index, an index measuring the composite price performance of
selected Japanese stocks. On the stated maturity date, you will receive a
payment on the MITTS Securities equal to the sum of two amounts: the "principal
amount" and the "Supplemental Redemption Amount".
Principal amount
The principal amount per unit is $10.
Supplemental Redemption Amount
The Supplemental Redemption Amount per unit will equal:
(Ending Value - Starting Value) Participation
$10 X (-----------------------------) X Rate
( Starting Value )
but will not be less than zero.
"Ending Value" means the average of the values of the Nikkei 225 Index at
the close of the market on five business days shortly before the maturity of
the MITTS Securities. We may calculate the Ending Value by reference to fewer
than five or even by reference to a single day's closing value if, during the
period prior to the stated maturity date of the MITTS Securities, there is a
disruption in the trading of the component stocks comprising the Nikkei 225
Index or certain futures or options relating to the Nikkei 225 Index.
"Starting Value" means the closing value of the Nikkei 225 Index on the
date the MITTS Securities are priced for initial sale to the public (the
"Pricing Date"). We will disclose the Starting Value to you in the final
prospectus supplement
S-4
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delivered to you in connection with sales of the MITTS Securities.
"Participation Rate" means a factor expected to be between 110% and 120%.
We will determine the Participation Rate on the Pricing Date and it will appear
in the final prospectus supplement delivered to you in connection with sales of
the MITTS Securities.
For more specific information about the Supplemental Redemption Amount,
please see the section "Description of the MITTS Securities" in this prospectus
supplement.
We will pay you a Supplemental Redemption Amount only if the Ending Value
is greater than the Starting Value. If the Ending Value is less than, or equal
to, the Starting Value, the Supplemental Redemption Amount will be zero. We
will pay you the principal amount of the MITTS Securities regardless of whether
any Supplemental Redemption Amount is payable.
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Examples
Here are two examples of Supplemental Redemption Amount calculations assuming
an investment term of seven years and a Participation Rate of 115%, the
midpoint of the expected range of 110% to 120%:
Example 1--The Nikkei 225 Index is below the Starting Value at maturity:
Starting Value: 17,738.85
Hypothetical Ending Value: 16,851.91
(Supplemental
(16,851.91 - 17,738.85) Redemption
Supplemental Redemption Amount (per unit) = $10 X (---------------------) X 115% = $0.00 Amount
( 17,738.85 ) cannot be
less than
zero)
Total payment at maturity (per unit) = $10 + $0 = $10
Example 2--The Nikkei 225 Index is above the Starting Value at maturity:
Starting Value: 17,738.85
Hypothetical Ending Value: 31,929.93
(31,929.93 - 17,738.85)
Supplemental Redemption Amount (per unit) = $10 X (----------------------) X 115% = $9.20
( 17,738.85 )
Total payment at maturity (per unit) = $10 + $9.20 = $19.20
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Who publishes the Nikkei 225 Index and what does the Nikkei 225 Index measure?
The Nikkei 225 Index is a stock index published by Nihon Keizai Shimbun,
Inc. ("NKS") that measures the composite price performance of selected Japanese
stocks. The Nikkei 225 Index is currently based on 225 common stocks traded on
the Tokyo Stock Exchange (the "TSE") and represents a broad cross section of
Japanese industry. All 225 underlying stocks (the "Underlying Stocks") are
stocks listed in the First Section of the TSE and are, therefore, among the
most actively traded stocks on the TSE. The Nikkei 225 Index is a modified,
price-weighted index, which means an Underlying Stock's weight in the Nikkei
225 Index is based on its price per share rather than the total market
capitalization of the issuer.
Please note that an investment in the MITTS Securities does not entitle
you to any ownership interest in the stocks of the companies included in the
Nikkei 225 Index.
How has the Nikkei 225 Index performed historically?
We have set forth the closing values of the Nikkei 225 Index on the last
business day of each year from 1967 to 1998 and the last business day of each
month from January 1992 to May 1999. You can find tables with these values in
the section
S-5
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entitled "The Nikkei 225 Index--Historical Data on the Nikkei 225 Index" in
this prospectus supplement. We have provided this historical information to
help you evaluate the behavior of the Nikkei 225 Index in various economic
environments; however, past performance of the Nikkei 225 Index is not
necessarily indicative of how the Nikkei 225 Index will perform in the future.
What about taxes?
Each year, 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, even though you will not receive any payments from us until
maturity.
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 estimated yield 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 % 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: $ in 1999, $ in
2000, $ in 2001, $ in 2002, $ in 2003, $ in 2004, $ in 2005 and
$ in 2006. However, in 2006, the amount of ordinary income that you will be
required to pay taxes on from owning that MITTS Security may be greater or less
than $ , depending upon the Supplemental Redemption Amount, if any, you
receive. Also, if the Supplemental Redemption Amount is less than $ , 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 allowed to
amend your tax returns for prior years. 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 "NKM", 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 "Risk Factors--There may be an uncertain trading market for the
MITTS Securities".
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, among other
things, the Ending Value and the Supplemental Redemption Amount. Under certain
circumstances, these duties could result in a conflict of interest between
MLPF&S' status as our subsidiary and its responsibilities as calculation agent.
Can you tell me more about ML&Co.?
Merrill Lynch & Co., Inc. is a holding company with various subsidiary
and affiliated companies that provide investment, financing, insurance and
related services on a global basis. For information about ML&Co. see the
section "Merrill Lynch & Co., Inc." in the accompanying prospectus. You should
also read the other documents ML&Co. has 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 risk. Please
refer to the section "Risk Factors" in this prospectus supplement.
S-6
<PAGE>
RISK FACTORS
Your investment in the MITTS Securities will involve risks. You should
carefully consider the following discussion of risks before deciding whether an
investment in the MITTS Securities is suitable for you.
You may not earn a return on your investment
You should be aware that if the 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 value of the Nikkei 225 Index 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.
If the Ending Value exceeds the Starting Value, then the Participation
Rate will enhance the amount of the Supplemental Redemption Amount received at
maturity. However, if the Ending Value does not exceed the Starting Value, you
will receive only the principal amount of your MITTS Securities.
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 debt security of Merrill Lynch &
Co., Inc. with the same stated 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.
Your return will not reflect the return of owning the stocks included in the
Nikkei 225 Index
Your return will not reflect the return you would realize if you actually
owned the stocks underlying the Nikkei 225 Index and received the dividends
paid on those stocks because NKS calculates the Nikkei 225 Index by reference
to the prices of the common stocks comprising the Nikkei 225 Index without
taking into consideration the value of dividends paid on those stocks.
Your return will not be adjusted for changes in currency exchange rates
Although the stocks included in the Nikkei 225 Index are traded in
Japanese yen and the MITTS Securities are denominated in U.S. dollars, we will
not adjust the amount payable at maturity for the currency exchange rate in
effect at the maturity of the MITTS Securities. Any amount in addition to the
principal amount of each unit payable to you at maturity is based solely upon
the percentage increase in the Nikkei 225 Index. Changes in exchange rates,
however, may reflect changes in the Japanese economy which in turn may affect
the value of the Nikkei 225 Index and the MITTS Securities.
There may be an uncertain trading market for the MITTS Securities
The MITTS Securities have been approved for listing on the AMEX under the
trading symbol "NKM", subject to official notice of issuance. While there have
been a number of issuances of 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 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 value of the Nikkei 225 Index.
S-7
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If the trading market for the MITTS Securities is limited, there may be a
limited number of buyers for your MITTS Securities if you do not wish to hold
your investment until maturity. This may affect the price you receive.
Many factors affect the trading value of the MITTS Securities; these factors
interrelate in complex ways and the effect of any one factor may offset or
magnify the effect of another factor
The trading value of the MITTS Securities will be affected by factors
that interrelate in complex ways. It is important for you to understand that
the effect of one factor may offset the increase in the trading value of the
MITTS Securities caused by another factor and that the effect of one factor may
exacerbate the decrease in the trading value of the MITTS Securities caused by
another factor. For example, an increase in U.S. 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 value of the Nikkei
225 Index. The following paragraphs describe the expected impact on the market
value of the MITTS Securities given a change in a specific factor, assuming all
other conditions remain constant.
The value of the Nikkei 225 Index is expected to affect the trading value
of the MITTS Securities. We expect that the market value of the MITTS
Securities will depend substantially on the amount, if any, by which the Nikkei
225 Index exceeds the Starting Value. If you choose to sell your MITTS
Securities when the value of the Nikkei 225 Index exceeds the Starting Value,
you may receive substantially less than the amount that would be payable at
maturity based on this value because of the expectation that the Nikkei 225
Index will continue to fluctuate until the Ending Value is determined. If you
choose to sell your MITTS Securities when the value of the Nikkei 225 Index is
below, or not sufficiently above, the Starting Value, you may receive less than
the $10 principal amount per unit of your MITTS Securities. In general, rising
Japanese dividend rates, or dividends per share, may increase the value of the
Nikkei 225 Index while falling Japanese dividend rates may decrease the value
of the Nikkei 225 Index. Political, economic and other developments that affect
the stocks underlying the Nikkei 225 Index may also affect the value of the
Nikkei 225 Index and indirectly the value of the MITTS Securities.
Changes in the levels of interest rates are expected to affect the
trading value of the MITTS Securities. Because we will pay, at a minimum, the
principal amount per unit of MITTS Securities at maturity, we expect that
changes in interest rates will affect the trading value of the MITTS
Securities. 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 the trading value of the MITTS Securities
will increase. In general, if interest rates in Japan increase, we expect the
trading value of the MITTS Securities will increase. If interest rates in Japan
decrease, we expect the trading value of the MITTS Securities will decrease.
The level of interest rates in Japan may also affect the Japanese economy and,
in turn, the value of the Nikkei 225 Index. Rising interest rates may lower the
value of the Nikkei 225 Index and, thus, the MITTS Securities. Falling interest
rates may increase the value of the Nikkei 225 Index and, thus, may increase
the value of the MITTS Securities.
Changes in the volatility of the Nikkei 225 Index are expected to affect
the trading value of the MITTS Securities. Volatility is the term used to
describe the size and frequency of price and/or market fluctuations. Generally,
if the volatility of the Nikkei 225 Index increases, we expect that the trading
value of the MITTS Securities will increase and, conversely, if the volatility
of the Nikkei 225 Index decreases, we expect that the trading value of the
MITTS Securities will decrease.
Volatility of the Japanese yen/U.S. dollar exchange rate. The Japanese
yen/U.S. dollar rate is a foreign exchange spot rate that measures the relative
values of two currencies, the Japanese yen and the U.S. dollar (the "JPY/USD
Rate"). The JPY/USD Rate increases when the U.S. dollar appreciates relative to
the Japanese yen. The JPY/USD Rate is expressed as a rate that reflects the
amount of Japanese yen that can be purchased for one U.S. dollar. Volatility is
the term used to describe the size and frequency of price and/or
S-8
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market fluctuations. In general, if the volatility of the JPY/USD Rate
increases, we expect that the trading value of the MITTS Securities will
increase and, conversely, if the volatility of the JPY/USD Rate decreases, we
expect that the trading value of the MITTS Securities will decrease.
Correlation Between the JPY/USD Rate and the Nikkei 225
Index. Correlation is the term used to describe the relationship between the
percentage changes in the JPY/USD Rate and the percentage changes in the Nikkei
225 Index. In general, if the correlation between the JPY/USD Rate and the
Nikkei 225 Index increases, we expect that the trading value of the MITTS
Securities will increase and, conversely, if the correlation between the
JPY/USD Rate and the Nikkei 225 Index decreases, we expect that the trading
value of the MITTS Securities will decrease.
As the time remaining to maturity of the MITTS Securities decreases, the
"time premium" associated with the MITTS Securities will decrease. 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 value of the Nikkei 225 Index. This difference will reflect a "time
premium" due to expectations concerning the value of the Nikkei 225 Index
during the period before the stated maturity of the MITTS Securities. However,
as the time remaining to the stated maturity of the MITTS Securities decreases,
we expect that this time premium will decrease, lowering the trading value of
the MITTS Securities.
Changes in dividend yields of the stocks included in the Nikkei 225 Index
are expected to affect the trading value of the MITTS Securities. In general,
if dividend yields on the stocks included in the Nikkei 225 Index increase, we
expect that the value of the MITTS Securities will decrease and, conversely, if
dividend yields on these stocks decrease, we expect that the value of the MITTS
Securities will increase.
Changes in our credit ratings may affect the trading value of the MITTS
Securities. 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 your
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 value of the Nikkei 225 Index at maturity, an
improvement in our credit ratings will not reduce the other investment risks
related to the MITTS Securities.
In general, assuming all relevant factors are held constant, we expect
that the effect on the trading value of the MITTS Securities of a given change
in most 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 a given increase in the value of the Nikkei 225 Index 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.
Amounts payable on the MITTS Securities may be limited by state law
New York State laws govern the 1983 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 MITTS Securities holders, to
the extent permitted by law, not to voluntarily claim the benefits of any laws
concerning usurious rates of interest.
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Risks associated with the Japanese securities markets
The Underlying Stocks that constitute the Nikkei 225 Index have been
issued by Japanese companies. You should be aware that investments in
securities indexed to the value of Japanese equity securities involve certain
risks. The Japanese securities markets may be more volatile than U.S. or other
securities markets and may be affected by market developments in different ways
than U.S. or other securities markets. Direct or indirect government
intervention to stabilize the Japanese securities markets and cross-
shareholdings in Japanese companies on those markets may affect prices and
volume of trading on those markets. Also, there is generally less publicly
available information about Japanese companies than about those U.S. companies
that are subject to the reporting requirements of the SEC, and Japanese
companies are subject to accounting, auditing and financial reporting standards
and requirements that differ from those applicable to U.S. reporting companies.
Securities prices in Japan are subject to political, economic, financial
and social factors that apply in Japan. These factors, which could negatively
affect the Japanese securities markets, include the possibility that recent or
future changes in the Japanese government's economic and fiscal policies, the
possible imposition of, or changes in, currency exchange laws or other Japanese
laws or restrictions applicable to Japanese companies or investments in
Japanese equity securities and the possibility of fluctuations in the rate of
exchange between currencies. Moreover, the Japanese economy may differ
favorably or unfavorably from the U.S. economy in these respects as growth of
gross national product, rate of inflation, capital reinvestment, resources and
self-sufficiency.
Purchases and sales by us and our affiliates may affect your return
We and our affiliates may from time to time buy or sell the stocks
underlying the Nikkei 225 Index or futures or options contracts in the Nikkei
225 Index for our own accounts for business reasons or in connection with
hedging our obligations under the MITTS Securities. These transactions could
affect the price of these stocks and, in turn, the value of the Nikkei 225
Index in a manner that would be adverse to your investment in the MITTS
Securities.
Potential conflicts
Our subsidiary, MLPF&S, is our agent for the purposes of calculating the
Ending Value and the Supplemental Redemption Amount payable to you at maturity.
Under certain circumstances, MLPF&S' role as our subsidiary and its
responsibilities as calculation agent for the MITTS Securities could give rise
to conflicts of interests. These conflicts could occur, for instance, in
connection with its determination as to whether the value of the Nikkei 225
Index can be calculated on a particular trading day, or in connection with
judgments that it would be required to make in the event of a discontinuance of
the Nikkei 225 Index. See "Description of the MITTS Securities--Adjustments to
the Nikkei 225 Index; Market Disruption Events" and "--Discontinuance of the
Nikkei 225 Index" in this prospectus supplement. 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 have entered into an arrangement with one of our subsidiaries to hedge
the market risks associated with our obligation to pay amounts due at maturity
on the MITTS Securities. This subsidiary expects to make a profit in connection
with this arrangement. We did not seek competitive bids for this arrangement
from unaffiliated parties.
Uncertain tax consequences
You should consider the tax consequences of investing in the MITTS
Securities, aspects of which are uncertain. See "United States Federal Income
Taxation" below.
S-10
<PAGE>
DESCRIPTION OF THE MITTS SECURITIES
ML&Co. will issue the MITTS Securities as a series of senior debt
securities under the 1983 Indenture, which is more fully described in the
accompanying prospectus. The MITTS Securities will mature on July , 2006.
While at maturity a beneficial owner of a MITTS Security will receive the
sum of the principal amount of each MITTS Security plus the Supplemental
Redemption Amount, if any, there will be no other payment of interest, periodic
or otherwise. See "--Payment at maturity".
The MITTS Securities are not subject to redemption by ML&Co. or at the
option of any beneficial owner before maturity. If an Event of Default occurs
with respect to the MITTS Securities, beneficial owners of the MITTS Securities
may accelerate the maturity of the MITTS Securities, as described under "--
Events of Default and Acceleration" in this prospectus supplement and
"Description of Debt Securities--Events of Default" in the accompanying
prospectus.
ML&Co. will issue the MITTS Securities in denominations of whole units of
$10.00 per unit.
The MITTS Securities do not have the benefit of any sinking fund.
Payment at maturity
At maturity, a beneficial owner of a MITTS Security will be entitled to
receive the principal amount of that MITTS Security plus a Supplemental
Redemption Amount, if any, all as provided below. If the Ending Value does not
exceed the Starting Value, you will be entitled to receive only the principal
amount of your MITTS Securities.
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>
(Ending Value - Starting Value)
Principal amount of the MITTS Security ($10 per unit) X (-----------------------------) X Participation Rate
( Starting Value )
</TABLE>
provided, however, that in no event will the Supplemental Redemption Amount be
less than zero.
The "Starting Value" will equal the closing value of the Nikkei 225 Index
on the Pricing Date. The Starting Value will be set forth in the final
prospectus supplement delivered to you in connection with sales of the MITTS
Securities.
The "Ending Value" will be determined by the calculation agent and will
equal the average or arithmetic mean of the closing values of the Nikkei 225
Index determined on each of the first five Calculation Days during the
Calculation Period. If there are fewer than five Calculation Days, then the
Ending Value will equal the average or arithmetic mean of the closing values of
the Nikkei 225 Index on those Calculation Days, and if there is only one
Calculation Day, then the Ending Value will equal the closing value of the
Nikkei 225 Index on that Calculation Day. If no Calculation Days occur during
the Calculation Period, then the Ending Value will equal the closing value of
the Nikkei 225 Index determined on the last scheduled Index Business Day in the
Calculation Period, regardless of the occurrence of a Market Disruption Event
on that day.
The "Participation Rate" means a factor expected to be between 110% and
120%. We will determine the Participation Rate on the Pricing Date and it will
appear in the final prospectus supplement delivered to you in connection with
sales of the MITTS Securities.
S-11
<PAGE>
The "Calculation Period" means the period from and including the seventh
scheduled Index Business Day prior to the maturity date to and including the
second scheduled Index Business Day prior to the maturity date.
A "Calculation Day" means any Index Business Day during the Calculation
Period on which a Market Disruption Event has not occurred.
An "Index Business Day" means a day on which the NYSE and the AMEX are
open for trading and the Nikkei 225 Index or any successor index is calculated
and published.
All determinations made by the calculation agent shall be at the sole
discretion of the calculation agent and, absent a determination by the
calculation agent of a manifest error, shall be conclusive for all purposes and
binding on ML&Co. and beneficial owners of the MITTS Securities.
Hypothetical returns
The following table illustrates, for a range of hypothetical Ending
Values of the Nikkei 225 Index during the Calculation Period:
. the percentage change from the Starting Value to the hypothetical
Ending Value,
. the total amount payable at maturity for each unit of MITTS
Securities,
. the total rate of return to beneficial owners of the MITTS
Securities,
. the pretax annualized rate of return to beneficial owners of MITTS
Securities, and
. the pretax annualized rate of return of an investment in the stocks
included in the Nikkei 225 Index, which includes an assumed aggregate
dividend yield of 0.70% per annum, as more fully described below.
<TABLE>
<CAPTION>
Pretax
Total amount Pretax annualized
Hypothetical Percentage Change payable at Total rate annualized rate of return
Ending Value from the maturity per of return rate of of stocks
during the Starting Value to unit of the on the return on underlying
Calculation the hypothetical MITTS MITTS the MITTS the Nikkei 225
Period Ending Value Securities(1) Securities(1) Securities(1)(2) Index(2)(3)
- ------------- ----------------- ------------- ------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
3,547.77 -80% 10.00 0.00% 0.00% -20.95%
7,095.54 -60% 10.00 0.00% 0.00% -11.97%
10,643.31 -40% 10.00 0.00% 0.00% -6.48%
14,191.08 -20% 10.00 0.00% 0.00% -2.47%
17,738.85(4) 0% 10.00 0.00% 0.00% 0.70%
21,286.62 20% 12.30 23.00% 2.98% 3.33%
24,834.39 40% 14.60 46.00% 5.48% 5.59%
28,382.16 60% 16.90 69.00% 7.63% 7.57%
31,929.93 80% 19.20 92.00% 9.53% 9.33%
35,477.70 100% 21.50 115.00% 11.23% 10.92%
39,025.47 120% 23.80 138.00% 12.77% 12.37%
42,573.24 140% 26.10 161.00% 14.17% 13.70%
46,121.01 160% 28.40 184.00% 15.47% 14.94%
49,668.78 180% 30.70 207.00% 16.67% 16.09%
53,216.55 200% 33.00 230.00% 17.79% 17.16%
</TABLE>
S-12
<PAGE>
- --------
(1) The table assumes a Participation Rate of 115%, the midpoint of the
expected range of 110% to 120%.
(2) The annualized rates of return specified in the preceding table are
calculated on a semiannual bond equivalent basis.
(3) This rate of return assumes:
(a) a percentage change in the aggregate price of the Underlying Stocks
that equals the percentage change in the Nikkei 225 Index from the
Starting Value to the relevant hypothetical Ending Value;
(b) a constant dividend yield of 0.70% per annum, paid quarterly from the
date of initial delivery of the MITTS Securities, applied to the value
of the Nikkei 225 Index at the end of each quarter assuming this value
increases or decreases linearly from the Starting Value to the
applicable hypothetical Ending Value;
(c) no transaction fees or expenses in connection with purchasing and
holding stocks included in the Nikkei 225 Index; and
(d) a seven-year investment term.
(4) This is the hypothetical Starting Value for the purposes of this table.
The actual Starting Value will equal the closing value of the Nikkei 225
Index on the Pricing Date.
The above figures are for purposes of illustration only. The actual
Supplemental Redemption Amount received by investors and the resulting total
and pretax annualized rate of return will depend entirely on the Starting
Value, the Participation Rate and the actual Ending Value determined by the
calculation agent as provided in this prospectus supplement.
Adjustments to the Nikkei 225 Index; Market Disruption Events
If at any time NKS changes its method of calculating the Nikkei 225
Index, or the value of the Nikkei 225 Index changes, in any material respect,
or if the Nikkei 225 Index is in any other way modified so that the Nikkei 225
Index does not, in the opinion of the calculation agent, fairly represent the
value of the Nikkei 225 Index had those changes or modifications not been
made, then, from and after that time, the calculation agent shall, at the
close of business in New York, New York, on each date that the closing value
of the Nikkei 225 Index is to be calculated, make any adjustments as, in the
good faith judgment of the calculation agent, may be necessary in order to
arrive at a calculation of a value of a stock index comparable to the Nikkei
225 Index as if those changes or modifications had not been made, and
calculate the closing value with reference to the Nikkei 225 Index, as so
adjusted. Accordingly, if the method of calculating the Nikkei 225 Index is
modified so that the value of the Nikkei 225 Index is a fraction or a multiple
of what it would have been if it had not been modified, e.g., due to a split,
then the calculation agent shall adjust the Nikkei 225 Index in order to
arrive at a value of the Nikkei 225 Index as if it had not been modified,
e.g., as if a split had not occurred.
"Market Disruption Event" means either of the following events, as
determined by the calculation agent:
(a) a suspension, material limitation or absence of trading on the TSE
of 20% or more of the Underlying Stocks which then comprise the
Nikkei 225 Index or a successor index during the one-half hour
period preceding the close of trading on the applicable exchange; or
(b) the suspension or material limitation on the Singapore International
Monetary Exchange, Ltd. (the "SIMEX"), the Osaka Securities Exchange
(the "OSE") or any other major futures or securities market from
trading in futures or options contracts related to the Nikkei 225
Index or a successor index during the one-half hour period preceding
the close of trading on the applicable exchange.
S-13
<PAGE>
For the purposes of determining whether a Market Disruption Event has
occurred:
(1) a limitation on the hours or number of days of trading will not
constitute a Market Disruption Event if it results from an announced
change in the regular business hours of the relevant exchange;
(2) a decision to permanently discontinue trading in the relevant
futures or options contract will not constitute a Market Disruption
Event;
(3) a suspension in trading in a futures or options contract on the
Nikkei 225 Index by a major securities market by reason of (a) a
price change violating limits set by that securities market, (b) an
imbalance of orders relating to those contracts or (c) a disparity
in bid and ask quotes relating to those contracts will constitute a
suspension or material limitation of trading in futures or options
contracts related to the Nikkei 225 Index; and
(4) an absence of trading on the TSE will not include any time when the
TSE is closed for trading under ordinary circumstances.
While ML&Co. understands that circumstances have occurred in the past
that would have been deemed Market Disruption Events, ML&Co. cannot predict
the likelihood of a Market Disruption Event occuring in the future.
Discontinuance of the Nikkei 225 Index
If the NKS discontinues publication of the Nikkei 225 Index and the NKS
or another entity publishes a successor or substitute index that the
calculation agent determines, in its sole discretion, to be comparable to the
Nikkei 225 Index (a "successor index"), then, upon the calculation agent's
notification of any determination to the trustee and ML&Co., the calculation
agent will substitute the successor index as calculated by the NKS or any
other entity for the Nikkei 225 Index and calculate the closing value as
described above under "--Payment at maturity". Upon any selection by the
calculation agent of a successor index, ML&Co. shall cause notice to be given
to holders of the MITTS Securities.
In the event that the NKS discontinues publication of the Nikkei 225
Index and:
. the calculation agent does not select a successor index, or
. the successor index is no longer published on any of the
Calculation Days,
the calculation agent will compute a substitute value for the Nikkei 225 Index
in accordance with the procedures last used to calculate the Nikkei 225 Index
before any discontinuance. If a successor index is selected or the calculation
agent calculates a value as a substitute for the Nikkei 225 Index as described
below, the successor index or value will be used as a substitute for the
Nikkei 225 Index for all purposes, including for purposes of determining
whether a Market Disruption Event exists.
If the NKS discontinues publication of the Nikkei 225 Index before the
period during which the Supplemental Redemption Amount is to be determined and
the calculation agent determines that no successor index is available at that
time, then on each Business Day until the earlier to occur of:
. the determination of the Ending Value and
. a determination by the calculation agent that a successor index is
available,
S-14
<PAGE>
the calculation agent will determine the value that would be used in computing
the Supplemental Redemption Amount as described in the preceding paragraph as
if that day were a Calculation Day. The calculation agent will cause notice of
each 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 these values to be made available by telephone.
A "Business Day" is any day on which the NYSE and the AMEX are open for
trading.
Notwithstanding these alternative arrangements, discontinuance of the
publication of the Nikkei 225 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 has
occurred and is 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, will be equal to the principal amount and the
Supplemental Redemption Amount, if any, calculated as though the date of early
repayment were the stated maturity date of the MITTS Securities. See "--Payment
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 was the maturity date of the MITTS Securities.
In case of default in payment of the MITTS Securities, whether at their
stated maturity or upon acceleration, from and after the maturity date the
MITTS Securities will bear interest, payable upon demand of their beneficial
owners, at the rate of % per annum to the extent that payment of any interest
is legally enforceable on the unpaid amount due and payable on that date in
accordance with the terms of the MITTS Securities to the date payment of that
amount has been made or duly provided for.
Depositary
Description of the Global Securities
Upon issuance, all MITTS Securities will be represented by one or more
fully registered global securities. Each global security will be deposited
with, or on behalf of, DTC (DTC, together with any successor, 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 the depositary or by a
nominee of the depositary to the depositary or another nominee of the
depositary or by the depositary or any nominee to a successor of the depositary
or a nominee of that 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 the 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 a 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 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 that person is not a
participant of DTC, on the procedures of the participant through which that
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
S-15
<PAGE>
that an owner of a beneficial interest in 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 that action, and those participants would authorize
beneficial owners owning through those participants to give or take that 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.
DTC Procedures
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.
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 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 the beneficial
owner entered into the transaction. Transfers of ownership interests in the
MITTS Securities are to be made by entries 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.
S-16
<PAGE>
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 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 that 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 that 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 those payments to direct participants
shall be the responsibility of DTC, and disbursement of any payments to the
beneficial owners will be the responsibility of direct participants and
indirect participants.
Exchange for Certificated Securities
If:
. 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,
. ML&Co. executes and delivers to the trustee a company order to the
effect that the global securities shall be exchangeable, or
. an Event of Default under the 1983 Indenture 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 of $10. The definitive MITTS Securities will be
registered in the name or names as the depositary shall instruct the trustee.
It is expected that instructions may be based upon directions received by the
depositary from participants with respect to ownership of beneficial interests
in the global securities.
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 these 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 its accuracy.
Same-Day Settlement and Payment
Settlement for the MITTS Securities will be made by the underwriter in
immediately available funds. ML&Co. will make all payments of principal and the
Supplemental Redemption Amount, if any, in immediately available funds so long
as the MITTS Securities are maintained in book-entry form.
S-17
<PAGE>
THE NIKKEI 225 INDEX
All disclosure contained in this prospectus supplement regarding the
Nikkei 225 Index, including, without limitation, its make-up, method of
calculation and changes in its components, unless otherwise stated, has been
derived from the Stock Market Indices Data Book published by NKS and other
publicly available sources. The information reflects the policies of NKS as
stated in these sources; and the policies are subject to change at the
discretion of NKS.
The Nikkei 225 Index is a stock index calculated, published and
disseminated by NKS that measures the composite price performance of selected
Japanese stocks. The Nikkei 225 Index is currently based on 225 Underlying
Stocks trading on the TSE and represents a broad cross-section of Japanese
industry. All 225 of the stocks underlying the Nikkei 225 Index are stocks
listed in the First Section of the TSE. Stocks listed in the First Section are
among the most actively traded stocks on the TSE. Futures and options contracts
on the Nikkei 225 Index are traded on the SIMEX, the OSE and the Chicago
Mercantile Exchange.
The Nikkei 225 Index is a modified, price-weighted index. Each stock's
weight in the Nikkei 225 Index is based on its price per share rather than the
total market capitalization of the issuer. NKS calculates the Nikkei 225 Index
by: multiplying the per share price of each Underlying Stock by the
corresponding weighting factor for that Underlying Stock (a "Weight Factor"),
calculating the sum of all these products and dividing that sum by a divisor.
The divisor, initially set in 1949 at 225, was 10.743 as of June 21, 1999, and
is subject to periodic adjustments as set forth below. Each Weight Factor is
computed by dividing (Yen)50 by the par value of the relevant Underlying Stock,
so that the share price of each Underlying Stock when multiplied by its Weight
Factor corresponds to a share price based on a uniform par value of (Yen)50.
Each Weight Factor represents the number of shares of the related Underlying
Stock which are included in one trading unit of the Nikkei 225 Index. The stock
prices used in the calculation of the Nikkei 225 Index are those reported by a
primary market for the Underlying Stocks, which is currently the TSE. The level
of the Nikkei 225 Index is calculated once per minute during TSE trading hours.
In order to maintain continuity in the level of the Nikkei 225 Index in
the event of certain changes due to non-market factors affecting the Underlying
Stocks, such as the addition or deletion of stocks, substitution of stocks,
stock dividends, stock splits or distributions of assets to stockholders, the
divisor used in calculating the Nikkei 225 Index is adjusted in a manner
designed to prevent any instantaneous change or discontinuity in the level of
the Nikkei 225 Index. The divisor remains at the new value until a further
adjustment is necessary as the result of another change. As a result of each
change affecting any Underlying Stock, the divisor is adjusted in such a way
that the sum of all share prices immediately after the change multiplied by the
applicable Weight Factor and divided by the new divisor, the level of the
Nikkei 225 Index immediately after the change, will equal the level of the
Nikkei 225 Index immediately prior to the change.
Underlying Stocks may be deleted or added by NKS. However, to maintain
continuity in the Nikkei 225 Index, the policy of NKS is generally not to alter
the composition of the Underlying Stocks except when an Underlying Stock is
deleted in accordance with the following criteria. Any stock becoming
ineligible for listing in the First Section of the TSE due to any of the
following reasons will be deleted from the Underlying Stocks: bankruptcy of the
issuer; merger of the issuer into, or acquisition of the issuer by, another
company; delisting of the stock or transfer of the stock to the "Seiri-Post"
because of excess debt of the issuer or because of any other reason; or
transfer of the stock to the Second Section of the TSE. Upon deletion of a
stock from the Nikkei 225 Index, NKS will select, in accordance with certain
criteria established by it, a replacement for the deleted Underlying Stock. In
an exceptional case, a newly listed stock in the First Section of the TSE that
is recognized by NKS to be representative of a market may be added to the
Underlying Stocks. As a result, an existing Underlying Stock with low trading
volume and not representative of a market will be deleted.
S-18
<PAGE>
NKS is under no obligation to continue the calculation and dissemination
of the Nikkei 225 Index. The MITTS Securities are not sponsored, endorsed, sold
or promoted by NKS. No inference should be drawn from the information contained
in this prospectus supplement that NKS makes any representation or warranty,
implied or express, to ML&Co., the holder of the MITTS Securities or any member
of the public regarding the advisability of investing in securities generally
or in the MITTS Securities in particular or the ability of the Nikkei 225 Index
to track general stock market performance. NKS has no obligation to take the
needs of ML&Co. or the holder of the MITTS Securities into consideration in
determining, composing or calculating the Nikkei 225 Index. NKS is not
responsible for, and has not participated in the determination of the timing
of, prices for, 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 settled in cash. NKS has no obligation or liability in connection with
the administration or marketing of the MITTS Securities.
The use of and reference to the Nikkei 225 Index in connection with the
MITTS Securities have been consented to by NKS, the publisher of the Nikkei 225
Index.
None of ML&Co., the calculation agent and MLPF&S accepts any
responsibility for the calculation, maintenance or publication of the Nikkei
225 Index or any successor index. NKS disclaims all responsibility for any
errors or omissions in the calculation and dissemination of the Nikkei 225
Index or the manner in which the Nikkei 225 Index is applied in determining any
Starting Values or Ending Values or any Supplemental Redemption Amount upon
maturity of the MITTS Securities.
The Tokyo Stock Exchange
The TSE is one of the world's largest securities exchanges in terms of
market capitalization. Trading hours are currently from 9:00 A.M. to 11:00 A.M.
and from 12:30 P.M. to 3:00 P.M., Tokyo time, Monday through Friday.
Due to the time zone difference, on any normal trading day the TSE will
close prior to the opening of business in New York City on the same calendar
day. Therefore, the closing level of the Nikkei 225 Index on a trading day will
generally be available in the United States by the opening of business on the
same calendar day.
The TSE has adopted certain measures, including daily price floors and
ceilings on individual stocks, intended to prevent any extreme short-term price
fluctuations resulting from order imbalances. In general, any stock listed on
the TSE cannot be traded at a price lower than the applicable price floor or
higher than the applicable price ceiling. These price floors and ceilings are
expressed in absolute Japanese yen, rather than percentage limits based on the
closing price of the stock on the previous trading day. In addition, when there
is a major order imbalance in a listed stock, the TSE posts a "special bid
quote" or a "special asked quote" for that stock at a specified higher or lower
price level than the stock's last sale price in order to solicit counter-orders
and balance supply and demand for the stock. Prospective investors should also
be aware that the TSE may suspend the trading of individual stocks in certain
limited and extraordinary circumstances, including, for example, unusual
trading activity in that stock. As a result, changes in the Nikkei 225 Index
may be limited by price limitations or special quotes, or by suspension of
trading, on individual stocks which comprise the Nikkei 225 Index, and these
limitations may, in turn, adversely affect the value of the MITTS Securities.
Historical Data on the Nikkei 225 Index
The following table sets forth the closing values of the Nikkei 225 Index
on the last business day of each year from 1967 through 1998. The historical
experience of the Nikkei 225 Index should not be taken as an indication of
future performance and no assurance can be given that the value of the Nikkei
225 Index will not decline and thereby reduce the Supplemental Redemption
Amount which may be payable to the beneficial owner of the MITTS Securities at
maturity or otherwise.
S-19
<PAGE>
Year-End Value of the Nikkei 225 Index
<TABLE>
<CAPTION>
Closing Closing
Year Value Year Value
---- ------- ---- -------
<S> <C> <C> <C>
1967 1,281 1983 9,894
1968 1,715 1984 11,543
1969 2,359 1985 13,113
1970 1,987 1986 18,701
1971 2,714 1987 21,564
1972 5,208 1988 30,159
1973 4,307 1989 38,916
1974 3,817 1990 23,849
1975 4,359 1991 22,984
1976 4,991 1992 16,925
1977 4,866 1993 17,417
1978 6,002 1994 19,723
1979 6,569 1995 19,868
1980 7,116 1996 19,361
1981 7,682 1997 15,259
1982 8,017 1998 13,842
</TABLE>
The following table sets forth the level of the Nikkei 225 Index at the
end of each month, in the period from January 1992 through May 1999. These
historical data on the Nikkei 225 Index are not necessarily indicative of the
future performance of the Nikkei 225 Index or what the value of the MITTS
Securities may be. Any historical upward or downward trend in the level of the
Nikkei 225 Index during any period set forth below is not an indication that
the Nikkei 225 Index is more or less likely to increase or decrease at any time
during the term of the MITTS Securities.
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January........... 22,023 17,024 20,229 18,650 20,813 18,330 16,628 14,499
February.......... 21,339 16,953 19,997 17,053 20,125 18,557 16,832 14,368
March............. 19,346 18,591 19,112 16,140 21,407 18,003 16,527 15,837
April............. 17,391 20,919 19,725 16,807 22,041 19,151 15,641 16,702
May............... 18,348 20,552 20,974 15,437 21,956 20,069 15,671 16,112
June.............. 15,952 19,590 20,644 14,517 22,531 20,605 15,830
July.............. 15,910 20,380 20,449 16,678 20,693 20,331 16,379
August............ 18,061 21,027 20,629 18,117 20,167 18,229 14,108
September......... 17,399 20,106 19,564 17,913 21,556 17,888 13,406
October........... 16,767 19,703 19,990 17,655 20,467 16,459 13,565
November.......... 17,684 16,407 19,076 18,744 21,020 16,636 14,884
December.......... 16,925 17,417 19,723 19,868 19,361 15,259 13,842
</TABLE>
The following graph sets forth the historical performance of the Nikkei
225 Index at the end of each year from 1967 through 1998. Past movements of the
Nikkei 225 Index are not necessarily indicative of the future Nikkei 225 Index
values. On June 21, 1999 the closing value of the Nikkei 225 Index was
17,738.85.
S-20
<PAGE>
Historical Year-End Closing Values
[THE GRAPH APPEARING HERE SETS FORTH THE HISTORICAL YEAR-END CLOSING VALUES OF
THE INDEX FROM 1967 THROUGH 1998. THE VERTICAL AXIS HAS A RANGE OF NUMBERS FROM
0 TO 40,000 IN INCREMENTS OF 5,000. THE HORIZONTAL AXIS HAS A RANGE OF YEARS
FROM 1967 TO 1998 IN INCREMENTS OF 1 YEAR.]
This graph is for historical information only and should not be used or
interpreted as a forecast or indication of future stock market performance,
interest rate levels or variable returns applicable to the MITTS Securities.
UNITED STATES FEDERAL INCOME TAXATION
Set forth in full below is the opinion of Brown & Wood LLP, tax 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 in this
prospectus supplement. The following 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 in this prospectus supplement, 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
S-21
<PAGE>
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 that date that elect to continue to
be treated as United States persons also will be a U.S. Holder. As used in this
prospectus supplement, 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 this 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 that 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
S-22
<PAGE>
maturity date of the principal amount thereof and a projected Supplemental
Redemption Amount equal to $ per unit (the "Projected Supplemental
Redemption Amount"). This represents an estimated yield on the MITTS Securities
equal to % 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 the 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 $
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 $ 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 $
per unit (i.e., the Projected Supplemental Redemption Amount), the amount by
which the Projected Supplemental Redemption Amount (i.e., $ 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 that 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., $ per unit) in excess of the actual Supplemental Redemption
Amount that is not treated as an interest offset pursuant to the foregoing
rules.
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 the 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 that 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 taxable gain will be treated as ordinary
income. Any 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 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.
Prospective investors in the MITTS Securities should be aware that if a
significant percentage of the total aggregate amount of the MITTS Securities
originally issued are sold at a discount from the principal amount thereof,
which is not expected to be the case, then the issue price of the MITTS
Securities, as determined for United States Federal income tax purposes, may be
less than the principal amount of the MITTS Securities. In that event, if a
U.S. Holder purchases a MITTS Security in connection with the original issuance
thereof for an amount equal to the principal amount thereof, the amount of the
difference between the principal amount of the MITTS Securities and the issue
price thereof generally should be allocated by the U.S. Holder to daily
portions of interest that are deemed to accrue on each relevant date as an
offset to that interest on each relevant date. In addition, on each relevant
date, the U.S. Holder's adjusted tax basis in the MITTS Security will be
reduced by the amount treated as an interest offset pursuant to the foregoing
rule. Alternatively, in the event that the issue price of the MITTS Securities,
as determined for United States Federal income tax purposes, equals the
principal amount thereof and a U.S. Holder purchases a MITTS Security in
connection with the original issuance thereof for an amount that is less than
the principal amount thereof, the amount of
S-23
<PAGE>
the difference between the principal amount of the MITTS Security and the
amount paid by the U.S. Holder to purchase the MITTS Security generally would
be allocated by the U.S. Holder to daily portions of interest that are deemed
to accrue on each relevant date as additional ordinary interest includible in
income by the U.S. Holder on each relevant date. In that event, on each
relevant date, the U.S. Holder's adjusted tax basis in the MITTS Security will
be increased by the amount treated as additional ordinary interest income. In
addition, U.S. Holders purchasing a MITTS Security at a price that differs from
the adjusted issue price of the MITTS Security as of the purchase date (e.g.,
subsequent purchases) will be subject to rules providing for certain
adjustments to the foregoing rules and these U.S. Holders should consult their
own tax advisors concerning these rules.
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.
Hypothetical table
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 hypothetical projected payment schedule for the MITTS
Securities (including both a hypothetical Projected Supplemental Redemption
Amount and a hypothetical estimated yield equal to 6.90% per annum (compounded
semiannually)) as determined by ML&Co. for purposes of illustrating the
application of the Final Regulations to the MITTS Securities as if the MITTS
Securities had been issued on June 22, 1999. The following table is for
illustrative purposes only. The actual projected payment schedule for the MITTS
Securities (including both the actual Projected Supplemental Redemption Amount
and the actual estimated yield) will be determined by ML&Co. on the date the
MITTS Securities are priced for initial sale to the public and will depend upon
actual market interest rates (and thus ML&Co.'s borrowing costs for debt
instruments with comparable maturities) as of that date. The actual projected
payment schedule for the MITTS Securities (including both the actual Projected
Supplemental Redemption Amount and the actual estimated yield) and the actual
tax accrual table will be set forth in the final prospectus supplement
delivered to investors in connection with sales of the MITTS Securities.
S-24
<PAGE>
<TABLE>
<CAPTION>
Total Interest
Deemed to Have
Interest Deemed Accrued on MITTS
to Accrue During Securities as of
Accrual Period End of Accrual Period
Accrual Period (per unit) (per unit)
-------------- ---------------- ---------------------
<S> <C> <C>
June 22, 1999 through December 22,
1999.................................. $0.3460 $0.3460
December 23, 1999 through June 22,
2000.................................. $0.3569 $0.7029
June 23, 2000 through December 22,
2000.................................. $0.3692 $1.0721
December 23, 2000 through June 22,
2001.................................. $0.3820 $1.4541
June 23, 2001 through December 22,
2001.................................. $0.3952 $1.8493
December 23, 2001 through June 22,
2002.................................. $0.4088 $2.2581
June 23, 2002 through December 22,
2002.................................. $0.4229 $2.6810
December 23, 2002 through June 22,
2003.................................. $0.4375 $3.1185
June 23, 2003 through December 22,
2003.................................. $0.4526 $3.5711
December 23, 2003 through June 22,
2004.................................. $0.4682 $4.0393
June 23, 2004 through December 22,
2004.................................. $0.4844 $4.5237
December 23, 2004 through June 22,
2005.................................. $0.5010 $5.0247
June 23, 2005 through December 22,
2005.................................. $0.5184 $5.5431
December 23, 2005 through June 22,
2006.................................. $0.5362 $6.0793
</TABLE>
- --------
Hypothetical Projected Supplemental Redemption Amount = $6.0793 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 the 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 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 the 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 that 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 that 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 that individual's death,
payments in respect of the MITTS Security would have been effectively connected
with the conduct by that individual of a trade or business in the United
States.Non-U.S. Holders
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
S-25
<PAGE>
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
the 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 that
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, 2000, subject to certain transition rules. Prospective
investors are urged to consult their own tax advisors regarding the New
Regulations.
USE OF PROCEEDS AND HEDGING
The net proceeds from the sale of the MITTS Securities will be used as
described under "Use of Proceeds" in the accompanying prospectus and to hedge
market risks of ML&Co. associated with its obligation to pay the principal
amount and the Supplemental Redemption Amount.
WHERE YOU CAN FIND MORE INFORMATION
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 accompanying this prospectus supplement summarizes
material provisions of contracts and other documents that we refer you to.
Because the prospectus 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.
S-26
<PAGE>
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We
have not, and the underwriter has 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, and the
underwriter is 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 and the accompanying prospectus is accurate as of the date on the
front cover of this prospectus supplement only. Our business, financial
condition and results of operations may have changed since that date.
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. $ aggregate principal amount of MITTS Securities. The
underwriting agreement provides that the obligations of the underwriter are
subject to certain conditions 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
prices 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. These 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 these 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
these transactions or that these transactions, once commenced, will not be
discontinued without notice.
The underwriter may use this prospectus supplement and the accompanying
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.
S-27
<PAGE>
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-28
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business Day............................................................... S-15
Calculation Day............................................................ S-12
Calculation Period......................................................... S-12
Depositary................................................................. S-16
Ending Value............................................................... S-4
Final Regulations.......................................................... S-22
Index Business Day......................................................... S-12
JPY/USD Rate............................................................... S-8
Market Disruption Event.................................................... S-13
MITTS Securities........................................................... S-1
ML&Co...................................................................... S-4
MLPF&S..................................................................... S-4
New Regulations............................................................ S-26
Nikkei 225 Index........................................................... S-4
NKS........................................................................ S-5
Non-U.S. Holder............................................................ S-22
OSE........................................................................ S-13
Participation Rate......................................................... S-5
Pricing Date............................................................... S-4
Principal Amount........................................................... S-4
Projected Supplemental Redemption Amount................................... S-23
SIMEX...................................................................... S-13
Starting Value............................................................. S-4
Successor Index............................................................ S-14
Supplemental Redemption Amount............................................. S-4
TSE........................................................................ S-5
U.S. Holder................................................................ S-21
Underlying Stocks.......................................................... S-5
Weight Factor.............................................................. S-18
Withholding Agent.......................................................... S-25
</TABLE>
S-29
<PAGE>
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[LOGO]
2,500,000 Units
Merrill Lynch & Co., Inc.
Nikkei 225 Market Index Target-Term Securities(R)
due July , 2006
"MITTS(R) Securities"
------------------------------
PROSPECTUS SUPPLEMENT
------------------------------
Merrill Lynch & Co.
July , 1999
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