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RULE NO. 424(b)(5)
REGISTRATION NO. 333-59997
Subject to Completion
Preliminary Prospectus Supplement dated February 4, 1999
PROSPECTUS SUPPLEMENT
(To prospectus dated July 30, 1998)
[LOGO]
2,500,000 Units
Merrill Lynch & Co., Inc.
STock Return Income DEbt Securities SM due August , 2000
"STRIDES SM Securities"
Linked to the value of the Nasdaq-100 Index(R)
($10 principal amount per unit)
---------------
General: . The STRIDES Securities will bear interest at a rate
expected to be between 5.00% and 5.25% per year. We will
determine the final interest rate on the date the STRIDES
Securities are initially priced for sale to the public and
disclose it to you in the final prospectus supplement
delivered in connection with sales of the STRIDES
Securities. Interest on the STRIDES Securities is payable
on February and August of each year, beginning August
, 1999. We will not redeem the STRIDES Securities before
their maturity.
Payment at Maturity:
. At maturity, for each unit of the STRIDES Securities that
you own, we will pay you the Redemption Amount which will
equal the lesser of:
.The Capped Value ($12.50); and
( Ending Value )
.$10 X ( ------------- )
( Starting Value )
. The Starting Value will be the closing value of the Nasdaq-
100 Index on the date the STRIDES Securities are initially
priced for sale to the public. The Starting Value will be
set forth in the final prospectus supplement delivered to
you in connection with sales of the STRIDES Securities.
. The Ending Value will be the average of the closing values
of the Nasdaq-100 Index on five business days shortly prior
to the stated maturity date.
. If the Redemption Amount is less than $10.00, you will
receive less at maturity than the initial issue price of
each unit, which may result in a loss to you. The
Redemption Amount will not exceed the Capped Value.
We have applied to have the STRIDES Securities listed on the American
Stock Exchange under the trading symbol "NML".
Investing in the STRIDES Securities involves certain risks which are
described in the "Risk Factors" section beginning on page S-6 of this
prospectus supplement.
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<TABLE>
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Per Unit Total
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Public offering price(1)(2)................................ $10.00 $
Underwriting discount(2)................................... $ $
Proceeds, before expenses, to Merrill Lynch & Co., Inc..... $ $
</TABLE>
(1) Plus accrued interest from February , 1999, if settlement occurs
after that date
(2) The public offering price and the underwriting discount for any
single transaction to purchase (a) between 100,000 units and
249,999 units will be $ per unit and $ per unit,
respectively, (b) between 250,000 units and 499,999 units will be
$ per unit and $ per unit, respectively and (c) 500,000 units
or more will be $ per unit and $ per unit, respectively.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus supplement or the accompanying prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
The STRIDES Securities will be ready for delivery in book-entry form only
through The Depository Trust Company on or about February , 1999.
---------------
Merrill Lynch & Co.
---------------
The date of this prospectus supplement is , 1999.
"STock Return Income DEbt Securities" and "STRIDES" are service marks owned by
Merrill Lynch & Co., Inc. "Nasdaq", "Nasdaq-100" and "Nasdaq-100 Index" are
trademarks, trade names or service marks owned by The Nasdaq Stock Market, Inc.
<PAGE>
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
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Page
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<S> <C>
Summary Information--Q&A................................................. S-3
Risk Factors............................................................. S-6
Where You Can Find More Information...................................... S-9
Ratio of Earnings to Fixed Charges....................................... S-9
Description of the STRIDES Securities.................................... S-10
The Index................................................................ S-18
Use of Proceeds and Hedging.............................................. S-22
United States Federal Income Taxation.................................... S-23
Underwriting............................................................. S-27
Validity of the STRIDES Securities....................................... S-27
Index of Certain Defined Terms........................................... S-28
Prospectus
Available Information.................................................... 2
Incorporation of Certain Documents by Reference.......................... 2
Merrill Lynch & Co., Inc................................................. 3
Use of Proceeds.......................................................... 3
Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined
Fixed Charges and Preferred Stock Dividends............................. 4
Description of Debt Securities........................................... 4
Description of Debt Warrants............................................. 9
Description of Currency Warrants......................................... 11
Description of Index Warrants............................................ 12
Description of Preferred Stock........................................... 17
Description of Depositary Shares......................................... 21
Description of Preferred Stock Warrants.................................. 25
Description of Common Stock.............................................. 27
Description of Common Stock Warrants..................................... 30
Plan of Distribution..................................................... 32
Experts.................................................................. 33
</TABLE>
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References in this prospectus supplement to "ML&Co.", "we", "us" and
"our" are to Merrill Lynch & Co., Inc.
References in this prospectus supplement to "MLPF&S" are to Merrill
Lynch, Pierce, Fenner & Smith Incorporated.
S-2
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SUMMARY INFORMATION--Q&A
This summary includes questions and answers that highlight selected
information from the prospectus and prospectus supplement to help you
understand the STock Return Income DEbt Securities SM or STRIDES SM Securities
due August , 2000. You should carefully read the prospectus and prospectus
supplement to fully understand the terms of the STRIDES Securities, the Nasdaq-
100 Index (the "Nasdaq-100 Index" or the "Index") as well as the tax and other
considerations that are important to you in making a decision about whether to
invest in the STRIDES Securities. You should, in particular, carefully review
the "Risk Factors" section, which highlights certain risks, to determine
whether an investment in the STRIDES Securities is appropriate for you.
What are the STRIDES Securities?
The STRIDES Securities are a series of senior debt securities issued by
ML&Co. and are not secured by collateral. The STRIDES Securities will rank
equally with all of our other unsecured and unsubordinated debt. The maturity
date of the STRIDES Securities will be August , 2000. We cannot redeem the
STRIDES Securities at any earlier date.
Each unit of the STRIDES Securities represents $10 principal amount of
the STRIDES Securities. You may transfer the STRIDES 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
STRIDES Securities in the form of a global certificate, which will be held by
The Depository Trust Company (otherwise known as DTC) or its nominee. Direct
and indirect participants in DTC will record beneficial ownership of the
STRIDES Securities by individual investors. You should refer to the section
"Description of the STRIDES Securities--Depositary" in this prospectus
supplement.
When will you receive interest?
You will receive interest payments on the STRIDES Securities at a rate
expected to be between 5.00% and 5.25% per year of the principal amount of each
unit, on February and August of each year, beginning August , 1999. We
will determine the final interest rate on the date the STRIDES Securities are
initially priced for sale to the public (the "Pricing Date") and disclose it to
you in the final prospectus supplement delivered in connection with sales of
the STRIDES Securities. If any interest payment date is not a Business Day, you
will be paid on the following Business Day. "Business Day" means each Monday,
Tuesday, Wednesday, Thursday and Friday that is not a day on which banking
institutions in The City of New York are authorized or obligated by law to
close and that is an Index Business Day.
What will you receive on the maturity date?
On the maturity date, for each unit of the STRIDES Securities that you
own, we will pay you an amount equal to the "Redemption Amount" which will
equal the lesser of:
. $12.50 (the "Capped Value"); and
( Ending Value )
. $10 X (--------------)
(Starting Value)
"Ending Value" means the average of the values of the Index at the close
of the market on five business days shortly before the maturity date. We may
calculate the Ending Value by reference to fewer than five or even by reference
to a single day's closing value if, during the period prior to the maturity
date, there is a disruption in the trading of the stocks included in the Index
or certain futures or options relating to the Index.
"Starting Value" means the closing value of the Index on the Pricing
Date. The actual Starting Value will be set forth in the final prospectus
supplement delivered to you in connection with sales of the STRIDES Securities.
You should understand that the opportunity to participate in the possible
increases in the value of the Index through an investment in the STRIDES
Securities is limited because the amount that you receive on the maturity date
will never exceed the Capped Value (which represents an appreciation of 25%
over the initial price of the STRIDES Securities). However, in the event that
the value of the Index declines over the term of the STRIDES Securities, you
will realize the entire decline in
S-3
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value of the STRIDES Securities and may therefore lose a part of your initial
investment in the STRIDES Securities. For more information about risks
associated with the STRIDES Securities, please see the section entitled "Risk
Factors" in this prospectus supplement.
For more specific information about the determination of the Ending Value
and the Redemption Amount, please see the sections entitled "Description of the
STRIDES Securities--Payment at Maturity" and "--Examples of Redemption Amount
Calculations" in this prospectus supplement.
Who publishes the Index and what does the Index measure?
The Nasdaq-100 Index is a modified capitalization-weighted index of 100
of the largest and most actively traded stocks (the "Underlying Stocks") of
non-financial companies listed on the Nasdaq National Market tier of the Nasdaq
Stock Market. The Index is currently calculated and published by The Nasdaq
Stock Market, Inc. ("Nasdaq").
Please note that an investment in the STRIDES Securities does not entitle
you to any ownership interest in any of the Underlying Stocks.
How has the Index performed historically?
Tables showing the closing value of the Index on the last business day of
each month from January 1989 through January 1999 are provided in the section
entitled "The Index--Historical Data" in this prospectus supplement. We have
provided this historical information to help you evaluate the behavior of the
Index in various economic environments; however, past performance of the Index
is not necessarily indicative of how the Index will perform in the future.
What about taxes?
The U.S. Federal income tax consequences of an investment in the STRIDES
Securities are complex and uncertain. Pursuant to the terms of the STRIDES
Securities, ML&Co. and you agree (in the absence of an administrative or
judicial ruling to the contrary) to characterize a STRIDES Security for all tax
purposes as an investment unit consisting of a debt instrument of ML&Co. and a
forward contract to acquire cash equivalent to the Redemption Amount. Under
this characterization of the STRIDES Securities, for U.S. Federal income tax
purposes, you will include payments of interest on the STRIDES Securities in
income in accordance with your regular method of tax accounting. You should be
required to recognize gain or loss to the extent that you receive cash on the
maturity date. You should review the discussion under the section entitled
"United States Federal Income Taxation" in this prospectus supplement.
Will the STRIDES Securities be listed on a stock exchange?
We have applied to have the STRIDES Securities listed on the American
Stock Exchange under the trading symbol "NML". You should be aware that listing
of the STRIDES Securities on the AMEX will not necessarily ensure that a liquid
trading market will be available for the STRIDES Securities. It is unlikely
that the secondary market price of the STRIDES Securities will correlate
exactly with the value of the Index. You should review the section entitled
"Risk Factors--Uncertain trading market" in this prospectus supplement.
What is the role of MLPF&S?
MLPF&S, our subsidiary, is the underwriter for the offering and sale of
the STRIDES Securities. After the initial offering, MLPF&S intends to buy and
sell STRIDES Securities to create a secondary market for beneficial owners of
the STRIDES Securities, and may stabilize or maintain the market price of the
STRIDES Securities during the initial distribution of the STRIDES Securities.
However, MLPF&S will not be obligated to engage in any of these market
activities, or continue them once it has started. For a more complete
description of these activities, please see the section "Underwriting" in this
prospectus supplement.
MLPF&S also will be our agent for purposes of calculating, among other
things, the Ending Value and the Redemption Amount. Under certain
circumstances, these duties could result in a conflict of interest between
MLPF&S's status as our subsidiary and its responsibilities as calculation
agent.
S-4
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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., please 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 entitled "Where You Can Find More Information"
in this prospectus supplement.
Are there any risks associated with an investment in the STRIDES Securities?
Yes, an investment in the STRIDES Securities is subject to certain risks.
Please review to the section entitled "Risk Factors" in this prospectus
supplement.
S-5
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RISK FACTORS
Your investment in the STRIDES Securities will involve certain risks. You
should consider carefully the following discussion of risks before you decide
that an investment in the STRIDES Securities is suitable for you.
General
The STRIDES Securities combine features of equity and debt instruments.
For example, like an equity instrument, your return will be based on the
appreciation of the Underlying Stocks as reflected in the closing value of the
Index. However, as a holder of the STRIDES Securities, you will not be entitled
to receive dividends that would be payable on the Underlying Stocks if you had
made a direct investment in such Underlying Stocks. In addition, like a debt
instrument, you will receive a fixed interest payment on your STRIDES
Securities on each interest payment date. However, the terms of the STRIDES
Securities differ from the terms of ordinary debt securities in that the
Redemption Amount payable on the maturity date is not a fixed amount, but is
based on the closing value of the Index on five (or, under certain
circumstances, fewer than five) Index Business Days shortly before the maturity
date, subject to the Capped Value.
Your investment may result in a loss
The STRIDES Securities are not principal-protected. Because the closing
value of the Index is subject to market fluctuations, the amount of cash paid
to you on the maturity date, determined as described below, may be more or less
than the principal amount of your STRIDES Securities. If the Ending Value is
less than the Starting Value, the Redemption Amount will be less than the
initial issue price of each STRIDES Security, in which case your investment in
the STRIDES Securities may result in a loss to you.
Your yield may be lower than the yield on a standard debt security of
comparable maturity
The interest payments and the amount we pay you at maturity may together
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 ours 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 is capped and will not reflect the return of owning the stocks
underlying the Index
You should understand that the opportunity to participate in the possible
increases in the value of the Index through an investment in the STRIDES
Securities is limited because the amount that you receive on the maturity date
will never exceed the Capped Value (which represents an appreciation of 25%
over the initial issue price of the STRIDES Securities). However, in the event
that the value of the Index declines over the term of the STRIDES Securities,
you will realize the entire decline in value of the STRIDES Securities, and may
lose a part of your investment in the STRIDES Securities. There is no assurance
that the amount that you receive on the maturity date will be equal to or
greater than the initial issue price of the STRIDES Securities. Accordingly,
the value of the STRIDES Securities may decline and that decline could be
substantial.
In addition, your return will not reflect the return you would realize if
you actually owned the stocks underlying the Index and received the dividends
paid on those stocks because the Index is calculated by reference to the prices
of the Underlying Stocks without taking into consideration the value of
dividends paid on such stocks.
Uncertain trading market
We have applied to have the STRIDES Securities listed on the AMEX under
the trading symbol "NML". There is no historical information to indicate how
the STRIDES Securities will trade in the secondary market. Listing the STRIDES
Securities on the AMEX does not necessarily ensure that a liquid trading market
S-6
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will develop for the STRIDES Securities. The development of a liquid trading
market for the STRIDES Securities will depend on our financial performance and
other factors such as the appreciation, if any, in the value of the Index. In
addition, it is unlikely that the secondary market price of the STRIDES
Securities will correlate exactly with the value of the Index.
If the trading market for the STRIDES Securities is limited, there may be
a limited number of buyers when you decide to sell your STRIDES Securities if
you do not wish to hold your investment until the maturity date. This may
affect the price you receive upon such sale.
Factors affecting the trading value of the STRIDES Securities
The market value of the STRIDES Securities will be affected by the value
of the Index and by a number of other factors. Some of these factors are
interrelated in complex ways; as a result, the effect of any one factor may be
magnified or mitigated by the effect of another factor. The following
paragraphs describe the expected effect on the market value of the STRIDES
Securities given a change in a specific factor, assuming all other conditions
remain constant.
. Value of the Index. The market value of the STRIDES Securities will
depend substantially on the amount by which the value of the Index
exceeds or does not exceed the Starting Value. In general, the value of
the STRIDES Securities will decrease as the value of the Index decreases
and the value of the STRIDES Securities will increase (subject to the
Capped Value) as the value of the Index increases. However, as the value
of the Index increases or decreases, the value of the STRIDES Securities
is not expected to increase or decrease at the same rate as the change in
value of the Index. The value of the STRIDES Securities on the maturity
date cannot be greater than the Capped Value, and therefore, the STRIDES
Securities will generally not trade in the secondary market above the
Capped Value. Additionally, political, economic and other developments
that can affect the capital markets generally (and over which we have no
control) and that affect the value of the Index will also affect the
value of the STRIDES Securities.
. Interest rates. In general, we anticipate that if U.S. interest rates
increase, the trading value of the STRIDES Securities will decrease, and
conversely, if U.S. interest rates decrease, the trading value of the
STRIDES Securities will increase. Generally, fluctuations in interest
rates will affect the U.S. economy and, in turn, the value of the Index.
Rising interest rates may lower the value of the Index and, as a result,
the value of the STRIDES Securities. Falling interest rates may increase
the value of the Index and, as a result, may increase the value of the
STRIDES Securities.
. Volatility of the Index. Volatility is the term used to describe the size
and frequency of market fluctuations. Generally, if the volatility of the
Index increases, we expect that the trading value of the STRIDES
Securities will decrease and if the volatility of the Index decreases, we
expect that the trading value of the STRIDES Securities will increase.
. Time remaining to maturity. We believe that before the maturity date the
STRIDES Securities will trade at a value above or below that which would
be expected based on the value of the Index. Generally, as the time
remaining to maturity decreases, the value of the STRIDES Securities will
approach the Redemption Amount that would be payable at maturity based on
the then current value of the Index. As a result, as the time remaining
to maturity decreases, any discount or premium attributed to the trading
value of the STRIDES Securities will diminish, increasing or decreasing
the trading value of the STRIDES Securities, as applicable.
. Dividend yields. Generally, if the dividend yield on the Underlying
Stocks increases, we expect that the value of the STRIDES Securities will
decrease, and conversely, if the dividend yield on the Underlying Stocks
decreases, we expect that the value of the STRIDES Securities will
increase.
. Credit ratings. Actual or anticipated changes in our credit ratings may
affect the market value of the STRIDES Securities.
S-7
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It is important for you to understand that a decrease in the trading
value of the STRIDES Securities resulting from the effect 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 STRIDES Securities attributable to
another factor, such as an increase in the value of the Index.
In general, assuming all relevant factors are held constant, we expect
that the effect on the trading value of the STRIDES Securities of a given
change in most of the factors listed above will be less if it occurs later in
the term of the STRIDES Securities than if it occurs earlier in the term of the
STRIDES Securities. However, so long as the value of the Index is less than 25%
above the Starting Value, we expect that the effect on the trading value of the
STRIDES Securities of a given increase or decrease in the value of the Index
will be greater if it occurs later in the term of the STRIDES Securities than
if it occurs earlier in the term of the STRIDES Securities.
Potential conflicts
The calculation agent for the STRIDES Securities is one of our
subsidiaries. Under certain circumstances, MLPF&S's role as our subsidiary and
its responsibilities as calculation agent for the STRIDES Securities could give
rise to conflicts of interests between the calculation agent and the holders of
the STRIDES Securities. Such conflicts could occur, for instance, in connection
with its determination as to whether a Market Disruption Event (as defined in
this prospectus supplement) has occurred. 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 arrangements with one of our subsidiaries to hedge
the market risks associated with our obligation to pay the Redemption Amount
and to pay interest. Such subsidiary expects to make a profit in connection
with such arrangements. We did not seek competitive bids for such arrangements
from unaffiliated parties.
Uncertain tax consequences
You should also consider the tax consequences of investing in the STRIDES
Securities, certain aspects of which are uncertain. See the section entitled
"United States Federal Income Taxation" in this prospectus supplement.
S-8
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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 copying 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 will send you copies of our SEC filings, excluding exhibits, at no
cost upon request. Please address your request to Lawrence M. Egan, Jr.,
Corporate Secretary's Office, Merrill Lynch & Co., Inc., 100 Church Street,
12th Floor, New York, New York 10080-6512; telephone number (212) 602-8439.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We
have not, and the underwriter has not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriter is not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted.
You should assume that the information appearing in this prospectus
supplement and the accompanying prospectus is accurate as of the date on the
front cover of this prospectus supplement only. Our business, financial
condition, results of operations and prospects may have changed since that
date.
RATIO OF EARNINGS TO FIXED CHARGES
In 1998, we acquired the outstanding shares of Midland Walwyn Inc.
("Midland"), in a transaction accounted for as a pooling-of-interests. The
following information has been restated, except as noted in note (a) below, as
if we and Midland 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 Nine Months
December Ended
--------------------------- September 25,
1993(a) 1994 1995 1996 1997 1998
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<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges... 1.4 1.2 1.2 1.2 1.2 1.1
</TABLE>
(a) The effect of combining Midland did not change the ratios reported for the
fiscal years 1994 through 1997 or for the nine months ended September 25,
1998, and the effect would not be material for the 1993 fiscal year.
For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" consist of earnings from continuing operations before income taxes
and fixed charges. "Fixed charges" consist of interest costs, amortization of
debt expense, preferred stock dividend requirements of majority-owned
subsidiaries, and that portion of rentals estimated to be representative of the
interest factor.
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DESCRIPTION OF THE STRIDES SECURITIES
General
The STRIDES 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.
Upon the occurrence of an Event of Default with respect to the STRIDES
Securities, beneficial owners of the STRIDES Securities may accelerate the
maturity of the STRIDES Securities, as described under "Description of the
STRIDES Securities--Events of Default and Acceleration" in this prospectus
supplement and "Description of Debt Securities--General--Events of Default" in
the accompanying prospectus.
The STRIDES Securities are to be issued in denominations of whole units.
The STRIDES Securities do not have the benefit of any sinking fund.
Interest
The STRIDES Securities will bear interest at a rate expected to be
between 5.00% and 5.25% per annum of the principal amount of each unit from
February , 1999, or from the most recent interest payment date to which
interest has been paid or provided for, until the maturity date. We will
determine the final interest rate on the Pricing Date and disclose it to you in
the final prospectus supplement delivered in connection with sales of the
STRIDES Securities. Interest on the STRIDES Securities will be payable in cash
semi-annually in arrears on February and August of each year, commencing
August , 1999, to the persons in whose names the STRIDES Securities are
registered at the close of business on the January and July (whether or
not a Business Day) immediately preceding such interest payment date. Interest
on the STRIDES Securities will be computed on the basis of a 360-day year of
twelve 30-day months. If an interest payment date falls on a day that is not a
Business Day, the interest payment to be made on such interest payment date
will be made on the next succeeding Business Day with the same force and effect
as if made on such interest payment date, and no additional interest will
accrue as a result of such delayed payment.
Payment at Maturity
The maturity date of the STRIDES Securities will be on August , 2000.
On the maturity date, the beneficial owner of each STRIDES Security will
receive, for each unit of the STRIDES Securities then held, the Redemption
Amount in cash and accrued interest from the last interest payment date for
which interest was paid.
The "Redemption Amount" will be determined by the calculation agent and
for each unit will equal the lesser of:
.$12.50 (the "Capped Value"); and
( Ending Value )
. $10 per unit X (--------------)
(Starting Value)
The "Starting Value" means the Closing Value (as defined below) of the
Index on the Pricing Date. We will disclose the Starting Value in the final
prospectus supplement delivered to you in connection with sales of the STRIDES
Securities. The Ending Value will be determined by the calculation agent and
will equal the average (arithmetic mean) of the Closing Values of the Index
determined on each of the first five Calculation Days during the Calculation
Period. If there are fewer than five Calculation Days in the Calculation
Period, then the Closing Values used to determine the Ending Value will equal
the average (arithmetic mean) of the Closing Values of the Index on such
Calculation Days, and if there is only one Calculation Day, then the Ending
Value will be equal to the Closing Value of the Index on such Calculation Day.
If no Calculation Days occur during the Calculation Period, then the Ending
Value will be equal to the Closing Value of the Index
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determined on the last scheduled Calculation Day in the Calculation Period,
regardless of the occurrence of a Market Disruption Event on such day.
The "Calculation Period" means the period from and including the seventh
scheduled Calculation Day prior to the maturity date to and including the
second scheduled Calculation Day prior to the maturity date.
"Calculation Day" means any Index Business Day on which a Market
Disruption Event has not occurred.
"Index Business Day" means any day on which the Nasdaq Stock Market, the
New York Stock Exchange and the AMEX are open for trading and the Index or any
Successor Index (as defined below) is calculated and published.
"Market Disruption Event" has the meaning defined in the section entitled
"--Adjustments to the Index; Market Disruption Events".
"Closing Value" means the value of the Index or any Successor Index at
the close of trading on any Index Business Day.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
that is not a day on which banking institutions in The City of New York are
authorized or obligated by law to close and that is an Index Business Day.
All determinations made by the calculation agent shall be at its sole
discretion and, absent a determination by such calculation agent of a manifest
error, shall be conclusive for all purposes and binding on ML&Co. and the
beneficial owners of the STRIDES Securities.
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Examples of Redemption Amount Calculations
Set forth below are three examples of Redemption Amount calculations:
"Example One--Ending Value is 30% less than Starting Value"
Starting Value: 2,078.69
Hypothetical Ending Value: 1,455.08
( 1,455.08 )
Redemption Amount (per unit) = $10.00 X ( -------- ) = $7.00
( 2,078.69 )
Redemption Amount (per unit) = $7.00
"Example Two--Ending Value is 10% greater than Starting Value"
Starting Value: 2,078.69
Hypothetical Ending Value: 2,286.56
( 2,286.56 )
Redemption Amount (per unit) = $10.00 X ( -------- ) = $11.00
( 2,078.69 )
Redemption Amount (per unit) = $11.00
"Example Three--Ending Value is 30% greater than Starting Value"
Starting Value: 2,078.69
Hypothetical Ending Value: 2,702.30
<TABLE>
<S> <C> <C>
( 2,702.30 ) (Redemption Amount
Redemption Amount (per unit) = $10.00 X ( -------- ) = $12.50 cannot be greater than
( 2,078.69 ) the Capped Value)
</TABLE>
Redemption Amount (per unit) = $12.50
S-12
<PAGE>
Hypothetical Returns
The following table illustrates, for a range of hypothetical Ending
Values, (i) the percentage change over the Starting Value; (ii) the Redemption
Amount payable per unit; (iii) the total rate of return to beneficial owners of
the STRIDES Securities; (iv) the pretax annualized rate of return to beneficial
owners of STRIDES Securities; and (v) the pretax annualized rate of return of
the Underlying Stocks (which includes an assumed aggregate dividend yield of
0.11% per annum, as more fully described below).
<TABLE>
<CAPTION>
Redemption Total Rate of Pretax Pretax Annualized
Percentage Change Amount Return of Annualized Rate of Return
Hypothetical Over the Payable STRIDES Rate of of the Underlying
Ending Value Starting Value per unit Securities(1) Return(2)(3) Stocks(3)(4)
- ------------ ----------------- ---------- ------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
1,039.35 -50.00% $ 5.00 -42.31% -34.73% -41.17%
1,143.28 -45.00% $ 5.50 -37.31% -29.83% -36.04%
1,247.21 -40.00% $ 6.00 -32.31% -25.20% -31.22%
1,351.15 -35.00% $ 6.50 -27.31% -20.81% -26.66%
1,455.08 -30.00% $ 7.00 -22.31% -16.63% -22.32%
1,559.02 -25.00% $ 7.50 -17.31% -12.64% -18.19%
1,662.95 -20.00% $ 8.00 -12.31% -8.81% -14.23%
1,766.89 -15.00% $ 8.50 -7.31% -5.14% -10.44%
1,870.82 -10.00% $ 9.00 -2.31% -1.60% -6.80%
1,974.76 -5.00% $ 9.50 2.69% 1.82% -3.28%
2,078.69(5) 0.00% $10.00 7.69% 5.12% 0.11%
2,182.62 5.00% $10.50 12.69% 8.32% 3.39%
2,286.56 10.00% $11.00 17.69% 11.42% 6.57%
2,390.49 15.00% $11.50 22.69% 14.44% 9.65%
2,494.43 20.00% $12.00 27.69% 17.36% 12.65%
2,598.36 25.00% $12.50 32.69% 20.22% 15.56%
2,702.30 30.00% $12.50 32.69% 20.22% 18.40%
2,806.23 35.00% $12.50 32.69% 20.22% 21.16%
2,910.17 40.00% $12.50 32.69% 20.22% 23.86%
3,014.10 45.00% $12.50 32.69% 20.22% 26.50%
3,118.04 50.00% $12.50 32.69% 20.22% 29.07%
</TABLE>
- --------
(1) The rates of return specified in this column assume a coupon yield of
5.125% per annum (the midpoint of the expected range of coupon yields on
the STRIDES Securities).
(2) The annualized rates of return specified in this column assume a constant
coupon yield of 5.125% per annum (the midpoint of the expected range of
coupon yields on the STRIDES Securities) paid semi-annually and applied to
the principal amount of each STRIDES Security.
(3) The annualized rates of return specified in these columns are calculated on
a semi-annual bond equivalent basis.
(4) The rates of return specified in this column assume: (i) a constant
dividend yield of 0.11% per annum, paid quarterly from the date of initial
delivery of STRIDES Securities, applied to the value of the Index at the
end of each such quarter assuming such value increases or decreases
linearly from the Starting Value to the applicable hypothetical Ending
Value; (ii) no transaction fees or expenses; (iii) a one and one-half year
investment term; and (iv) a final Index value equal to the hypothetical
Ending Value.
(5) This value is the hypothetical Starting Value for the purposes of this
table only. The actual Starting Value will be determined on the Pricing
Date of the STRIDES Securities.
The above figures are for purposes of illustration only. The actual
Redemption Amount received by investors and the total and pretax annualized
rate of return resulting therefrom will depend entirely on the actual Ending
Value determined by the calculation agent as provided herein. Historical data
regarding the Index is included in this prospectus supplement under "The
Index--Historical Data".
S-13
<PAGE>
Adjustments to the Index; Market Disruption Events
If at any time the method of calculating the Index, or the value thereof,
is changed in any material respect, or if the Index is in any other way
modified so that such Index does not, in the opinion of the calculation agent,
fairly represent the value of the Index had such changes or modifications not
been made, then, from and after such time, the calculation agent shall, at the
close of business in New York, New York, on each date that the Closing Value is
to be calculated, make such 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 Index as if such changes or
modifications had not been made, and calculate such Closing Value with
reference to the Index, as adjusted. Accordingly, if the method of calculating
the Index is modified so that the value of such 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 in the Index), then the calculation agent shall adjust such Index in
order to arrive at a value of the Index as if it had not been modified (e.g.,
as if such split had not occurred).
"Market Disruption Event" means either of the following events; as
determined by the calculation agent:
(a) the suspension or material limitation on trading (limitations pursuant
to NYSE Rule 80A (or any applicable rule or regulation enacted or
promulgated by the NYSE or any other self regulatory organization or
the SEC of similar scope as determined by the calculation agent) on
trading during significant market fluctuations shall be considered
"material" for purposes of this definition), in each case, for more
than two hours of trading, or during the one-half hour period preceding
the close of trading on the applicable exchange, in 20% or more of the
stocks which then comprise the 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 (A) futures contracts related to the Index, or options on
such futures contracts, which are traded on any major U.S. exchange or
(B) option contracts related to the Index which are traded on any major
U.S. exchange.
For the purposes of this definition, a limitation on the hours in a
trading day and/or number of days of trading will not constitute a Market
Disruption Event if it results from an announced change in the regular business
hours of the relevant exchange.
Discontinuance of the Index
If Nasdaq discontinues publication of the Index and Nasdaq or another
entity publishes a successor or substitute index that the calculation agent
determines, in its sole discretion, to be comparable to such Index (any such
index being referred to herein as a "Successor Index"), then, upon the
calculation agent's notification of such determination to the Trustee and
ML&Co., the calculation agent will substitute the Successor Index as calculated
by Nasdaq or such other entity for the Index. Upon any selection by the
calculation agent of a Successor Index, ML&Co. will cause notice thereof to be
given to holders of the STRIDES Securities.
If Nasdaq discontinues publication of the Index and a Successor Index is
not selected by the calculation agent or is no longer published on any of the
Calculation Days, the value to be substituted for the Index for any such
Calculation Day used to calculate the Redemption Amount at maturity will be a
value computed by the calculation agent for each Calculation Day in accordance
with the procedures last used to calculate the Index prior to such
discontinuance. If a Successor Index is selected or the calculation agent
calculates a value as a substitute for the Index as described below, such
Successor Index or value shall be substituted for the Index for all purposes,
including for purposes of determining whether a Market Disruption Event exists.
If the calculation agent calculates a value as a substitute for the Index,
"Calculation Day" shall mean any day on which the calculation agent is able to
calculate such value.
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<PAGE>
If Nasdaq discontinues publication of the Index prior to the period
during which the Redemption Amount is to be determined and the calculation
agent determines that no Successor Index is available at such time, then on
each Index Business Day until the earlier to occur of (a) the determination of
the Ending Value and (b) 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 Redemption Amount as described in the
preceding paragraph as if such day were a Calculation Day. The calculation
agent will cause notice of each such value to be published not less often than
once each month in "The Wall Street Journal" (or another newspaper of general
circulation), and arrange for information with respect to such values to be
made available by telephone. Notwithstanding these alternative arrangements,
discontinuance of the publication of the Index may adversely affect trading in
the STRIDES Securities.
Events of Default and Acceleration
In case an Event of Default with respect to any STRIDES Securities shall
have occurred and be continuing, the amount payable to a beneficial owner of a
STRIDES Security upon any acceleration permitted by the STRIDES Securities,
with respect to each $10 unit thereof, will be equal to the principal amount
and any accrued interest due thereon. If a bankruptcy proceeding is commenced
in respect of the ML&Co., the claim of the beneficial owner of a STRIDES
Security may be limited, under Section 502(b)(2) of Title 11 of the United
States Code, to the principal amount of the STRIDES Security plus an additional
amount of contingent interest calculated as though the date of the commencement
of the proceeding were the maturity date of the STRIDES Securities.
In case of default in payment of the STRIDES Securities (whether at any
interest payment date, the maturity date or upon acceleration), from and after
any such date the STRIDES Securities shall bear interest, payable upon demand
of the beneficial owners thereof, at the rate of % per annum (to the extent
that payment of such interest shall be legally enforceable) on the unpaid
amount due and payable on such date in accordance with the terms of the STRIDES
Securities to the date payment of such amount has been made or duly provided
for.
Depositary
Upon issuance, all STRIDES Securities will be represented by one or more
fully registered global securities. Each such global security will be deposited
with, or on behalf of, DTC (DTC, together with any successor thereto, being the
"Depositary"), as Depositary, registered in the name of Cede & Co. (DTC's
partnership nominee). Unless and until it is exchanged in whole or in part for
STRIDES 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 such nominee to a successor of the
Depositary or a nominee of such successor.
So long as DTC, or its nominee, is a registered owner of a global
security, DTC or its nominee, as the case may be, will be considered the sole
owner or holder of the STRIDES Securities represented by such global security
for all purposes under the 1983 Indenture. Except as provided below, the
beneficial owner of the STRIDES Securities represented by a global security
will not be entitled to have the STRIDES Securities represented by such global
securities registered in their names, will not receive or be entitled to
receive physical delivery of the STRIDES Securities in definitive form and will
not be considered the owners or holders thereof (as defined in the 1983
Indenture), including for purposes of receiving any reports delivered by ML&Co.
or the Trustee pursuant to the 1983 Indenture. Accordingly, each beneficial
owner of a global security must rely on the procedures of DTC and, if such
person is not a participant of DTC, on the procedures of the participant
through which such person owns its interest, to exercise any rights of a holder
under the 1983 Indenture. ML&Co. understands that under existing industry
practices, in the event that ML&Co. requests any action of holders or that an
owner of a beneficial interest in such a global security desires to give or
take any action which a holder is entitled to give or take under the 1983
Indenture, DTC would authorize the participants holding the relevant beneficial
interests to give or take such action, and such participants would
S-15
<PAGE>
authorize beneficial owners owning through such participants to give or take
such action or would otherwise act upon the instructions of beneficial owners.
Conveyance of notices and other communications by DTC to participants, by
direct participants to indirect participants and by direct and indirect
participants to beneficial owners will be governed by arrangements among them,
subject to any statutory or regulatory requirements as may be in effect from
time to time.
If (x) the Depositary is at any time unwilling or unable to continue as
Depositary and a successor depositary is not appointed by ML&Co. within 60
days, (y) ML&Co. executes and delivers to the Trustee a Company Order to the
effect that the global securities shall be exchangeable or (z) an Event of
Default has occurred and is continuing with respect to the STRIDES Securities,
the global securities will be exchangeable for STRIDES Securities in definitive
form of like tenor and of an equal aggregate principal amount, in denominations
of $10 and integral multiples thereof. Such definitive STRIDES Securities will
be registered in such name or names as the Depositary shall instruct the
Trustee. It is expected that such instructions may be based upon directions
received by the Depositary from participants with respect to ownership of
beneficial interests in such global securities.
The following is based on information furnished by DTC:
DTC will act as securities depositary for the STRIDES Securities. The
STRIDES Securities will be issued as fully registered securities registered in
the name of Cede & Co. (DTC's partnership nominee). One or more fully
registered global securities will be issued for the STRIDES 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 Exchange
Act. DTC holds securities that its participants deposit with DTC. DTC also
facilitates the settlement among participants of securities transactions, such
as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct participants
of DTC include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. DTC is owned by a number of its
direct participants and by the NYSE, the AMEX, and the National Association of
Securities Dealers, Inc. Access to the DTC's system is also available to others
such as securities brokers and dealers, banks and trust companies that clear
through or maintain a custodial relationship with a direct participant, either
directly or indirectly. The rules applicable to DTC and its participants are on
file with the SEC.
Purchases of STRIDES Securities under the DTC system must be made by or
through direct participants, which will receive a credit for the STRIDES
Securities on the DTC's records. The ownership interest of each beneficial
owner is in turn to be recorded on the records of direct participants and
indirect participants. Beneficial owners will not receive written confirmation
from DTC of their purchase, but such beneficial owners are expected to receive
written confirmations providing details of the transaction, as well as periodic
statements of their holdings, from the direct participants or indirect
participants through which such beneficial owner entered into the transaction.
Transfers of ownership interests in the STRIDES Securities are to be
accomplished by entries made on the books of participants acting on behalf of
beneficial owners. Beneficial owners will not receive certificates representing
their ownership interests in STRIDES Securities, except in the event that use
of the book-entry system for the STRIDES Securities is discontinued.
To facilitate subsequent transfers, all STRIDES Securities deposited with
DTC are registered in the name of DTC's partnership nominee, Cede & Co. The
deposit of STRIDES 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 STRIDES Securities; DTC's records reflect
only the identity of the direct participants to whose accounts such STRIDES
Securities are credited, which may or may not be the beneficial
S-16
<PAGE>
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
STRIDES 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
to whose accounts the STRIDES Securities are credited on the record date
(identified in a listing attached to the Omnibus Proxy).
Principal, premium, if any, and/or interest, if any, payments on the
STRIDES Securities will be made in immediately available funds to DTC. DTC's
practice is to credit direct participants' accounts on the applicable payment
date in accordance with their respective holdings shown on the Depositary's
records unless DTC has reason to believe that it will not receive payment on
such date. Payments by participants to beneficial owners will be governed by
standing instructions and customary practices, as is the case with securities
held for the accounts of customers in bearer form or registered in "street
name", and will be the responsibility of such participant and not of DTC, the
Trustee or ML&Co., subject to any statutory or regulatory requirements as may
be in effect from time to time. Payment of principal, premium, if any, and/or
interest, if any, to DTC is the responsibility of ML&Co. or the Trustee,
disbursement of such payments to direct participants shall be the
responsibility of DTC, and disbursement of such payments to the beneficial
owners shall be the responsibility of direct participants and indirect
participants.
DTC has advised ML&Co. that management of DTC is aware that some computer
applications, systems, and the like for processing data ("Systems") that are
dependent upon calendar dates, including dates before, on, and after January 1,
2000, may encounter "Year 2000 problems". DTC has informed direct and indirect
participants and other members of the financial community (the "Industry") that
it has developed and is implementing a program so that its Systems, as the same
relate to the timely payment of distributions (including principal and interest
payments) to securityholders, book-entry deliveries, and settlement of trades
within DTC ("Depositary Services"), continue to function appropriately. This
program includes a technical assessment and a remediation plan, each of which
is complete. Additionally, DTC's plan includes a testing phase, which is
expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including, but not limited to, issuers and their agents, as
well as DTC's direct participants and indirect participants, and third party
vendors from whom DTC licenses software and hardware, and third party vendors
on whom DTC relies for information or the provision of services, including
telecommunication and electrical utility service providers, among others. DTC
has informed the Industry that it is contacting (and will continue to contact)
third party vendors from whom DTC acquires services to: (i) impress upon them
the importance of such services being Year 2000 compliant; and (ii) determine
the extent of their efforts for Year 2000 remediation (and, as appropriate,
testing) of their services. In addition, DTC is in the process of developing
such contingency plans as it deems appropriate.
According to DTC, the information in the preceding two paragraphs with
respect to DTC has been provided to the Industry for informational purposes
only and is not intended to serve as a representation, warranty, or contract
modification of any kind.
DTC may discontinue providing its services as securities depositary with
respect to the STRIDES Securities at any time by giving reasonable notice to
ML&Co. or the Trustee. Under such circumstances, in the event that a successor
securities depositary is not obtained, STRIDES Security certificates are
required to be printed and delivered.
S-17
<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,
security certificates will be printed and delivered.
The information in this section concerning DTC and DTC's system has been
obtained from sources that ML&Co. believes to be reliable, but ML&Co. takes no
responsibility for the accuracy thereof.
Same-Day Settlement and Payment
Settlement for the STRIDES Securities will be made by the underwriter in
immediately available funds. All payments of interest and the Redemption Amount
will be made by ML&Co. in immediately available funds so long as the STRIDES
Securities are maintained in book-entry form.
THE INDEX
General
The Nasdaq-100 Index(R) is a modified capitalization-weighted index of
100 of the largest and most actively traded stocks of non-financial companies
listed on the Nasdaq National Market tier of the Nasdaq Stock Market. The Index
was first published in January 1985 and includes companies across a variety of
major industry groups. As of December 31, 1998, the major industry groups
covered in the Index (listed according to their respective capitalization in
the Index) were as follows: computer and office equipment (32.6%), computer
software/services (30.2%), telecommunications (17.8%), retail/wholesale trade
(8.0%), biotechnology (5.0%), services (2.4%), health care (2.1%),
manufacturing (1.5%) and transportation (0.4%). The identity and capitalization
weightings of the five largest companies represented in the Index as of
December 31, 1998 were as follows: Microsoft Corporation (14.5%), Intel
Corporation (8.4%), Cisco Systems, Inc. (6.4%), MCI WORLDCOM, Inc. (5.8%), and
Dell Computer Corporation (4.2%). Current information regarding the market
value of the Index is available from Nasdaq as well as numerous market
information services. The Index is determined, comprised and calculated by
Nasdaq without regard to the STRIDES Securities.
The Index share weights of the component securities, or Underlying
Stocks, of the Index at any time are based upon the total shares outstanding in
each of the 100 securities in the Index and are additionally subject, in
certain cases, to rebalancing to ensure that the relative weighting of the
Underlying Stocks continues to meet minimum pre-established requirements for a
diversified portfolio. Accordingly, each Underlying Stock's influence on the
value of the Index is directly proportional to the value of its Index share
weight. At any moment in time, the value of the Index equals the aggregate
value of the then current Index share weights of each of the component 100
Underlying Stocks multiplied by each such security's respective last sale price
on the Nasdaq Stock Market, and divided by a scaling factor (the "divisor")
which becomes the basis for the reported Index value. The divisor serves the
purpose of scaling such aggregate value (otherwise in the trillions) to a lower
order of magnitude which is more desirable for Index reporting purposes.
After the close of trading on December 18, 1998, the Index share weights
of the component securities in the Index were rebalanced in accordance with the
modified capitalization weighted methodology implemented on such date. Hence,
the performance of the Index after December 18, 1998 will reflect the
performance of the securities in the Index as calculated in accordance with the
revised Index methodology.
Computation of the Index
"Underlying Stock Eligibility Criteria and Annual Ranking Review"
To be eligible for inclusion in the Index, a security must be traded on
the Nasdaq National Market tier of the Nasdaq Stock Market and meet the
following criteria:
(1) the security must be of a non-financial company;
(2) only one class of security per issuer is allowed;
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<PAGE>
(3) the security may not be issued by an issuer currently in bankruptcy
proceedings;
(4) the security must have average daily trading volume of at least
100,000 shares per day;
(5) the security must have "seasoned" on the Nasdaq Stock Market or
another recognized market (generally, a company is considered to be
seasoned by Nasdaq if it has been listed on a market for at least
two years; in the case of spin-offs, the operating history of the
spin-off will be considered);
(6) if a security would otherwise qualify to be in the top 25% of the
issuers included in the Index by market capitalization, then a one
year "seasoning" criteria would apply;
(7) if the security is of a foreign issuer, the company must have a
worldwide market value of at least $10 billion, a U.S. market value
of at least $4 billion, and average trading volume on the Nasdaq
Stock Market of at least 200,000 shares per day; in addition,
foreign securities must be eligible for listed options trading; and
(8) the issuer of the security may not have entered into a definitive
agreement or other arrangement which would result in the security no
longer being listed on the Nasdaq Stock Market within the next six
months.
These Index eligibility criteria may be revised from time to time by the
National Association of Securities Dealers, Inc. without regard to the STRIDES
Securities.
The Underlying Stocks are evaluated annually as follows (such evaluation
is referred to herein as the "Annual Ranking Review"). Securities listed on the
Nasdaq Stock Market which meet the above eligibility criteria are ranked by
market value. Index-eligible securities which are already in the Index and
which are in the top 150 eligible securities (based on market value) are
retained in the Index provided that such security was ranked in the top 100
eligible securities as of the previous year's annual review. Securities not
meeting such criteria are replaced. The replacement securities chosen are those
Index-eligible securities not currently in the Index which have the largest
market capitalization. The list of annual additions and deletions is publicly
announced via a press release in the early part of December. Replacements are
made effective after the close of trading on the third Friday in December.
Moreover, if at any time during the year an Underlying Stock is no longer
traded on the Nasdaq Stock Market, or is otherwise determined by Nasdaq to
become ineligible for continued inclusion in the Index, the security will be
replaced with the largest market capitalization security not currently in the
Index and meeting the Index eligibility criteria listed above.
In addition to the Annual Ranking Review, the securities in the Index are
monitored every day by Nasdaq with respect to changes in total shares
outstanding arising from secondary offerings, stock repurchases, conversions,
or other corporate actions. Nasdaq has adopted the following quarterly
scheduled weight adjustment procedures with respect to such changes. If the
change in total shares outstanding arising from such corporate action is
greater than or equal to 5.0%, such change is ordinarily made to the Index on
the evening prior to the effective date of such corporate action. Otherwise, if
the change in total shares outstanding is less than 5%, then all such changes
are accumulated and made effective at one time on a quarterly basis after the
close of trading on the third Friday in each of March, June, September, and
December. In either case, the Index share weights for such Underlying Stocks
are adjusted by the same percentage amount by which the total shares
outstanding have changed in such Underlying Stocks. Ordinarily, whenever there
is a change in Index share weights or a change in a component security included
in the Index, Nasdaq adjusts the divisor to assure that there is no
discontinuity in the value of the Index which might otherwise be caused by any
such change.
"Rebalancing of the Index"
Effective after the close of trading on December 18, 1998, the Index has
been calculated under a "modified capitalization-weighted" methodology, which
is a hybrid between equal weighting and conventional capitalization weighting.
This methodology is expected to: (1) retain in general the economic attributes
of capitalization weighting; (2) promote portfolio weight diversification
(thereby limiting domination of the Index
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<PAGE>
by a few large stocks); (3) reduce Index performance distortion by preserving
the capitalization ranking of companies; and (4) reduce market impact on the
smallest Underlying Stocks from necessary weight rebalancings.
Under the methodology employed, on a quarterly basis coinciding with
Nasdaq's quarterly scheduled weight adjustment procedures, the Underlying
Stocks are categorized as either "Large Stocks" or "Small Stocks" depending on
whether their current percentage weights (after taking into account such
scheduled weight adjustments due to stock repurchases, secondary offerings, or
other corporate actions) are greater than, or less than or equal to, the
average percentage weight in the Index (i.e., as a 100-stock index, the average
percentage weight in the Index is 1.0%).
Such quarterly examination will result in an Index rebalancing if either
one or both of the following two weight distribution requirements are not met:
(1) the current weight of the single largest market capitalization Underlying
Stock must be less than or equal to 24.0% and (2) the "collective weight" of
those Underlying Stocks whose individual current weights are in excess of 4.5%,
when added together, must be less than or equal to 48.0%.
If either one or both of these weight distribution requirements are not
met upon quarterly review, a weight rebalancing will be performed in accordance
with the following plan. First, relating to weight distribution requirement (1)
above, if the current weight of the single largest Underlying Stock exceeds
24.0%, then the weights of all Large Stocks will be scaled down proportionately
towards 1.0% by enough for the adjusted weight of the single largest Underlying
Stock to be set to 20.0%. Second, relating to weight distribution requirement
(2) above, for those Underlying Stocks whose individual current weights or
adjusted weights in accordance with the preceding step are in excess of 4.5%,
if their "collective weight" exceeds 48.0%, then the weights of all Large
Stocks will be scaled down proportionately towards 1.0% by just enough for the
"collective weight," so adjusted, to be set to 40.0%.
The aggregate weight reduction among the Large Stocks resulting from
either or both of the above rescalings will then be redistributed to the Small
Stocks in the following iterative manner. In the first iteration, the weight of
the largest Small Stock will be scaled upwards by a factor which sets it equal
to the average Index weight of 1.0%. The weights of each of the smaller
remaining Small Stocks will be scaled up by the same factor reduced in relation
to each stock's relative ranking among the Small Stocks such that the smaller
the Underlying Stock in the ranking, the less the scale-up of its weight. This
is intended to reduce the market impact of the weight rebalancing on the
smallest component securities in the Index.
In the second iteration, the weight of the second largest Small Stock,
already adjusted in the first iteration, will be scaled upwards by a factor
which sets it equal to the average index weight of 1.0%. The weights of each of
the smaller remaining Small Stocks will be scaled up by this same factor
reduced in relation to each stock's relative ranking among the Small Stocks
such that, once again, the smaller the stock in the ranking, the less the
scale-up of its weight.
Additional iterations will be performed until the accumulated increase in
weight among the Small Stocks exactly equals the aggregate weight reduction
among the Large Stocks from rebalancing in accordance with weight distribution
requirement (1) and/or weight distribution requirement (2).
Then, to complete the rebalancing procedure, once the final percent
weights of each Index Security are set, the Index share weights will be
determined anew based upon the last sale prices and aggregate capitalization of
the Index at the close of trading on the Thursday in the week immediately
preceding the week of the third Friday in March, June, September, and December.
Changes to the Index share weights will be made effective after the close of
trading on the third Friday in March, June, September, and December and an
adjustment to the Index divisor will be made to ensure continuity of the Index.
Effective after the close of trading on December 18, 1998, the Index was
rebalanced in accordance with the above methodology. As a result of the
rebalancing, the Index share weights of the five (5) stocks
S-20
<PAGE>
whose unadjusted weights were in excess of 4.5% were adjusted downwards on such
date. As of the close of trading on December 31, 1998, the weights of these
five stocks in the Index as rebalanced, in relation to what they would have
been if the Index were not rebalanced, were as follows: Microsoft Corporation
(14.5% vs. 22.5%), Intel Corporation (8.4% vs. 12.8%), Cisco Systems, Inc.
(6.4% vs. 9.5%), MCI WORLDCOM, Inc. (5.8% vs. 8.5%), and Dell Computer
Corporation (4.2% vs. 6.1%).
Historical Data
The following table sets forth the level of the Index at the end of each
month, in the period from January 1989 through January 1999. These historical
data on the Index are not necessarily indicative of the future performance of
the Index or what the value of the STRIDES Securities may be. Any historical
upward or downward trend in the level of the Index during any period set forth
below is not an indication that the Index is more or less likely to increase or
decrease at any time during the term of the STRIDES Securities.
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ ------ ------ ------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
January................. 186.47 201.94 232.43 338.32 370.56 413.99 405.33 591.82 921.55 1,071.13 2,127.19
February................ 183.79 207.92 250.12 345.88 351.14 412.17 432.50 622.83 850.46 1,194.13 --
March................... 185.87 213.15 264.91 323.05 359.42 382.96 447.15 609.69 797.06 1,220.66 --
April................... 200.47 205.82 263.66 307.86 339.95 373.25 469.56 666.73 874.74 1,248.12 --
May..................... 214.55 236.15 279.00 315.30 368.11 378.85 488.10 692.39 958.85 1,192.07 --
June.................... 204.59 238.46 254.20 301.23 366.13 360.30 538.03 677.30 957.30 1,337.34 --
July.................... 214.28 223.39 272.16 310.90 352.87 370.16 568.88 636.01 1,107.03 1,377.26 --
August.................. 222.01 193.62 287.41 299.26 372.65 397.90 576.77 663.57 1,074.17 1,140.34 --
September............... 226.42 177.06 287.54 313.19 382.72 393.85 585.08 737.58 1,097.17 1,345.48 --
October................. 222.62 172.56 292.51 329.16 390.99 413.05 598.78 751.99 1,019.62 1,400.52 --
November................ 224.45 192.66 284.79 350.96 386.76 404.82 593.72 834.01 1,050.51 1,557.96 --
December................ 223.84 200.53 330.86 360.19 398.28 404.27 576.23 821.36 990.80 1,836.01 --
</TABLE>
The following graph sets forth the historical performance of the Index at
the end of each month, in the period from January 1989 through January 1999.
Past movements of the Index are not necessarily indicative of the future Index
values. On February 2, 1999, the Closing Value of the Index was 2,078.69.
[The graph sets forth the performance of the Index from January 1989 through
January 1999. The vertical axis has a range of numbers from 0 to 2,500 in
increments of 500. The horizontal axis has a range of years from January
1989 to January 1999 in increments of one month.]
This graph is for historical information only and should not be used or
interpreted as a forecast or indication of future stock market performance,
interest rate levels or variable returns applicable to the STRIDES Securities.
S-21
<PAGE>
License Agreement
The Nasdaq Stock Market, Inc. and Merrill Lynch & Co., Inc. have entered
into a non-exclusive license agreement providing for the license to ML&Co., in
exchange for a fee, of the right to use the Index in connection with certain
securities, including the STRIDES Securities.
The license agreement between Nasdaq and ML&Co. provides that the
following language must be stated in this prospectus supplement:
"The STRIDES Securities are not sponsored, endorsed, sold or promoted by,
The Nasdaq Stock Market, Inc. (including its affiliates) (Nasdaq, with
its affilaites, are referred to as the "Corporations"). The Corporations
have not passed on the legality or suitability of, or the accuracy or
adequacy of descriptions and disclosures relating to, the STRIDES
Securities. The Corporations make no representation or warranty, express
or implied to the owners of the STRIDES Securities or any member of the
public regarding the advisability of investing in securities generally or
in the STRIDES Securities particularly, or the ability of the Nasdaq-100
Index(R) to track general stock market performance. The Corporations'
only relationship to ML&Co. is in the licensing of the Nasdaq-100(R),
Nasdaq-100 Index(R), and Nasdaq(R) trademarks or service marks, and
certain trade names of the Corporations and the use of the Nasdaq-100
Index(R) which is determined, composed and calculated by Nasdaq without
regard to ML&Co. or the STRIDES Securities. Nasdaq has no obligation to
take the needs of ML&Co. or the owners of the STRIDES Securities into
consideration in determining, composing or calculating the Nasdaq-100
Index(R). The Corporations are not responsible for and have not
participated in the determination of the timing of, prices at, or
quantities of the STRIDES Securities to be issued or in the determination
or calculation of the equation by which the STRIDES Securities is to be
converted into cash. The Corporations have no liability in connection
with the administration, marketing or trading of the STRIDES Securities.
"The Corporations do not guarantee the accuracy and/or uninterrupted
calculation of the Nasdaq-100 Index(R) or any data included therein. The
Corporations make no warranty, express or implied, as to results to be
obtained by ML&Co., owners of the STRIDES Securities, or any other person
or entity from the use of the Nasdaq-100 Index(R) or any data included
therein. The Corporations make no express or implied warranties, and
expressly disclaim all warranties of merchantability or fitness for a
particular purpose or use with respect to the Nasdaq-100 Index(R) or any
data included therein. Without limiting any of the foregoing, in no event
shall the Corporations have any liability for any lost profits or
special, incidental, punitive, indirect, or consequential damages, even
if notified of the possibility of such damages.""
All disclosures contained in this prospectus supplement regarding the
Index, including its make-up, method of calculation and changes in its
components, are derived from publicly available information prepared by Nasdaq.
ML&Co. and MLPF&S do not assume any responsibility for the accuracy or
completeness of such information.
USE OF PROCEEDS AND HEDGING
The net proceeds to be received by ML&Co. from the sale of the STRIDES
Securities will be used for general corporate purposes and, in part, by ML&Co.
or one or more of its affiliates in connection with hedging ML&Co.'s
obligations under the STRIDES Securities. See also "Use of Proceeds" in the
accompanying prospectus.
S-22
<PAGE>
UNITED STATES FEDERAL INCOME TAXATION
The following discussion is based upon the opinion of Brown & Wood LLP,
counsel to ML&Co. ("Tax Counsel"). As the law applicable to the U.S. Federal
income taxation of instruments such as the STRIDES Securities is technical and
complex, the discussion below necessarily represents only a general summary.
The following summary is based upon laws, regulations, rulings and decisions
now in effect, all of which are subject to change (including changes in
effective dates) or possible differing interpretations. It deals only with
STRIDES 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,
persons holding STRIDES 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, or persons whose functional currency is not the United States
dollar. It also does not deal with holders other than original purchasers
(except where otherwise specifically noted). Persons considering the purchase
of the STRIDES Securities should consult their own tax advisors concerning the
application of United States Federal income tax laws to their particular
situations as well as any consequences of the purchase, ownership and
disposition of the STRIDES Securities arising under the laws of any other
taxing jurisdiction.
As used herein, the term "U.S. Holder" means a beneficial owner of a
STRIDES Security that is for United States Federal income tax purposes (i) a
citizen or resident of the United States, (ii) a corporation or a 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 (unless, in
the case of a partnership, Treasury regulations are adopted that provide
otherwise), (iii) an estate whose income is subject to United States Federal
income tax regardless of its source (iv) 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 (v) any other person whose income or
gain in respect of a STRIDES Security is effectively connected with the conduct
of a United States trade or business. Certain trusts not described in clause
(iv) above in existence on August 20, 1996 that elect to be treated as a United
States person will also be a U.S. Holder for purposes of the following
discussion. As used herein, the term "non-U.S. Holder" means a beneficial owner
of a STRIDES Security that is not a U.S. Holder.
General
There are no statutory provisions, regulations, published rulings or
judicial decisions addressing or involving the characterization and treatment,
for U.S. Federal income tax purposes, of the STRIDES Securities or securities
with terms substantially the same as the STRIDES Securities. Accordingly, the
proper U.S. Federal income tax characterization and treatment of the STRIDES
Securities is uncertain. Pursuant to the terms of the STRIDES Securities,
ML&Co. and every holder of a STRIDES Security agree (in the absence of an
administrative determination or judicial ruling to the contrary) to
characterize a STRIDES Security for all tax purposes as an investment unit
consisting of the following components (the "Components"): (i) a debt
instrument of ML&Co. (the "Debt Instrument") with a fixed principal amount
unconditionally payable on the maturity date equal to the principal amount of
the STRIDES Securities and bearing stated interest at the Interest Rate and
(ii) a contract (the "Forward Contract") pursuant to which the holder agrees to
use the principal payment due on the Debt Instrument to make a payment to
ML&Co. in exchange for the right to receive cash at maturity linked to the
Index. In the opinion of Tax Counsel, such characterization and tax treatment
of the STRIDES Securities, although not the only reasonable characterization
and tax treatment, is based on reasonable interpretations of law currently in
effect and, even if successfully challenged by the Internal Revenue Service
(the "IRS"), will not result in the imposition of penalties. Furthermore, based
on ML&Co.'s determination of the relative fair market values of the Components
at the time of issuance of the STRIDES Securities, it is anticipated that
ML&Co. will allocate the entire issue price of the STRIDES Securities to the
Debt Instrument and none of the issue price to the Forward Contract. ML&Co.'s
allocation of the issue price will be binding on a U.S. Holder of a STRIDES
Security, unless such U.S. Holder timely and explicitly
S-23
<PAGE>
discloses to the IRS that its allocation is different from ML&Co.'s. The
treatment of the STRIDES Securities described above and ML&Co.'s allocation are
not, however, binding on the IRS or the courts. No statutory, judicial or
administrative authority directly addresses the characterization of the STRIDES
Securities or instruments similar to the STRIDES Securities for U.S. Federal
income tax purposes, and no ruling is being requested from the IRS with respect
to the STRIDES Securities.
Due to the absence of authorities that directly address instruments that
are similar to the STRIDES Securities, significant aspects of the U.S. Federal
income tax consequences of an investment in the STRIDES Securities are not
certain, and no assurance can be given that the IRS or the courts will agree
with the characterization described above. Accordingly, prospective purchasers
are urged to consult their tax advisors regarding the U.S. Federal income tax
consequences of an investment in a STRIDES Security (including alternative
characterizations of a STRIDES Security) and with respect to any tax
consequences arising under the laws of any state, local or foreign taxing
jurisdiction. Unless otherwise stated, the following discussions are based on
the assumption that the treatment and the allocation described above are
accepted for U.S. Federal income tax purposes.
Tax Treatment of a STRIDES Security
"Interest on the Debt Instrument." As described above, the Debt Instrument
is treated as bearing interest at a stated rate of % per annum. A U.S. Holder
will include "qualified stated interest" equal to the stated interest on the
STRIDES Securities in income in accordance with the U.S. Holder's method of
accounting for U.S. Federal income tax purposes. Based on ML&Co.'s
determination set forth above, the U.S. Holder's tax basis in the Debt
Instrument would initially be 100% of the issue price.
However, if less than the entire issue price is allocated by ML&Co. to
the Debt Instrument, the U.S. Holder's tax basis in the Debt Instrument would
initially be the portion of the issue price allocated to the Debt Instrument
and the Debt Instrument could be subject to the "original issue discount"
rules. In such a case, each U.S. Holder, including a taxpayer who otherwise
used the cash method of accounting, would be required to include original issue
discount ("OID") on the Debt Instruments in income as it accrues, in accordance
with a constant yield method based on a compounding of interest. Such method
would generally cause the U.S. Holder to include OID in each accrual period in
an amount equal to the product of the adjusted issue price of the Debt
Instrument at the beginning of the accrual period and the yield of the Debt
Instrument, less the amount of any qualified stated interest allocable to the
accrual period. Because the yield on the Debt Instrument would be higher than
the stated interest rate, the amount of income recognized by the U.S. Holder
would generally be more than the stated interest paid to the U.S. Holder and
could increase during the term of the Notes.
"Settlement of the Forward Contract." Upon the final settlement of the
Forward Contract, a U.S. Holder would, pursuant to the Forward Contract, be
deemed to have applied an amount (the "Forward Contract Payment Amount") equal
to the principal amount of the Debt Instrument toward the exchange for the cash
payment of the Redemption Amount at maturity, and a U.S. Holder would recognize
gain or loss. The amount of such gain or loss would be the extent to which the
amount of such cash received differs from the Forward Contract Payment Amount.
U.S. Holders should note that it is uncertain whether any gain or loss
recognized upon the final settlement of the Forward Contract for cash would be
capital gain or loss or ordinary income or loss. The distinction between
capital gain or loss and ordinary income or loss is potentially significant in
several respects. For example, limitations apply to a U.S. Holder's ability to
offset capital losses against ordinary income, and certain U.S. Holders may be
subject to lower U.S. Federal income tax rates with respect to long-term
capital gain than with respect to ordinary income. U.S. Holders should consult
their tax advisors with respect to the treatment of gain or loss on a STRIDES
Security.
S-24
<PAGE>
Sale or Exchange of the STRIDES Securities
Upon a sale or exchange of a STRIDES Security prior to the maturity of
the STRIDES Securities, a U.S. Holder would recognize taxable gain or loss
equal to the difference between the amount realized on such sale or exchange
(as allocated among the Components in accordance with their relative fair
market values) and such U.S. Holder's tax basis in the Components deemed so
sold or exchanged. Any such gain or loss would generally be long-term or short-
term capital gain or loss (depending on the U.S. Holder's holding period for
the STRIDES Securities). For these purposes, the amount realized does not
include any amount attributable to accrued interest on the Debt Instrument,
which would be taxed as described under "Tax Treatment of a STRIDES Security--
Interest on the Debt Instrument" above.
Possible Alternative Tax Treatments of an Investment in a STRIDES Security
Due to the absence of authorities that directly address the proper
characterization of the STRIDES Securities, no assurance can be given that the
IRS will accept, or that a court will uphold, the characterization and tax
treatment described above. In particular, the IRS could seek to analyze the
U.S. Federal income tax consequences of owning a STRIDES Security under
Treasury regulations governing contingent payment debt instruments (the
"Contingent Payment Regulations").
ML&Co. will take the position that the Contingent Payment Regulations do
not apply to the STRIDES Securities. If the IRS were successful in asserting
that the Contingent Payment Regulations applied to the STRIDES Securities, the
timing and character of income thereon would be significantly affected. Among
other things, a U.S. Holder would be required to accrue as OID, subject to the
adjustments described below, income at a "comparable yield" on the issue price,
regardless of the U.S. Holder's usual method of accounting for U.S. Federal
income tax purposes. In addition, the Contingent Payment Regulations require
that a projected payment schedule, which results in such a "comparable yield,"
be determined, and that adjustments to income accruals be made to account for
differences between actual payments and projected amounts (including upon
receipt of the Redemption Amount at maturity). Furthermore, any gain realized
with respect to a STRIDES Security would generally be treated as ordinary
income, and any loss realized would generally be treated as ordinary loss to
the extent of the U.S. Holder's prior ordinary income inclusions (which were
not previously reversed) with respect to the STRIDES Securities.
Even if the Contingent Payment Regulations do not apply to the STRIDES
Securities, other alternative U.S. Federal income characterizations or
treatments of the STRIDES Securities are also possible, which may also affect
the timing and the character of the income or loss with respect to the STRIDES
Securities. Accordingly, prospective purchasers are urged to consult their tax
advisors regarding the U.S. Federal income tax consequences of an investment in
a STRIDES Security.
Proposed Legislation
On February 4, 1998, Representative Barbara Kennelly released H.R. 3170
(the "Kennelly Bill"), which, if enacted, would treat a taxpayer owning certain
types of derivative positions in property as having "constructive ownership" of
that property, with the result that all or a portion of any long-term capital
gain recognized by such taxpayer with respect to the derivative position would
be recharacterized as short-term capital gain. It is unclear whether, if
enacted in its present form, the Kennelly Bill would apply to a STRIDES
Security. If the Kennelly Bill were to apply to a STRIDES Security, the effect
on a U.S. Holder of a STRIDES Security would be to treat all or a portion of
any long-term capital gain recognized by such U.S. Holder on sale or maturity
of the STRIDES Securities as short-term capital gain, but only to the extent
such long-term capital gain exceeds the long-term capital gain that would have
been recognized by such U.S. Holder if the U.S. Holder had acquired Underlying
Stocks themselves on the issue date of the STRIDES Securities and disposed of
the Underlying Stocks upon disposition of the STRIDES Securities. In addition,
the Kennelly Bill would impose an interest charge on the gain that was
recharacterized on the sale or maturity of the STRIDES Securities. As proposed,
the Kennelly Bill would be effective for gains recognized after the date of
enactment.
S-25
<PAGE>
U.S. Holders should consult their tax advisors regarding the potential
application of the Kennelly Bill or any similar proposal to the purchase,
ownership and disposition of a STRIDES Security.
Non-U.S. Holders
Based on the treatment of each STRIDES Security as an investment unit
consisting of the Debt Instrument and the Forward Contract, in the case of a
non-U.S. Holder, payments of interest made with respect to the STRIDES
Securities should not be subject to United States withholding tax, provided
that such non-U.S. Holder complies with applicable certification requirements
and that such payments are not effectively connected with a United States trade
or business of such non-U.S. Holder. Any capital gain realized upon the sale or
other disposition of a STRIDES Security by a non-U.S. Holder will generally not
be subject to United States Federal income tax if (i) such gain is not
effectively connected with a United States trade or business of such non-U.S.
Holder and (ii) in the case of an individual non-U.S. Holder, such individual
is not present in the United States for 183 days or more in the taxable year of
the sale or other disposition, or the gain is not attributable to a fixed place
of business maintained by such individual in the United States and such
individual does not have a "tax home" (as defined for United States Federal
income tax purposes ) in the United States.
As discussed above, alternative characterizations of the STRIDES
Securities for United States Federal income tax purposes are possible. Should
an alternative characterization of the STRIDES Securities, by reason of a
change or clarification of the law, by regulation or otherwise, cause payments
with respect to the STRIDES Securities to become subject to withholding tax,
ML&Co. will withhold tax at the statutory rate. Prospective non-U.S. Holders of
the STRIDES Securities should consult their own tax advisors in this regard.
Backup Withholding and Information Reporting
A beneficial owner of a STRIDES Security may be subject to information
reporting and to backup withholding at a rate of 31% of certain amounts paid to
the beneficial owner unless such beneficial owner provides proof of an
applicable exemption or a correct taxpayer identification number, and otherwise
complies with applicable requirements of the backup withholding rules.
Any amounts withheld under the backup withholding rules from a payment to
a beneficial owner would be allowed as a refund or a credit against such
beneficial owner's United States Federal income tax provided the required
information is furnished to the IRS.
New Withholding Regulations
On October 6, 1997, the Treasury Department issued new regulations which
make certain modifications to the withholding, backup withholding and
information reporting rules described above. The new regulations attempt to
unify certification requirements and modify reliance standards. The new
regulations will generally be effective for payments made after December 31,
1999, subject to certain transitional rules. Prospective investors are urged to
consult their own tax advisors regarding the new regulations.
S-26
<PAGE>
UNDERWRITING
MLPF&S, the underwriter of the offering, has agreed, subject to the terms
and conditions of the Underwriting Agreement and a Terms Agreement, to purchase
from ML&Co. $25,000,000 aggregate principal amount of STRIDES Securities. The
Underwriting Agreement provides that the obligations of the underwriter are
subject to certain conditions precedent and that the underwriter will be
obligated to purchase all of the STRIDES Securities if any are purchased.
The underwriter has advised ML&Co. that it proposes initially to offer
all or part of the STRIDES Securities directly to the public at the public
offering price set forth on the cover page of this prospectus supplement. After
the initial public offering, the public offering price may be changed. The
underwriter is offering the STRIDES Securities subject to receipt and
acceptance and subject to the underwriter's right to reject any order in whole
or in part.
The underwriting of the STRIDES Securities will conform to the
requirements set forth in the applicable sections of Rule 2720 of the Conduct
Rules of the NASD.
In connection with the offering, the underwriter is permitted to engage
in certain transactions that stabilize the market price of the STRIDES
Securities. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the market price of the STRIDES Securities.
If the underwriter creates a short position in the STRIDES Securities in
connection with the offering, i.e., if they sell more units of the STRIDES
Securities than are set forth on the cover page of this prospectus supplement,
the underwriter may reduce that short position by purchasing the units of the
STRIDES 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 market price of the security to be
higher than it might be in the absence of such purchases. Neither ML&Co. nor
the underwriter makes any representation or prediction as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the STRIDES Securities. In addition, neither ML&Co. nor the
underwriter makes any representation that the underwriter will engage in such
transactions or that such transactions, once commenced, will not be
discontinued without notice.
The underwriter may use this prospectus supplement and the accompanying
prospectus for offers and sales related to market-making transactions in the
STRIDES 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 STRIDES SECURITIES
The validity of the STRIDES Securities will be passed upon for ML&Co. and
for the underwriter by Brown & Wood LLP, New York, New York.
S-27
<PAGE>
INDEX OF CERTAIN DEFINED TERMS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business Day............................................................... S-3
Calculation Day............................................................ S-11
Calculation Period......................................................... S-11
Capped Value............................................................... S-3
Closing Value.............................................................. S-11
Depositary................................................................. S-15
Ending Value............................................................... S-3
Index...................................................................... S-3
Index Business Day......................................................... S-11
Market Disruption Event.................................................... S-14
ML&Co...................................................................... S-2
MLPF&S..................................................................... S-2
Nasdaq..................................................................... S-4
Nasdaq-100 Index........................................................... S-3
Pricing Date............................................................... S-3
Redemption Amount.......................................................... S-3
Starting Value............................................................. S-3
Successor Index............................................................ S-14
Underlying Stocks.......................................................... S-4
</TABLE>
S-28
<PAGE>
- --------------------------------------------------------------------------------
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[LOGO]
2,500,000 Units
Merrill Lynch & Co., Inc.
STock Return Income DEbt Securities SM
due August , 2000
"STRIDES SM Securities"
Linked to the value of the Nasdaq-100 Index(R)
------------------------------
PROSPECTUS SUPPLEMENT
------------------------------
Merrill Lynch & Co.
February , 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
