<PAGE>
FILED PURSUANT TO RULE NO. 424(b)(5)
REGISTRATION NO. 333-59997
Subject to Completion
Preliminary Prospectus Supplement dated May 5, 1999
PROSPECTUS SUPPLEMENT
(To prospectus dated July 30, 1998) [LOGO] Merrill Lynch
PROTECTED GROWTH(SM) INVESTING
"Pursuit of Growth, Protection of Principal"
2,500,000 Units
Merrill Lynch & Co., Inc.
Select Sector SPDR Fund Growth Portfolio
Market Index Target-Term Securities(R)
due June , 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
will pay you an amount equal to the
. No payments before the maturity sum of the principal amount of each
date. unit and an additional amount based
on the percentage increase, if any,
. Senior unsecured debt securities of in the value of the Select Sector
Merrill Lynch & Co., Inc. SPDR Fund Growth Portfolio Index,
reduced by an annual adjustment
. Linked to the value of the Select factor expected to be between 2.00%
Sector SPDR Fund Growth Portfolio and 2.50%.
Index, an index tracking the value of
various Select Sector SPDR Funds. . At maturity, you will receive no
Each Select Sector SPDR Fund is an less than the principal amount of
index fund whose stated investment your MITTS Securities.
objective is to provide investment
results that, before expenses,
correspond generally to the price and
yield performance of publicly-traded
equity securities involved in a
specific market sector comprising the
relevant sector index.
. The MITTS Securities will be listed
on the American Stock Exchange under
the trading symbol "GWM".
. Closing: June , 1999.
Investing in the MITTS Securities involves risk.
See "Risk Factors" beginning on page S-9 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.
<TABLE>
<CAPTION>
Per unit Total
-------- -----
<S> <C> <C>
Public offering price............................ $10.00 $25,000,000.00
Underwriting discount............................ $ $
Proceeds, before expenses, to Merrill Lynch &
Co., Inc. ...................................... $ $
</TABLE>
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 June , 1999.
"MITTS" and "Market Index Target-Term Securities" are registered service marks
of Merrill Lynch & Co., Inc.
"SPDRs", "Select Sector SPDR", "Select Sector SPDRs", and "Select Sector
Standard & Poor's Depositary Receipts" are trademarks of the McGraw-Hill
Companies, Inc.
<PAGE>
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY INFORMATION -- Q&A................................................ S-4
What are the MITTS Securities?.......................................... S-4
What will I receive at the stated maturity date of the MITTS
Securities?............................................................ S-5
What is the SPDR Fund Growth Portfolio Index?........................... S-6
What about taxes?....................................................... S-7
Will the MITTS Securities be listed on a stock exchange?................ S-7
What is the role of MLPF&S?............................................. S-7
Who is ML&Co.?.......................................................... S-8
Are there any risks associated with my investment?...................... S-8
RISK FACTORS.............................................................. S-9
You may not earn a return on your investment............................ S-9
Your yield may be lower than the yield on a standard debt security of
comparable maturity.................................................... S-9
Your return will not reflect the return of owning the Select Sector SPDR
Funds comprising the SPDR Fund Growth Portfolio Index.................. S-9
Changes in the value per share of a Select Sector SPDR Fund will not
exactly mirror changes in the related Select Sector Index.............. S-9
There may be an uncertain trading market for the MITTS Securities....... S-10
There are many factors affecting the trading value of the MITTS
Securities............................................................. S-10
No affiliation between ML&Co. and the Select Sector SPDR Funds.......... S-12
Amounts payable on the MITTS Securities may be limited by state law..... S-12
Purchases and sales by us and our affiliates may affect your return..... S-12
Potential conflicts of interests........................................ S-12
Uncertain tax consequences.............................................. S-13
RATIO OF EARNINGS TO FIXED CHARGES........................................ S-14
DESCRIPTION OF THE MITTS SECURITIES....................................... S-15
Payment at maturity..................................................... S-15
Hypothetical returns.................................................... S-16
Adjustments to the SPDR Fund Growth Portfolio Index; Market Disruption
Events................................................................. S-18
Discontinuance of the SPDR Fund Growth Portfolio Index.................. S-18
Events of Default and Acceleration...................................... S-19
Depositary.............................................................. S-19
Same-day settlement and payment......................................... S-22
THE SELECT SECTOR SPDR FUND GROWTH PORTFOLIO INDEX........................ S-22
Select Sector SPDR Funds................................................ S-23
License agreement....................................................... S-24
UNITED STATES FEDERAL INCOME TAXATION..................................... S-25
General................................................................. S-26
U.S. Holders............................................................ S-26
Hypothetical table...................................................... S-28
Non-U.S. Holders........................................................ S-29
Backup withholding...................................................... S-29
New withholding regulations............................................. S-29
USE OF PROCEEDS........................................................... S-30
WHERE YOU CAN FIND MORE INFORMATION....................................... S-30
UNDERWRITING.............................................................. S-30
VALIDITY OF THE MITTS SECURITIES.......................................... S-31
INDEX OF DEFINED TERMS.................................................... S-32
</TABLE>
S-2
<PAGE>
Prospectus
<TABLE>
<CAPTION>
Page
----
AVAILABLE INFORMATION...................................................... 2
<S> <C>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................ 2
MERRILL LYNCH & CO., INC. ................................................. 3
USE OF PROCEEDS............................................................ 3
RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS............................... 4
DESCRIPTION OF DEBT SECURITIES............................................. 4
DESCRIPTION OF DEBT WARRANTS............................................... 9
DESCRIPTION OF CURRENCY WARRANTS........................................... 11
DESCRIPTION OF INDEX WARRANTS.............................................. 12
DESCRIPTION OF PREFERRED STOCK............................................. 17
DESCRIPTION OF DEPOSITARY SHARES........................................... 21
DESCRIPTION OF PREFERRED STOCK WARRANTS.................................... 25
DESCRIPTION OF COMMON STOCK................................................ 27
DESCRIPTION OF COMMON STOCK WARRANTS....................................... 30
PLAN OF DISTRIBUTION....................................................... 32
EXPERTS.................................................................... 33
</TABLE>
S-3
<PAGE>
SUMMARY INFORMATION -- Q&A
This summary includes questions and answers that highlight selected
information from the prospectus and prospectus supplement to help you
understand the Select Sector SPDR Fund Growth Portfolio Market Index Target-
Term Securities due June , 2006. You should carefully read the accompanying
prospectus and this prospectus supplement to fully understand the terms of the
MITTS Securities, the Select Sector SPDR Fund Growth Portfolio Index (the "SPDR
Fund Growth Portfolio Index") and the tax and other considerations that should
be important to you in making a decision about whether to invest in the MITTS
Securities. You should carefully review the "Risk Factors" section, which
highlights the material 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.
We have attached the prospectus for the Select Sector SPDR Funds. You
should carefully read the fund prospectus to fully understand the operation and
management of the Select Sector SPDR Funds, including the fees and expenses
associated with shares of the Select Sector SPDR Funds which affect the value
per share of the Select Sector SPDR Funds and which will therefore indirectly
affect the value of the SPDR Fund Growth Portfolio Index.
Our affiliate, MLPF&S, is both a soliciting dealer in the shares of the
Select Sector SPDR Funds and the index compilation agent for each of the
indices related to the Select Sector SPDR Funds. However, we are not affiliated
with any of the Select Sector SPDR Funds. The Select Sector SPDR Funds will not
receive any of the proceeds from the sale of the MITTS Securities and will not
have any obligations with respect to the MITTS Securities.
We have attached the fund prospectus and are delivering it to you
together with this prospectus supplement and the accompanying prospectus of
ML&Co. for the convenience of reference only. The fund prospectus does not
constitute a part of this prospectus supplement or the accompanying prospectus
of ML&Co., nor is it incorporated by reference in this prospectus supplement or
in the accompanying prospectus of ML&Co.
What are the MITTS Securities?
The MITTS Securities are a series of senior debt securities issued by
ML&Co. and are not secured by collateral. The MITTS Securities will rank
equally with all of our other unsecured and unsubordinated debt. The MITTS
Securities will mature on June , 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.
S-4
<PAGE>
What will I receive at the stated maturity date of the MITTS Securities?
We have designed the MITTS Securities for investors who want to protect
their investment by receiving at least the principal amount of their investment
at maturity and who also want to participate in possible increases in the value
of the SPDR Fund Growth Portfolio Index. At 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:
(Adjusted Ending Value - Starting Value)
$10 X (--------------------------------------)
( Starting Value )
but will not be less than zero.
The "Starting Value" of the SPDR Fund Growth Portfolio Index will be set
to 100 on the date the MITTS Securities are priced for initial sale to the
public (the "Pricing Date").
"Adjusted Ending Value" means the average of the closing values of the
SPDR Fund Growth Portfolio Index at the close of the market on five business
days before the maturity of the MITTS Securities as reduced on each day by the
application of the Adjustment Factor. We may calculate the Adjusted Ending
Value by reference to fewer than five or even a single day's closing value if,
during the period shortly before the stated maturity date of the MITTS
Securities, there is a disruption in the trading of a sufficient number of the
component stocks included in any of the funds underlying the SPDR Fund Growth
Portfolio Index or certain futures or options relating to those funds or the
S&P 500 Index.
The "Adjustment Factor" will be a fixed percentage that is expected to be
between 2.00% and 2.50% per year and will be applied over the entire term of
the MITTS Securities to reduce the closing values of the SPDR Fund Growth
Portfolio Index used to calculate the Supplemental Redemption Amount during the
Calculation Period. As a result of the cumulative effect of this reduction, the
values used to calculate the Supplemental Redemption Amount during the
Calculation Period will be approximately 13.07% to 16.07% less than the actual
value of the SPDR Fund Growth Portfolio Index on each day during the
calculation period. We will determine the Adjustment Factor on the Pricing Date
and it will appear in the final prospectus supplement delivered to you in
connection with your purchase of the MITTS Securities. For a detailed
discussion of how the Adjustment Factor will affect the value of the SPDR Fund
Growth Portfolio Index used to calculate your Supplemental Redemption Amount,
see "Description of the MITTS Securities--Payment at maturity" in this
prospectus supplement.
For more specific information about the Supplemental Redemption Amount,
please see the section "Description of the MITTS Securities--Payment at
maturity" in this prospectus supplement.
We will pay you a Supplemental Redemption Amount only if the Adjusted
Ending Value is greater than the Starting Value. If the Adjusted 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 your MITTS
Securities regardless of whether any Supplemental Redemption Amount is payable.
S-5
<PAGE>
"Examples"
Here are two examples of Supplemental Redemption Amount calculations
assuming an Adjustment Factor of 2.25% per year (the midpoint of the
expected range of 2.00% to 2.50%) and a term equal to seven years:
Example 1--The SPDR Fund Growth Portfolio Index, as adjusted, is below the
Starting Value at maturity:
Hypothetical Starting Value: 100.00
Hypothetical closing value of the SPDR Fund Growth Portfolio Index at
maturity: 105.00
Hypothetical Adjusted Ending Value: 89.69
<TABLE>
<S> <C>
(89.69 - 100) (Supplemental
Supplemental Redemption Amount (per unit) = $10 X (-----------) = $0.00 Redemption
( 100 ) Amount cannot be
less than zero)
</TABLE>
Total payment at maturity (per unit) = $10 + $0 = $10
Example 2--The SPDR Fund Growth Portfolio Index, as adjusted, is above the
Starting Value at maturity:
Hypothetical Starting Value: 100.00
Hypothetical closing value of the SPDR Fund Growth Portfolio Index at
maturity: 180.00
Hypothetical Adjusted Ending Value: 153.75
(153.75 - 100)
Supplemental Redemption Amount (per unit) = $10 X (------------) = $5.38
( 100 )
Total payment at maturity (per unit) = $10 + $5.38 = $15.38
What is the SPDR Fund Growth Portfolio Index?
The AMEX will publish the SPDR Fund Growth Portfolio Index under the
symbol "GWI". The index measures the performance of eight underlying funds
(each a "Select Sector SPDR Fund") that each tracks the performance of stocks
in a particular sector or group of industries selected from a universe of
companies defined in the S&P 500 Index.
Each Select Sector SPDR Fund is an index fund whose stated investment
objective is to provide investment results that, before expenses, correspond
generally to the price and yield performance of publicly-traded equity
securities comprising the relevant sector index (each a "Select Sector Index").
Each Select Sector Index consists of the equity securities of publicly-traded
companies that are components of the S&P 500 Index and are involved in a
specific market sector. The Select Sector SPDR Funds are eight of the nine
investment funds comprising the Select Sector SPDR Trust, a management
investment company registered under the Investment Company Act of 1940, as
amended. The combined companies constituting the nine Select Sector Indexes
represent all of the companies whose stocks are components of the S&P 500
Index. The funds included in the SPDR Fund Growth Portfolio Index include all
sectors of stock included in the S&P 500 Index except one, the utilities
sector.
Our affiliate, MLPF&S, is both a soliciting dealer in the shares of the
Select Sector SPDR Funds and the index compilation agent for the Select Sector
Indexes underlying the Select Sector SPDR Funds. The Select Sector SPDR Funds
will not receive any of the proceeds from the sale of, or have any obligations
under, the MITTS Securities.
You should carefully read the fund prospectus accompanying this
prospectus supplement and prospectus of ML&Co. to fully understand the
operation and management of the Select Sector SPDR Funds, including the fees
and expenses charged by the Select Sector SPDR Funds. In addition, because the
Select Sector SPDR Trust is subject to the registration requirements of the
Securities Act of 1933, as amended, and the Investment Company Act, the Select
Sector SPDR
S-6
<PAGE>
Trust is required to file periodically certain information specified by the
SEC. For more information about the Select Sector SPDR Funds you can inspect
information provided to or filed with the SEC by the Select Sector SPDR Trust
at the SEC's public reference facilities or accessed over the Internet through
a web site maintained by the SEC at "http://www.sec.gov." You may also obtain
copies of these documents at no cost by calling the Select Sector SPDR Trust at
(800) 843-2639 or by writing the Select Sector SPDR Trust c/o ALPS Mutual Funds
Services, Inc., 370 17th Street, Suite 3100, Denver, CO 80202. Neither the fund
prospectus nor these other documents are incorporated by reference in this
prospectus supplement, and we make no representation or warranty as to the
accuracy or completeness of this information.
Please note that an investment in the MITTS Securities does not entitle
you to any ownership interest in the Select Sector SPDR Funds comprising the
SPDR Fund Growth Portfolio Index.
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 each 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 will be listed on the AMEX under the trading symbol
"GWM", 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" in this prospectus supplement.
What is the role of MLPF&S?
Our subsidiary, MLPF&S, is the underwriter for the offering and sale of
the MITTS Securities. After the initial offering, MLPF&S intends to buy and
sell the 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 Adjusted 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.
S-7
<PAGE>
MLPF&S also is a soliciting dealer in the shares of the Select Sector
SPDR Funds and is the index compilation agent for the indices related to the
Select Sector SPDR Funds. Under certain circumstances, these duties could
result in a conflict of interest between MLPF&S's status as our subsidiary and
its responsibilities to the Select Sector SPDR Funds and the Select Sector
Indexes. Please see the section entitled "Risk Factors--Potential conflicts of
interests" in this prospectus supplement.
Who is ML&Co.?
Merrill Lynch & Co., Inc. is a holding company with various subsidiary
and affiliated companies that provide investment, financing, 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 we have filed with the SEC, which you can find by
referring to the section "Where You Can Find More Information" in this
prospectus supplement.
Are there any risks associated with my investment?
Yes, an investment in the MITTS Securities is subject to risk. Please
refer to the section "Risk Factors" in this prospectus supplement.
S-8
<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 Adjusted Ending Value does not exceed the
Starting Value at the stated maturity date, the Supplemental Redemption Amount
will be "zero". This will be true even if the value of the SPDR Fund Growth
Portfolio Index, as reduced by the Adjustment Factor over the term of the MITTS
Securities, 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 repay you 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 ML&Co. with the
same maturity date. Your investment may not reflect the full opportunity cost
to you when you take into account factors that affect the time value of money.
Your return will not reflect the return of owning the Select Sector SPDR Funds
comprising the SPDR Fund Growth Portfolio Index
The SPDR Fund Growth Portfolio Index is calculated by reference to the
values of eight Select Sector SPDR Funds that reflect the prices of those funds
without taking into consideration the value of dividends paid on those funds.
The return on your MITTS Securities will not reflect the return you would
realize if you actually owned all of the Select Sector SPDR Funds comprising
the SPDR Fund Growth Portfolio Index and received the dividends paid on those
funds because of the cumulative effect of the reduction caused by the
Adjustment Factor and because the value of the SPDR Fund Growth Portfolio Index
is calculated by reference to the values of the Select Sector SPDR Funds
without taking into consideration the value of any dividends paid on those
funds.
Changes in the value per share of a Select Sector SPDR Fund will not exactly
mirror changes in the related Select Sector Index
As indicated in the fund prospectus, a Select Sector SPDR Fund's
investment objective is to provide investment results that, before expenses,
correspond generally to the price and yield performance of the publicly-traded
equity securities included in the related Select Sector Index. However, changes
in the value of a Select Sector Index and in the value per share of the related
Select Sector SPDR Fund are not expected to be identical because:
. a Select Sector SPDR Fund's investment portfolio may not hold all
of the stocks in the related Select Sector Index or may not hold
each stock in the same weighting as the related Select Sector
Index,
. a Select Sector SPDR Fund may hold assets other than equity
securities, and
. the value per share of a Select Sector SPDR Fund reflects the
reduction of fund assets resulting from the accrual of fees and
expenses and the payment of distributions, if any.
As stated in the fund prospectus, the investment adviser to the Select
Sector SPDR Funds believes that "over time, "the tracking error' of a Select
Sector SPDR Fund relative to the performance of the related Select Sector
Index, adjusted for the effect of that Select Sector SPDR Fund's expenses, will
be less than 5%". There is no assurance that the tracking error will not be
greater than 5% at any time, including the time that you may wish to sell your
MITTS Securities before the maturity date or at the time the calculation agent
determines the Supplemental Redemption Amount, if any.
S-9
<PAGE>
The SPDR Fund Growth Portfolio Index is expected to be indirectly
affected by fees charged by the underlying Select Sector SPDR Funds to their
shareholders which will reduce the value of the Select Sector SPDR Fund shares.
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 "GWM", subject to official notice of issuance. While there have
been a number of issuances of Market Index Target-Term Securities, trading
volumes have varied historically from one transaction 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 SPDR Fund Growth Portfolio
Index.
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.
There are many factors affecting the trading value of the MITTS Securities
We believe that the trading value of the MITTS Securities will be
affected by the value of the SPDR Fund Growth Portfolio Index and by a number
of other factors. Some of these factors interrelate in complex ways; as a
result, the effect of any one factor may offset or magnify the effect of
another factor. 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.
. SPDR Fund Growth Portfolio Index value. We expect that the market
value of the MITTS Securities will depend substantially on the
amount by which the SPDR Fund Growth Portfolio Index, as reduced
by the Adjustment Factor over the term of the MITTS Securities,
exceeds the Starting Value. If you choose to sell your MITTS
Securities when the value of the SPDR Fund Growth Portfolio Index,
as reduced by the Adjustment Factor over the term of the MITTS
Securities, 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
SPDR Fund Growth Portfolio Index will continue to fluctuate until
the Adjusted Ending Value is determined. If you choose to sell
your MITTS Securities when the value of the SPDR Fund Growth
Portfolio 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 dividend rates, or
dividends per share, may increase the value of the SPDR Fund
Growth Portfolio Index while falling dividend rates may decrease
the value of the SPDR Fund Growth Portfolio Index.
S-10
<PAGE>
. Interest rates. Because we will pay, at a minimum, the principal
amount per unit of MITTS Securities at maturity, we expect that
changes in U.S. 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.
The level of U.S. interest rates may also affect the U.S. economy
and, in turn, the value of the SPDR Fund Growth Portfolio Index.
Rising interest rates may lower the value of the SPDR Fund Growth
Portfolio Index and, thus, the MITTS Securities. Falling interest
rates may increase the value of the SPDR Fund Growth Portfolio
Index and, thus, may increase the value of the MITTS Securities.
. Volatility of the SPDR Fund Growth Portfolio Index. Volatility is
the term used to describe the size and frequency of price and/or
market fluctuations. Generally, if the volatility of the SPDR Fund
Growth Portfolio Index increases, we expect that the trading value
of the MITTS Securities will increase and, conversely, if the
volatility of the SPDR Fund Growth Portfolio Index decreases, we
expect that the trading value of the MITTS Securities will
decrease.
. Time remaining to maturity. We anticipate that before their
maturity, the MITTS Securities may trade at a value above that
which would be expected based on the level of interest rates and
the value of the SPDR Fund Growth Portfolio Index. This difference
will reflect a "time premium" due to expectations concerning the
value of the SPDR Fund Growth Portfolio 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.
. Dividend yields. Generally, if dividend yields on the stocks
included in the Select Sector SPDR Funds comprising the SPDR Fund
Growth Portfolio 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. 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
SPDR Fund Growth Portfolio Index at maturity, an improvement in
our credit ratings will not reduce the investment risks related to
the MITTS Securities.
It is important for you to understand that the impact of one of the
factors specified above, such as an increase in interest rates, may offset some
or all of any increase in the trading value of the MITTS Securities
attributable to another factor, such as an increase in the value of the SPDR
Fund Growth Portfolio Index.
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 SPDR Fund Growth
Portfolio 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.
S-11
<PAGE>
No affiliation between ML&Co. and the Select Sector SPDR Funds
Our affiliate MLPF&S is both a soliciting dealer in the shares of the
Select Sector SPDR Funds and the index compilation agent for the related Select
Sector Indexes. However, we are not affiliated with the Select Sector SPDR
Funds or the related Select Sector Indexes. The Select Sector SPDR Funds have
no obligations with respect to the MITTS Securities or amounts to be paid to
you, including any obligation to take the needs of ML&Co. or of beneficial
owners of the MITTS Securities into consideration for any reason. The Select
Sector SPDR Funds will not receive any of the proceeds from this offering and
are not responsible for, and have not participated in, the determination or
calculation of the amount you will receive on your MITTS Securities at
maturity. In addition, the Select Sector SPDR Funds are not involved with the
administration or trading of the MITTS Securities and have no obligations with
respect to any amounts due under 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 were 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.
Purchases and sales by us and our affiliates may affect your return
We and our affiliates may from time to time buy or sell shares of the
Select Sector SPDR Funds comprising the SPDR Fund Growth Portfolio Index or the
stocks underlying those funds 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 the underlying stocks, the value of the
Select Sector SPDR Funds and, in turn, the value of the SPDR Fund Growth
Portfolio Index in a manner that would be adverse to your investment in the
MITTS Securities.
Potential conflicts of interests
Our subsidiary, MLPF&S, is our agent for the purposes of calculating the
Adjusted 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 SPDR Fund
Growth Portfolio 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 SPDR Fund Growth Portfolio Index. See "Description of the
MITTS Securities--Adjustments to the SPDR Fund Growth Portfolio Index; Market
Disruption Events" and "Discontinuance of the SPDR Fund Growth Portfolio Index"
in this prospectus supplement.
MLPF&S is a soliciting dealer in the shares of the Select Sector SPDR
Funds. Under certain circumstances, MLPF&S's role as calculation agent for the
MITTS Securities and its role as a soliciting dealer in these shares could give
rise to conflicts of interests between the calculation agent and holders of the
MITTS Securities. These conflicts could occur in connection with its
determination as to the Adjusted Ending Value and the amount we owe you at
maturity.
S-12
<PAGE>
Additionally, MLPF&S serves as Index Compilation Agent for each Select
Sector Index. In its capacity as Index Compilation Agent, MLPF&S determines, in
consultation with S&P, which securities of the S&P 500 are to be included in
each Select Sector Index. Under certain circumstances, MLPF&S's role as
calculation agent for the MITTS Securities and its role as Index Compilation
Agent could give rise to conflicts of interests between the calculation agent
and holders of the MITTS Securities.
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 also consider the tax consequences of investing in the MITTS
Securities, aspects of which are uncertain. See "United States Federal Income
Taxation" below.
S-13
<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES
In 1998, we acquired the outstanding shares of Midland Walwyn, Inc., in a
transaction accounted for as a pooling-of-interests. The following information
for the fiscal years 1994 through 1997 has been restated as if the two entities
had always been combined.
The following table sets forth our historical ratios of earnings to fixed
charges for the periods indicated:
<TABLE>
<CAPTION>
Year Ended Last Friday
in December
------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges(a).................. 1.2 1.2 1.2 1.2 1.1
</TABLE>
- --------
(a) The effect of combining Midland Walwyn did not change the ratios reported
for the fiscal years 1994 through 1997.
For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" consist of earnings from continuing operations before income taxes
and fixed charges, excluding capitalized interest and preferred security
dividend requirements of subsidiaries. "Fixed charges" consist of interest
costs, the interest factor in rentals, amortization of debt issuance costs,
preferred security dividend requirements of subsidiaries, and capitalized
interest.
S-14
<PAGE>
DESCRIPTION OF THE MITTS SECURITIES
The MITTS Securities are to be issued as a series of senior debt
securities under the senior indenture, referred to as the "1983 Indenture",
which is more fully described in the accompanying prospectus. The MITTS
Securities will mature on June , 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. Upon the occurrence of an Event
of Default with respect to the MITTS Securities, beneficial owners of the MITTS
Securities may accelerate the maturity of the MITTS Securities, as described
under "Description of the MITTS Securities--Events of Default and Acceleration"
in this prospectus supplement and "Description of Debt Securities--General--
Events of Default" in the accompanying prospectus.
The MITTS Securities are to be issued in denominations of whole units 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 Supplemental
Redemption Amount is not greater than zero, a beneficial owner of a MITTS
Security will be entitled to receive only the principal amount of its MITTS
Securities.
The "Supplemental Redemption Amount" for a MITTS Security will be
determined by the calculation agent and will equal:
<TABLE>
<S> <C>
(Adjusted Ending Value - Starting Value)
principal amount of each MITTS Security ($10 per unit) X (--------------------------------------)
( Starting Value )
</TABLE>
"provided", "however", that in no event will the Supplemental Redemption Amount
be less than zero.
The "Starting Value" of the SPDR Fund Growth Portfolio Index will be set
to 100 on the Pricing Date.
The "Adjusted Ending Value" will be determined by the calculation agent
and will equal the average or arithmetic mean of the closing values of the SPDR
Fund Growth Portfolio Index, as reduced by the application of the Adjustment
Factor on each Calculation Day, determined on each of the first five
Calculation Days during the Calculation Period. If there are fewer than five
Calculation Days, then the Adjusted Ending Value will equal the average or
arithmetic mean of the closing values of the SPDR Fund Growth Portfolio Index
on those Calculation Days, as reduced by the application of the Adjustment
Factor on each Calculation Day, and if there is only one Calculation Day, then
the Adjusted Ending Value will equal the closing value of the SPDR Fund Growth
Portfolio Index on that Calculation Day, as reduced by the application of the
Adjustment Factor on that Calculation Day. If no Calculation Days occur during
the Calculation Period, then the Adjusted Ending Value will equal the closing
value of the SPDR Fund Growth Portfolio Index determined on the last scheduled
Index Business Day in the Calculation Period, as reduced by the application of
the Adjustment Factor on that day, regardless of the occurrence of a Market
Disruption Event on that day.
S-15
<PAGE>
The "Adjustment Factor" will be a fixed percentage that is expected to
be between 2.00% and 2.50% per year and will be applied over the entire term
of the MITTS Securities. On each calendar day during the term of the MITTS
Securities, we will apply this percentage on a pro-rated basis based on a 365-
day year to reduce the value used to calculate the Supplemental Redemption
Amount on each Calculation Day during the Calculation Period. As a result of
the cumulative effect of this reduction, the values used to calculate the
Supplemental Redemption Amount during the Calculation Period will be
approximately 13.07% to 16.07% less than the actual closing value of the SPDR
Fund Growth Portfolio Index on each Calculation Day during the Calculation
Period. We will determine the Adjustment Factor on the Pricing Date and it
will appear in the final prospectus supplement delivered to you in connection
with your purchase of the MITTS Securities.
The "Calculation Period" means the period from and including the seventh
scheduled Index Business Day before the maturity date to and including the
second scheduled Index Business Day before 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" is any day on which the NYSE and the AMEX are
open for trading and the SPDR Fund Growth Portfolio 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 closing
values of the SPDR Fund Growth Portfolio Index during the Calculation Period:
. the percentage change from the Starting Value to the hypothetical
closing value of the SPDR Fund Growth Portfolio Index,
. the Adjusted Ending Value used to calculate the Supplemental Redemption
Amount,
. 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
shares of the Select Sector SPDR Funds included in the SPDR Fund
Growth Portfolio Index, which includes an assumed aggregate
dividend yield of 1.02% per annum, as more fully described below.
S-16
<PAGE>
For the purposes of calculating this table, we have assumed a
hypothetical Adjustment Factor of 2.25% per annum, the midpoint of the expected
range of 2.00% to 2.50%.
<TABLE>
<CAPTION>
Pretax
Percentage annualized
change rate of
Hypothetical from the Total amount Pretax return of
closing Starting payable at Total annualized the shares
value Value to the maturity per rate of rate of of the Select
during the hypothetical Adjusted unit of the return on return on Sector SPDR
Calculation closing Ending MITTs the MITTS the MITTS Funds in the
Period value Value(1) Securities Securities Securities(2) index(2)(3)
- ------------ ------------ -------- ------------ ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
20.00 -80.00% 17.08 $10.00 0.00% 0.00% -20.60%
40.00 -60.00% 34.17 $10.00 0.00% 0.00% -11.65%
60.00 -40.00% 51.25 $10.00 0.00% 0.00% -6.16%
80.00 -20.00% 68.33 $10.00 0.00% 0.00% -2.15%
100.00(4) 0.00% 85.42 $10.00 0.00% 0.00% 1.02%
120.00 20.00% 102.50 $10.25 2.50% 0.35% 3.66%
140.00 40.00% 119.58 $11.96 19.58% 2.57% 5.92%
160.00 60.00% 136.67 $13.67 36.67% 4.51% 7.90%
180.00 80.00% 153.75 $15.38 53.75% 6.24% 9.67%
200.00 100.00% 170.83 $17.08 70.83% 7.79% 11.27%
220.00 120.00% 187.92 $18.79 87.92% 9.21% 12.72%
240.00 140.00% 205.00 $20.50 105.00% 10.51% 14.06%
260.00 160.00% 222.08 $22.21 122.08% 11.72% 15.31%
280.00 180.00% 239.17 $23.92 139.17% 12.84% 16.46%
300.00 200.00% 256.25 $25.63 156.25% 13.89% 17.55%
</TABLE>
- --------
(1) The Adjusted Ending Values specified in this column are approximately
14.58% less than the hypothetical closing values of the SPDR Fund Growth
Portfolio Index as a result of the application of a hypothetical Adjustment
Factor of 2.25% per annum over an assumed investment term of seven years.
(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) an investment of a fixed amount in the shares of the Select Sector SPDR
Funds comprising the SPDR Fund Growth Portfolio Index with the
allocation of this amount reflecting the relative weights of each of the
Select Sector SPDR Funds in the SPDR Fund Growth Portfolio Index;
(b) a percentage change in the aggregate price of the shares that equals the
percentage change in the SPDR Fund Growth Portfolio Index from the
Starting Value to the relevant hypothetical closing value;
(c) a constant dividend yield of 1.02% per annum, paid quarterly from the
date of initial delivery of the MITTS Securities, applied to the value
of the shares of the Select Sector SPDR Funds comprising the SPDR Fund
Growth Portfolio Index at the end of each quarter assuming this value
increases or decreases linearly from the Starting Value to the
applicable hypothetical closing value;
(d) no transaction fees or expenses in connection with purchasing and
holding shares of the Select Sector SPDR Funds;
(e) a seven-year investment term; and
(f) a final value of the SPDR Fund Growth Portfolio Index equal to the
hypothetical closing value.
(4) The Starting Value of the SPDR Fund Growth Portfolio Index will be set to
100 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 Adjustment Factor and the actual Adjusted Ending Value determined by
the calculation agent as provided in this prospectus supplement.
S-17
<PAGE>
Adjustments to the SPDR Fund Growth Portfolio Index; Market Disruption Events
If at any time AMEX changes its method of calculating the SPDR Fund
Growth Portfolio Index, or the value of the SPDR Fund Growth Portfolio Index
changes, in any material respect, or if the SPDR Fund Growth Portfolio Index
is in any other way modified so that the SPDR Fund Growth Portfolio Index does
not, in the opinion of the calculation agent, fairly represent the value of
the SPDR Fund Growth Portfolio Index had any 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 SPDR Fund Growth Portfolio 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 SPDR Fund Growth Portfolio Index as if no changes or
modifications had been made, and calculate the closing value with reference to
the SPDR Fund Growth Portfolio Index, as so adjusted. Accordingly, if the
method of calculating the SPDR Fund Growth Portfolio Index is modified so that
the value of the SPDR Fund Growth Portfolio 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 SPDR Fund Growth Portfolio Index
in order to arrive at a value of the SPDR Fund Growth Portfolio Index as if it
had not been modified, e.g., as if a split had not occurred.
"Market Disruption Event" means any of the following events, with respect
to the Select Sector SPDR Funds, as determined by the calculation agent:
(a) the suspension or material limitation on trading for more than two
hours of trading, or during the one-half hour period preceding the
close of trading on the applicable exchange, in 20% or more of the
stocks which then comprise the Select Sector SPDR Funds underlying
the SPDR Fund Growth Portfolio Index; or
(b) the suspension or material limitation on trading, in each case, for
more than two hours of trading whether by reason of movements in
price otherwise exceeding levels permitted by the relevant exchange
or otherwise in option contracts or futures contracts related to the
S&P 500 Index or the shares of a Select Sector SPDR Fund underlying
the SPDR Fund Growth Portfolio Index which are traded on any major
U.S. exchange.
A limitation on the hours in a trading day and/or number of days of
trading will not constitute a Market Disruption Event if it results from an
announced change in the regular business hours of the relevant exchange.
For the purposes of clause (a) above, any limitations on trading during
significant market fluctuations under NYSE Rule 80A or any applicable rule or
regulation enacted or promulgated by the NYSE or any other self regulatory
organization or the SEC of similar scope as determined by the calculation
agent, will be considered "material".
Discontinuance of the SPDR Fund Growth Portfolio Index
If the AMEX discontinues publication of the SPDR Fund Growth Portfolio
Index and the AMEX or another entity publishes a successor or substitute index
that the calculation agent determines, in its sole discretion, to be
comparable to the SPDR Fund Growth Portfolio 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 AMEX or any other entity for the SPDR Fund Growth
Portfolio 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 AMEX discontinues publication of the SPDR Fund
Growth Portfolio Index and:
.the calculation agent does not select a successor index, or
S-18
<PAGE>
. the successor index is no longer published on any of the Calculation
Days,
the calculation agent will compute a substitute value for the SPDR Fund Growth
Portfolio Index in accordance with the procedures last used to calculate the
SPDR Fund Growth Portfolio Index before any discontinuance. If a successor
index is selected or the calculation agent calculates a value as a substitute
for the SPDR Fund Growth Portfolio Index as described below, the successor
index or value will be used as a substitute for the SPDR Fund Growth Portfolio
Index for all purposes, including for purposes of determining whether a Market
Disruption Event exists.
If the AMEX discontinues publication of the SPDR Fund Growth Portfolio
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 Exchange Business Day until the earlier
to occur of:
. the determination of the Adjusted Ending Value and
. a determination by the calculation agent that a successor index is
available,
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.
An "Exchange 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 SPDR Fund Growth Portfolio 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 was the stated maturity date of the MITTS Securities,
"provided", "however", that the Adjustment Factor will be applied to the values
used to calculate the Supplemental Redemption Amount as if the MITTS
Securities had not been accelerated and had remained outstanding to the stated
maturity date. 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 at the maturity date of the MITTS
Securities, whether at their stated maturity or upon acceleration, from and
after the maturity date the MITTS Securities 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
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
S-19
<PAGE>
successor, being a "depositary"), as depositary, registered in the name of Cede
& Co., DTC's 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 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.
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.
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 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
S-20
<PAGE>
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 nominee, Cede & Co. The deposit of
MITTS Securities with DTC and their registration in the name of Cede & Co.
effect no change in beneficial ownership. DTC has no knowledge of the actual
beneficial owners of the MITTS Securities; DTC's records reflect only the
identity of the direct participants to whose accounts such MITTS Securities are
credited, which may or may not be the beneficial owners. The participants will
remain responsible for keeping account of their holdings on behalf of their
customers.
Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants, and by direct
participants and indirect participants to beneficial owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Neither DTC nor Cede & Co. will consent or vote with respect to the MITTS
Securities. Under its usual procedures, DTC mails an omnibus proxy to ML&Co. as
soon as possible after the applicable record date. The omnibus proxy assigns
Cede & Co.'s consenting or voting rights to those direct participants
identified in a listing attached to the omnibus proxy to whose accounts the
MITTS Securities are credited on the record date.
Principal, premium, if any, and/or interest, if any, payments 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.
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.
S-21
<PAGE>
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.
THE SELECT SECTOR SPDR FUND GROWTH PORTFOLIO INDEX
The SPDR Fund Growth Portfolio Index is an index tracking the value of
eight underlying Select Sector SPDR Funds. Each Select Sector SPDR Fund is an
index fund whose stated investment objective is to provide investment results
that, before expenses, correspond generally to the price and yield performance
of the publicly-traded equity securities comprising the relevant sector index.
Each sector index consists of the equity securities of publicly-traded
companies that are components of the S&P 500 Index and are involved in a
specific market sector. An investment in the MITTS Securities does not entitle
you to any ownership interest in the Select Sector SPDR Funds comprising the
SPDR Fund Growth Portfolio Index.
The initial multipliers will be calculated so that the value of the SPDR
Fund Growth Portfolio Index will equal 100 on the Pricing Date and the weight
of each Select Sector SPDR Fund on the Pricing Date will equal the initial
weight set forth in the final prospectus supplement delivered to you in
connection with sales of the MITTS Securities. The initial multiplier for each
Select Sector SPDR Fund will be determined by the calculation agent on the
Pricing Date and will equal:
. the initial weighting for the Select Sector SPDR Fund multiplied by 100,
divided by
. the last sale price reported on the AMEX of that Select Sector
SPDR Fund on the Pricing Date.
The respective multipliers will remain constant for the term of the MITTS
Securities unless adjusted for certain events such as, splits or reverse splits
in any Select Sector SPDR Fund or capital gains distributions. The AMEX will
have the sole discretion as to whether to make any adjustments and the amount
of any adjustments.
The AMEX will calculate and disseminate the value of the SPDR Fund Growth
Portfolio Index that will equal the sum of the products, for each Select Sector
SPDR Fund, of the applicable multiplier and the most recently reported price at
which the Select Sector SPDR Fund has traded on its primary exchange. The AMEX
intends to disseminate the SPDR Fund Growth Portfolio Index at approximately
15-second intervals during the AMEX's business hours and at the end of each
Index Business Day via the Consolidated Tape Association's Network B. The SPDR
Fund Growth Portfolio Index is reported by the AMEX and Bloomberg under the
symbol "GWI" and by Reuters under the symbol ".GWI".
S-22
<PAGE>
The following table sets forth the name, the AMEX trading symbol and the
weighting of each Select Sector SPDR Fund as of May 4, 1999. These weightings
may be changed. Any changes to the weightings will be determined on the Pricing
Date and will be set forth in the final prospectus supplement delivered to you
in connection with the sale of the MITTS Securities. The initial multipliers
will be determined on the Pricing Date and will appear in the final prospectus
supplement delivered to you in connection with sales of the MITTS Securities.
<TABLE>
<CAPTION>
Trading Initial
Select Sector SPDR Fund Symbol Weighting Multiplier
- ----------------------- ------- --------- ----------
<S> <C> <C> <C>
The Technology Select Sector SPDR Fund........... XLK 25%
The Consumer Services Select Sector SPDR Fund.... XLV 18%
The Consumer Staples Select Sector SPDR Fund..... XLP 16%
The Financial Select Sector SPDR Fund............ XLF 15%
The Energy Select Sector SPDR Fund............... XLE 8%
The Industrial Select Sector SPDR Fund........... XLI 7%
The Basic Industries Select Sector SPDR Fund..... XLB 6%
The Cyclical/Transportation Select Sector SPDR
Fund............................................ XLY 5%
</TABLE>
Select Sector SPDR Funds
ML&Co. has attached the fund prospectus describing the Select Sector SPDR
Funds and is delivering it to purchasers of the MITTS Securities together with
this prospectus supplement and the accompanying prospectus of ML&Co. for the
convenience of reference only. The fund prospectus does not constitute a part
of this prospectus supplement or the accompanying prospectus of ML&Co., nor is
it incorporated by reference in this prospectus supplement or the accompanying
prospectus of ML&Co. The summary description below is qualified in its entirety
by the information describing the Select Sector SPDR Funds and the Select
Sector Indexes included in the attached fund prospectus.
The investment objective of each Select Sector SPDR Fund is to provide
investment results that, before expenses, correspond generally to the price and
yield performance of publicly traded equity securities of companies in a
particular sector or group of industries as represented by a specified Select
Sector Index published by the AMEX. The companies included in each Select
Sector SPDR Index are selected on the basis of general industry classification
from a universe of companies defined by the S&P 500. For further information on
the Select Sector SPDR Funds and the Select Sector Indexes you should carefully
read the fund prospectus accompanying this prospectus supplement.
Although ML&Co.'s subsidiary, MLPF&S, provides certain services to the
Select Sector SPDR Funds and the provider of the Select Sector Indexes, ML&Co.
is not affiliated with the Select Sector SPDR Funds or the Select Sector
Indexes, and the Select Sector SPDR Funds will not receive any of the proceeds
from the sale of, or have any obligations under, the MITTS Securities. A
prospective purchaser of the MITTS Securities should independently decide
whether an investment in the MITTS Securities is appropriate.
The Select Sector SPDR Trust is subject to the registration requirements
of the Securities Act and the Investment Company Act, and is required to file
periodically certain information specified by the SEC. For more information
about the Select Sector SPDR Funds, the information provided to or filed with
the SEC by the Trust can be inspected at the SEC's public reference facilities
or accessed over the Internet through a web site maintained by the SEC at
"http://www.sec.gov". Copies of these documents may also be obtained at no cost
by calling the Trust at (800) 843-2639 or by writing the Trust c/o ALPS Mutual
Funds Services, Inc., 370 17th Street, Suite 3100, Denver, CO 80202. Neither
the fund prospectus nor such other documents are incorporated by reference in
this prospectus supplement, and ML&Co. makes no representation or warranty as
to the accuracy or completeness of any such documents.
ML&Co. is not affiliated with any of the Select Sector SPDR Funds, and
the Select Sector SPDR Funds do not have obligations with respect to the MITTS
Securities. This prospectus supplement relates only to the MITTS Securities
offered by this prospectus supplement and does not relate to the shares of the
Select
S-23
<PAGE>
Sector SPDR Funds or any other securities relating to the Select Sector SPDR
Funds. The information contained in this prospectus supplement regarding the
Select Sector SPDR Funds has been derived from the publicly available documents
described in the preceding paragraph. ML&Co. makes no representation that these
publicly available documents or any other publicly available information
regarding the Select Sector SPDR Funds are accurate or complete. Furthermore,
there can be no assurance that all events occurring prior to the date of this
prospectus supplement, including events that would affect the accuracy or
completeness of the publicly available documents described in the preceding
paragraph, that would affect the trading price of the shares of the Select
Sector SPDR Funds, and therefore the trading price of the MITTS Securities,
have been publicly disclosed. Subsequent disclosure of any of these events or
the disclosure of or failure to disclose material future events concerning the
Select Sector SPDR Funds could affect the Supplemental Redemption Amount, if
any, to be received at maturity and therefore the trading value of the MITTS
Securities.
MLPF&S, a subsidiary of ML&Co., is a soliciting dealer in the shares of
the Select Sector SPDR Funds. Additionally, MLPF&S serves as index compilation
agent for the Select Sector Indexes. In its capacity as index compilation
agent, MLPF&S determines, in consultation with S&P, the composition of the
securities measured by the Select Sector Indexes.
License agreement
S&P, the AMEX and MLPF&S have entered into a non-exclusive license
agreement providing for the license to MLPF&S, in exchange for a fee, of the
right to use Select Sector Indexes owned and published by S&P in connection
with certain securities, including the MITTS Securities, and ML&Co. is an
authorized sublicensee of MLPF&S.
The license agreement among S&P, the AMEX and MLPF&S provides that the
following language must be stated in this prospectus supplement:
"Standard & Poor's(R)", "Standard & Poor's 500(R)", "S&P 500(R)",
"S&P(R)", "500", "Standard & Poor's Depositary Receipts", "SPDRs", "Select
Sector SPDR" and "Select Sector Standard & Poor's Depositary Receipts" are
registered trademarks of Standard & Poor's, a division of The McGraw-Hill
Companies, Inc., and have been licensed for use by MLPF&S. ML&Co. is an
authorized sublicensee of MLPF&S. The stocks comprising the Select Sector
Indexes were selected by MLPF&S, as index compilation agent, in consultation
with S&P from the universe of companies represented by the S&P 500 Index. The
composition and weightings of the stocks included in the Select Sector Indexes
can be expected to differ from the composition and weighting of stocks included
in any similar S&P 500 sector indexes published and disseminated by S&P.
The MITTS Securities, the SPDR Fund Growth Portfolio Index, the Select
Sector SPDR Funds and the Select Sector Indexes are not sponsored, endorsed,
sold or promoted by S&P. S&P makes no representation or warranty, express or
implied, to the holders of the MITTS Securities or any member of the public
regarding the advisability of investing in securities generally or in the MITTS
Securities particularly or in the ability of the SPDR Fund Growth Portfolio
Index to track the performance and yield of the Select Sector Indexes or in the
ability of the Select Sector Indexes to track the performance of the
corresponding sectors represented in the stock market. The stocks included in
the Select Sector Indexes were selected by MLPF&S as the index compilation
agent in consultation with S&P. The composition and weightings of the stocks
included in each Select Sector Index can be expected to differ from the
composition and weighting of stocks included in any corresponding S&P 500
sector index that is published and disseminated by S&P. S&P's only relationship
to the index compilation agent is the licensing of certain trademarks and trade
names of S&P and of the S&P 500 Index which is determined, composed and
calculated by S&P without regard to the index compilation agent or the MITTS
Securities. S&P has no obligation to take the needs of the index compilation
agent, ML&Co. or the holders of the MITTS Securities into consideration in
determining, composing or calculating the S&P 500 Index. S&P is not responsible
for and has not participated in any determination of the timing of the sale of
the
S-24
<PAGE>
MITTS Securities, prices at which the MITTS Securities are initially to be
sold, or quantities of the MITTS Securities to be issued or in the calculation
of the Supplemental redemption Amount. S&P has no obligation or liability in
connection with the administration, marketing or trading of the MITTS
Securities.
S&P does not guarantee the accuracy and/or the completeness of the S&P
500 Index, the Select Sector Indexes or any data included therein. S&P makes no
warranty, express or implied, as to results to be obtained by ML&Co., MLPF&S,
the holders of the MITTS Securities, or any other person or entity from the use
of the S&P 500 Index, the Select Sector Indexes or any data included therein in
connection with the rights licensed under the license agreement described
herein or for any other use. S&P makes no express or implied warranties, and
expressly disclaims all warranties of merchantability or fitness for a
particular purpose with respect to the S&P 500 Index, the Select Sector Indexes
or any data included therein. Without limiting the generality of the foregoing,
in no event shall S&P have any liability for any special, punitive, indirect or
consequential damages, including lost profits, even if notified of the
possibility of such damages."
All disclosures contained in this prospectus supplement regarding the S&P
500 Index or the Select Sector Indexes, including its respective make-up,
method of calculation and changes in its components, are derived from publicly
available information prepared by S&P and the Select Sector SPDR Trust,
respectively. ML&Co. and MLPF&S do not assume any responsibility for the
accuracy or completeness of this information.
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
or partnership (including an entity treated as a corporation or a partnership
for United States Federal income tax purposes) created or organized in or under
the laws of the United States, any state thereof or the District of Columbia
(other than a partnership that is not treated as a United States person under
any applicable Treasury regulations), (c) an estate the income of which is
subject to United States Federal income taxation regardless of its source, (d)
a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United States
persons have the authority to control all substantial decisions of the trust,
or (e) any other person whose income or gain in respect of a MITTS Security is
effectively connected with the conduct of a United States trade or business.
Notwithstanding clause (d) of the preceding sentence, to the extent provided in
Treasury regulations, certain trusts in existence on August 20, 1996, and
treated as United States persons prior to 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.
S-25
<PAGE>
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 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
S-26
<PAGE>
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 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 purchasers) 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
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<PAGE>
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 would 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 6.14% 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 May 5, 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:
<TABLE>
<CAPTION>
Total interest
Interest deemed to have
deemed to accrued on MITTS
accrue during Securities as of end
accrual period of accrual period
Accrual period (per unit) (per unit)
-------------- -------------- --------------------
<S> <C> <C>
May 5, 1999 through November 5, 1999....... $0.3096 $0.3096
November 6, 1999 through May 5, 2000....... $0.3165 $0.6261
May 6, 2000 through November 5, 2000....... $0.3262 $0.9523
November 6, 2000 through May 5, 2001....... $0.3362 $1.2885
May 6, 2001 through November 5, 2001....... $0.3466 $1.6351
November 6, 2001 through May 5, 2002....... $0.3572 $1.9923
May 6, 2002 through November 5, 2002....... $0.3681 $2.3604
November 6, 2002 through May 5, 2003....... $0.3795 $2.7399
May 6, 2003 through November 5, 2003....... $0.3911 $3.1310
November 6, 2003 through May 5, 2004....... $0.4031 $3.5341
May 6, 2004 through November 5, 2004....... $0.4155 $3.9496
November 6, 2004 through May 5, 2005....... $0.4283 $4.3779
May 6, 2005 through November 5, 2005....... $0.4414 $4.8193
November 6, 2005 through May 5, 2006....... $0.4549 $5.2742
</TABLE>
- --------
Hypothetical Projected Supplemental Redemption Amount = $5.2742 per unit.
S-28
<PAGE>
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.
Backup withholding
Backup withholding of United States Federal income tax at a rate of 31%
may apply to payments made in respect of the MITTS Securities to registered
owners who are not "exempt recipients" and who fail to provide certain
identifying information (such as the registered owner's taxpayer identification
number) in the required manner. Generally, individuals are not exempt
recipients, whereas corporations and certain other entities generally are
exempt recipients. Payments made in respect of the MITTS Securities to a U.S.
Holder must be reported to the IRS, unless the U.S. Holder is an exempt
recipient or establishes an exemption. Compliance with the identification
procedures described in the preceding section would establish an exemption from
backup withholding for those non-U.S. Holders who are not exempt recipients.
In addition, upon the sale of a MITTS Security to (or through) a broker,
the broker must withhold 31% of the entire purchase price, unless either (a)
the broker determines that the seller is a corporation or other exempt
recipient or (b) the seller provides, in the required manner, certain
identifying information and, in the case of a non-U.S. Holder, certifies that
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
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<PAGE>
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
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.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement. We have not authorized any other
person to provide you with different information. If anyone provides you with
different or inconsistent information, you should not rely on it. We are not
making an offer to sell these securities in any jurisdiction where the offer or
sale is not permitted.
You should assume that the information appearing in this prospectus
supplement is accurate as of the date 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.
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<PAGE>
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.
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.
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<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
Page
----
<S> <C>
A
Adjusted Ending Value...................................................... S-5
Adjustment Factor.......................................................... S-5
C
Calculation Day............................................................ S-16
Calculation Period......................................................... S-16
E
Exchange Business Day...................................................... S-19
F
Final Regulations.......................................................... S-26
I
Index Business Day......................................................... S-16
M
Market Disruption Event.................................................... S-18
ML&Co...................................................................... S-4
MLPF&S..................................................................... S-4
N
New Regulations............................................................ S-29
Non-U.S. Holder............................................................ S-25
P
Pricing Date............................................................... S-5
Projected Supplemental Redemption Amount................................... S-26
S
Select Sector Index........................................................ S-6
Select Sector SPDR Fund.................................................... S-6
SPDR Fund Growth Portfolio Index........................................... S-4
Starting Value............................................................. S-5
Supplemental Redemption Amount............................................. S-5
U
U.S. Holder................................................................ S-25
W
Withholding Agent.......................................................... S-29
</TABLE>
S-32
<PAGE>
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[LOGO]
2,500,000 Units
Merrill Lynch & Co., Inc.
Select Sector SPDR Fund Growth Portfolio
Market Index Target-Term Securities(R)
due June , 2006
"MITTS(R) Securities"
------------------------------
PROSPECTUS SUPPLEMENT
------------------------------
Merrill Lynch & Co.
June , 1999
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