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RULE NO. 424(b)(5)
REGISTRATION NO. 333-68747
Subject to Completion
Preliminary Prospectus Supplement dated June 28, 1999
PROSPECTUS SUPPLEMENT [LOGO] Merrill Lynch
(To prospectus dated May 6, 1999) PROTECTED GROWTH(SM) INVESTING
Pursuit of Growth, Protection of Principal
2,500,000 Units
Merrill Lynch & Co., Inc.
S&P 500(R) Market Index Target-Term Securities(R)
due July , 2006
"MITTS(R) Securities"
$10 principal amount per unit
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The MITTS Securities: Payment at maturity:
. 100% principal protection at . On the maturity date, for each unit
maturity. of the MITTS Securities you own, we
. No payments before the maturity will pay you an amount equal to the
date. sum of the principal amount of each
. Senior unsecured debt securities unit and an additional amount based
of Merrill Lynch & Co., Inc. on the percentage increase, if any,
. Linked to the value of the S&P 500 in the value of the S&P 500 Index
Index. reduced by an annual adjustment
. The MITTS Securities have been factor expected to be between 2.1%
approved for listing on the and 2.6%.
American Stock Exchange under the . At maturity, you will receive no less
trading symbol "MPF". than the principal amount of your
. Closing date: July , 1999. MITTS Securities.
Investing in the MITTS Securities involves risk.
See "Risk Factors" beginning on page S-8 of this prospectus supplement.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus supplement or the accompanying prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
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Per unit Total
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Public offering price............................... $10.00 $25,000,000
Underwriting discount............................... $ $
Proceeds, before expenses, to Merrill Lynch & Co.,
Inc................................................ $ $
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The public offering price and the underwriting discount for any single
transaction to purchase:
(a) between 100,000 units and 499,999 units will be $ per unit and
$ per unit, respectively, and
(b) 500,000 units or more will be $ per unit and $ per unit,
respectively.
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Merrill Lynch & Co.
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The date of this prospectus supplement is July , 1999.
"MITTS" and "Market Index Target-Term Securities" are registered service marks
of Merrill Lynch & Co., Inc.
"Standard & Poor's(R)", "Standard & Poor's 500", "S&P 500(R)", "S&P(R)" and
"500", are trademarks of The McGraw-Hill Companies, Inc. and have been licensed
for use by Merrill Lynch Capital Services, Inc., and Merrill Lynch & Co., Inc.
is an authorized sublicensee.
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TABLE OF CONTENTS
Prospectus Supplement
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Page
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SUMMARY INFORMATION--Q&A.................................................. S-4
What are the MITTS Securities?.......................................... S-4
What will I receive on the stated maturity date of the MITTS
Securities?............................................................ S-4
Who publishes the S&P 500 Index and what does the S&P 500 Index
measure?............................................................... S-6
How has the S&P 500 Index performed historically?....................... S-6
What about taxes?....................................................... S-6
Will the MITTS Securities be listed on a stock exchange?................ S-7
What is the role of MLPF&S?............................................. S-7
Who is ML&Co.?.......................................................... S-7
Are there any risks associated with my investment?...................... S-7
RISK FACTORS.............................................................. S-8
You may not earn a return on your investment............................ S-8
Your yield may be lower than the yield on a standard debt security of
comparable maturity.................................................... S-8
Your return will not reflect the return of owning the stocks included in
the S&P 500 Index...................................................... S-8
There may be an uncertain trading market for the MITTS Securities....... S-8
Many factors affect the trading value of the MITTS Securities; these
factors interrelate in complex ways and the effect of any one factor
may offset or magnify the effect of another factor..................... S-8
Amounts payable on the MITTS Securities may be limited by state law..... S-10
Purchases and sales by us and our affiliates may affect your return..... S-10
Potential conflicts..................................................... S-10
Uncertain tax consequences.............................................. S-10
DESCRIPTION OF THE MITTS SECURITIES....................................... S-11
Payment at maturity..................................................... S-11
Hypothetical returns.................................................... S-12
Adjustments to the S&P 500 Index; Market Disruption Events.............. S-13
Discontinuance of the S&P 500 Index..................................... S-14
Events of Default and Acceleration...................................... S-15
Depositary.............................................................. S-15
Same-Day Settlement and Payment......................................... S-17
THE S&P 500 INDEX......................................................... S-18
Computation of the S&P 500 Index........................................ S-18
Historical Data on the S&P 500 Index.................................... S-19
License Agreement....................................................... S-21
UNITED STATES FEDERAL INCOME TAXATION..................................... S-21
General................................................................. S-22
U.S. Holders............................................................ S-22
Hypothetical Table...................................................... S-25
Non-U.S. Holders........................................................ S-25
Backup withholding...................................................... S-26
New withholding regulations............................................. S-26
USE OF PROCEEDS AND HEDGING............................................... S-26
WHERE YOU CAN FIND MORE INFORMATION....................................... S-27
UNDERWRITING.............................................................. S-27
VALIDITY OF THE MITTS SECURITIES.......................................... S-28
INDEX OF DEFINED TERMS.................................................... S-29
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S-2
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Prospectus
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MERRILL LYNCH & CO., INC................................................. 2
USE OF PROCEEDS.......................................................... 2
RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS............................. 3
THE SECURITIES........................................................... 3
DESCRIPTION OF DEBT SECURITIES........................................... 4
DESCRIPTION OF DEBT WARRANTS............................................. 10
DESCRIPTION OF CURRENCY WARRANTS......................................... 12
DESCRIPTION OF INDEX WARRANTS............................................ 14
DESCRIPTION OF PREFERRED STOCK........................................... 19
DESCRIPTION OF DEPOSITARY SHARES......................................... 24
DESCRIPTION OF PREFERRED STOCK WARRANTS.................................. 28
DESCRIPTION OF COMMON STOCK.............................................. 30
DESCRIPTION OF COMMON STOCK WARRANTS..................................... 33
PLAN OF DISTRIBUTION..................................................... 35
WHERE YOU CAN FIND MORE INFORMATION...................................... 36
INCORPORATION OF INFORMATION WE FILE WITH THE SEC........................ 36
EXPERTS.................................................................. 37
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S-3
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SUMMARY INFORMATION -- Q&A
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This summary includes questions and MITTS Securities--Depositary" in this prospectus
answers that highlight selected information from the supplement.
prospectus and prospectus supplement to help you
understand the S&P 500 Market Index Target- What will I receive on the stated maturity date of
Term Securities(R) due July , 2006. You should the MITTS Securities?
carefully read this prospectus supplement and the
accompanying prospectus to fully understand the We have designed the MITTS Securities for
terms of the MITTS Securities, the S&P 500 Index investors who want to protect their investment by
and the tax and other considerations that are receiving at least the principal amount of their
important to you in making a decision about whether investment at maturity and who also want to
to invest in the MITTS Securities. You should participate in possible increases in the value of the
carefully review the "Risk Factors" section, which S&P 500 Index as reduced by the Adjustment
highlights certain risks associated with an Factor. On the stated maturity date, you will receive
investment in the MITTS Securities, to determine a payment on the MITTS Securities equal to the sum
whether an investment in the MITTS Securities is of two amounts: the "principal amount" and the
appropriate for you. "Supplemental Redemption Amount".
References in this prospectus supplement to Principal amount
"ML&Co.", "we", "us" and "our" are to Merrill
Lynch & Co., Inc. The principal amount per unit is $10.
References in this prospectus supplement to Supplemental Redemption Amount
"MLPF&S" are to Merrill Lynch, Pierce, Fenner &
Smith Incorporated. The Supplemental Redemption Amount per
unit will equal:
What are the MITTS Securities?
(Adjusted Ending Value - Starting Value)
The MITTS Securities will be a series of $10 X(--------------------------------------)
senior debt securities issued by ML&Co. and will ( Starting Value )
not be secured by collateral. The MITTS Securities
will rank equally with all of our other unsecured and but will not be less than zero.
unsubordinated debt. The MITTS Securities will
mature on July , 2006. We cannot redeem the "Starting Value" means the closing value
MITTS Securities at any earlier date. We will not of the S&P 500 Index on the date the MITTS
make any payments on the MITTS Securities until Securities are priced for initial sale to the public (the
maturity. "Pricing Date"). We will disclose the Starting
Value in the final prospectus supplement delivered
Each unit of MITTS Securities represents to you in connection with sales of the MITTS
$10 principal amount of MITTS Securities. You Securities.
may transfer the MITTS Securities only in whole
units. You will not have the right to receive physical "Adjusted Ending Value" means the
certificates evidencing your ownership except under average or arithmetic mean of the values of the S&P
limited circumstances. Instead, we will issue the 500 Index at the close of the market on five business
MITTS Securities in the form of a global certificate, days before the maturity of the MITTS Securities as
which will be held by The Depository Trust reduced on each day by the application of the
Company, also known as DTC, or its nominee. Adjustment Factor. We may calculate the Adjusted
Direct and indirect participants in DTC will record Ending Value by reference to fewer than five or
your ownership of the MITTS Securities. You even a single day's closing value if, during the
should refer to the section "Description of the period shortly before the stated maturity date of the
MITTS Securities, there is a disruption in the trading
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S-4
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of a sufficient number of the stocks included in the MITTS Securities. For a detailed discussion of how
S&P 500 Index or certain futures or options the Adjustment Factor will affect the value of the
contracts relating to the S&P 500 Index. S&P 500 Index used to calculate the Supplemental
Redemption Amount, see "Description of the
The "Adjustment Factor" will be a fixed MITTS Securities--Payment at maturity" in this
percentage which is expected to be between 2.1% prospectus supplement.
and 2.6% per year and will be prorated based on a
365-day year and applied over the entire term of the For more specific information about the
MITTS Securities on each calendar day to reduce Supplemental Redemption Amount, please see the
the closing values of the S&P 500 Index used to section "Description of the MITTS Securities" in
calculate the Supplemental Redemption Amount this prospectus supplement.
during the Calculation Period. As a result of the
cumulative effect of this reduction, the values of the We will pay you a Supplemental
S&P 500 Index used to calculate the Supplemental Redemption Amount only if the Adjusted Ending
Redemption Amount during the Calculation Period Value is greater than the Starting Value. If the
will be approximately 13.68% to 16.65% less than Adjusted Ending Value is less than, or equal to,
the actual closing values of the S&P 500 Index on the Starting Value, the Supplemental Redemption
each day during the Calculation Period. We will Amount will be zero. We will pay you the principal
determine the Adjustment Factor on the Pricing Date amount of your MITTS Securities regardless of
and it will appear in the final prospectus supplement whether any Supplemental Redemption Amount
delivered to you in connection with sales of the is payable.
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Examples
Here are two examples of Supplemental Redemption Amount calculations
assuming an investment term of seven years and an Adjustment Factor of
2.35% per year, the midpoint of the expected range of 2.1% and 2.6%:
Example 1--The S&P 500 Index, as adjusted, is below the Starting Value at
maturity:
Hypothetical Starting Value: 1,315.31
Hypothetical closing value of the S&P 500 Index at maturity: 1,446.84
Hypothetical Adjusted Ending Value: 1,227.21
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(Supplemental
(1,227.21 - 1,315.31) Redemption
Supplemental Redemption Amount (per unit) = $10 X (-------------------) = $0.00 Amount cannot
( 1,315.31 ) be less than zero)
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Total payment at maturity (per unit) = $10 + $0 = $10
Example 2--The S&P 500 Index, as adjusted, is above the Starting Value at
maturity:
Hypothetical Starting Value: 1,315.31
Hypothetical closing value of the S&P 500 Index at maturity: 2,367.56
Hypothetical Adjusted Ending Value: 2,008.17
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(2,008.17 - 1,315.31)
Supplemental Redemption Amount (per unit) = $10 X (-------------------) = $5.27
( 1,315.31 )
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Total payment at maturity (per unit) = $10 + $5.27 = $15.27
S-5
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Who publishes the S&P 500 Index and what does Index", in this prospectus supplement. We have
the S&P 500 Index measure? provided this historical information to help you
evaluate the behavior of the S&P 500 Index in
The S&P 500 Index is published by various economic environments; however, past
Standard & Poor's, a division of The McGraw-Hill performance of the S&P 500 Index is not necessarily
Companies, Inc., and is intended to provide an indicative of how the S&P 500 Index will perform
indication of the pattern of common stock price in the future.
movement. The value of the S&P 500 Index is based
on the relative value of the aggregate market value What about taxes?
of the common stocks of 500 companies as of a
particular time compared to the aggregate average Each year, you will be required to pay taxes
market value of the common stocks of 500 similar on ordinary income from the MITTS Securities over
companies during the base period of the years 1941 their term based upon an estimated yield for the
through 1943. The market value for the common MITTS Securities, even though you will not receive
stock of a company is the product of the market any payments from us until maturity. We have
price per share of the common stock and the number determined this estimated yield, in accordance with
of outstanding shares of common stock. As of regulations issued by the U.S. Treasury Department,
June 15, 1999, the 500 companies included in the solely in order for you to figure the amount of taxes
S&P 500 Index represented approximately 78% of that you will owe each year as a result of owning a
the aggregate market value of common stocks traded MITTS Security. This estimated yield is neither a
on the New York Stock Exchange; however, these prediction nor a guarantee of what the actual
500 companies are not the 500 largest companies Supplemental Redemption Amount will be, or that
listed on the NYSE and not all of these 500 the actual Supplemental Redemption Amount will
companies are listed on the NYSE. As of June 15, even exceed zero. We have determined that this
1999, the aggregate market value of the 500 estimated yield will equal % per annum,
companies included in the S&P 500 Index compounded semiannually.
represented approximately 70% of the aggregate
market value of United States domestic, public Based upon this estimated yield, if you pay
companies. Standard & Poor's chooses companies your taxes on a calendar year basis and if you buy a
for inclusion in the S&P 500 Index with the aim of MITTS Security for $10 and hold the MITTS
achieving a distribution by broad industry groupings Security until maturity, you will be required to pay
that approximates the distribution of these groupings taxes on the following amounts of ordinary income
in the common stock population of the NYSE, from the MITTS Securities each year: $ in
which Standard & Poor's uses as an assumed model 1999, $ in 2000, $ in 2001, $
for the composition of the total market. in 2002, $ in 2003, $ in 2004,
$ in 2005 and $ in 2006. However, in
Please note that an investment in the 2006, the amount of ordinary income that you will
MITTS Securities does not entitle you to any be required to pay taxes on from owning each
ownership interest in the stocks of the companies MITTS Security may be greater or less than
included in the S&P 500 Index. $ , depending upon the Supplemental
Redemption Amount, if any, you receive. Also, if
How has the S&P 500 Index performed the Supplemental Redemption Amount is less than
historically? $ , you may have a loss which you could
deduct against other income you may have in 2006,
We have included tables showing the year- but under current tax regulations, you would neither
end closing value of the S&P 500 Index for each be required nor allowed to amend your tax returns
year from 1947 through 1998 and the month-end for prior years. For further information, see "United
closing value of the S&P 500 Index from January States Federal Income Taxation" in this prospectus
1990 through May 1999 in the section entitled "The supplement.
S&P 500 Index--Historical Data on the S&P 500
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S-6
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Will the MITTS Securities be listed on a stock Adjusted Ending Value and the Supplemental
exchange? Redemption Amount. Under certain circumstances,
these duties could result in a conflict of interest
The MITTS Securities have been approved between MLPF&S' status as a subsidiary of
for listing on the AMEX under the trading symbol ML&Co. and its responsibilities as calculation agent.
"MPF", subject to official notice of issuance. You
should be aware that the listing of the MITTS Who is ML&Co.?
Securities on the AMEX will not necessarily ensure
that a liquid trading market will be available for the Merrill Lynch & Co., Inc. is a holding
MITTS Securities. You should review "Risk Factors company with various subsidiary and affiliated
- --There may be an uncertain trading market for the companies that provide investment, financing,
MITTS Securities" in this prospectus supplement. insurance and related services on a global basis. For
information about ML&Co. see the section "Merrill
What is the role of MLPF&S? Lynch & Co., Inc." in the accompanying
prospectus. You should also read the other
Our subsidiary, MLPF&S, is the documents we have filed with the SEC, which you
underwriter for the offering and sale of the MITTS can find by referring to the section "Where You
Securities. After the initial offering, MLPF&S Can Find More Information" in this prospectus
intends to buy and sell the MITTS Securities to supplement.
create a secondary market for holders of the MITTS
Securities, and may stabilize or maintain the market Are there any risks associated with my
price of the MITTS Securities during the initial investment?
distribution of the MITTS Securities. However,
MLPF&S will not be obligated to engage in any of Yes, an investment in the MITTS Securities
these market activities or continue them once it has is subject to risk. Please refer to the section "Risk
started. Factors" in this prospectus supplement.
MLPF&S will also be our agent for
purposes of calculating, among other things, the
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S-7
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RISK FACTORS
Your investment in the MITTS Securities will involve risks. You should
carefully consider the following discussion of risks before deciding whether an
investment in the MITTS Securities is suitable for you.
You may not earn a return on your investment
You should be aware that if the Adjusted Ending Value does not exceed the
Starting Value on the stated maturity date, the Supplemental Redemption Amount
will be zero. This will be true even if the value of the S&P 500 Index, as
reduced by the Adjustment Factor over the term of the MITTS Securities, was
higher than the Starting Value at some time during the life of the MITTS
Securities but later falls below the Starting Value. If the Supplemental
Redemption Amount is zero, we will pay you only the principal amount of your
MITTS Securities.
Your yield may be lower than the yield on a standard debt security of
comparable maturity
The amount we pay you at maturity may be less than the return you could
earn on other investments. Your yield may be less than the yield you would earn
if you bought a standard senior non-callable debt security of ML&Co. with the
same stated maturity date. Your investment may not reflect the full opportunity
cost to you when you take into account factors that affect the time value of
money.
Your return will not reflect the return of owning the stocks included in the
S&P 500 Index
The return on your MITTS Securities will not reflect the return you would
realize if you actually owned the stocks included in the S&P 500 Index and
received the dividends paid on those stocks because of the cumulative effect of
the reduction caused by the Adjustment Factor and because the value of the S&P
500 Index is calculated by reference to the prices of the stocks included in
the S&P 500 Index without taking into consideration the value of dividends paid
on those stocks.
There may be an uncertain trading market for the MITTS Securities
The MITTS Securities have been approved for listing on the AMEX under the
trading symbol "MPF", subject to official notice of issuance. While there have
been a number of issuances of series of Market Index Target-Term Securities,
trading volumes have varied historically from one series to another and it is
therefore impossible to predict how the MITTS Securities will trade. You cannot
assume that a trading market will develop for the MITTS Securities. If a
trading market does develop, there can be no assurance that there will be
liquidity in the trading market. The development of a trading market for the
MITTS Securities will depend on our financial performance, and other factors
such as the increase, if any, in the value of the S&P 500 Index.
If the trading market for the MITTS Securities is limited, there may be a
limited number of buyers for your MITTS Securities if you do not wish to hold
your investment until maturity. This may affect the price you receive.
Many factors affect the trading value of the MITTS Securities; these factors
interrelate in complex ways and the effect of any one factor may offset or
magnify the effect of another factor
The trading value of the MITTS Securities will be affected by factors
that interrelate in complex ways. It is important for you to understand that
the effect of one factor may offset the increase in the trading value of the
MITTS Securities caused by another factor and that the effect of one factor may
exacerbate the decrease in the trading value of the MITTS Securities caused by
another factor. For example, an increase in interest rates may offset some or
all of any increase in the trading value of the MITTS Securities attributable
to another factor, such as an increase in the value of the S&P 500 Index. The
following paragraphs describe the expected impact on the market value of the
MITTS Securities given a change in a specific factor, assuming all other
conditions remain constant.
S-8
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The value of the S&P 500 Index is expected to affect the trading value of
the MITTS Securities. We expect that the market value of the MITTS Securities
will depend substantially on the amount by which the S&P 500 Index, as reduced
by the Adjustment Factor over the term of the MITTS Securities, exceeds the
Starting Value. If you choose to sell your MITTS Securities when the value of
the S&P 500 Index, as reduced by the Adjustment Factor over the term of the
MITTS Securities, exceeds the Starting Value, you may receive substantially
less than the amount that would be payable at maturity based on that value
because of the expectation that the S&P 500 Index will continue to fluctuate
until the Adjusted Ending Value is determined. If you choose to sell your MITTS
Securities when the value of the S&P 500 Index is below, or not sufficiently
above, the Starting Value, you may receive less than the $10 principal amount
per unit of MITTS Securities. In general, rising U.S. dividend rates or
dividends per share may increase the value of the S&P 500 Index while falling
U.S. dividend rates may decrease the value of the S&P 500 Index.
Changes in the levels of interest rates are expected to affect the
trading value of the MITTS Securities. Because we will pay, at a minimum, the
principal amount per unit of MITTS Securities at maturity, we expect that
changes in U.S. interest rates will affect the trading value of the MITTS
Securities. In general, if U.S. interest rates increase, we expect that the
trading value of the MITTS Securities will decrease and, conversely, if U.S.
interest rates decrease, we expect the trading value of the MITTS Securities
will increase. Rising U.S. interest rates may lower the value of the S&P 500
Index and, thus, the MITTS Securities. Falling U.S. interest rates may increase
the value of the S&P 500 Index and, thus, may increase the value of the MITTS
Securities.
Changes in the volatility of the S&P 500 Index are expected to affect the
trading value of the MITTS Securities. Volatility is the term used to describe
the size and frequency of price and/or market fluctuations. In general, if the
volatility of the S&P 500 Index increases, we expect that the trading value of
the MITTS Securities will increase and, conversely, if the volatility of the
S&P 500 Index decreases, we expect that the trading value of the MITTS
Securities will decrease.
As the time remaining to maturity of the MITTS Securities decreases, the
"time premium" associated with the MITTS Securities will decrease. We
anticipate that before their maturity, the MITTS Securities may trade at a
value above that which would be expected based on the level of interest rates
and the S&P 500 Index. This difference will reflect a time premium due to
expectations concerning the value of the S&P 500 Index during the period before
the stated maturity of the MITTS Securities. However, as the time remaining to
the stated maturity of the MITTS Securities decreases, we expect that this time
premium will decrease, lowering the trading value of the MITTS Securities.
Changes in dividend yields of the stocks included in the S&P 500 Index
are expected to affect the trading value of the MITTS Securities. In general,
if dividend yields on the stocks included in the S&P 500 Index increase, we
expect that the value of the MITTS Securities will decrease and, conversely, if
dividend yields on the stocks included in the S&P 500 Index decrease, we expect
that the value of the MITTS Securities will increase.
Changes in our credit ratings may affect the trading value of the MITTS
Securities. Our credit ratings are an assessment of our ability to pay our
obligations. Consequently, real or anticipated changes in our credit ratings
may affect the trading value of the MITTS Securities. However, because your
return on your MITTS Securities is dependent upon factors in addition to our
ability to pay our obligations under the MITTS Securities, such as the
percentage increase in the value of the S&P 500 Index at maturity, an
improvement in our credit ratings will not reduce the other investment risks
related to the MITTS Securities.
In general, assuming all relevant factors are held constant, we expect
that the effect on the trading value of the MITTS Securities of a given change
in most of the factors listed above will be less if it occurs later in the term
of the MITTS Securities than if it occurs earlier in the term of the MITTS
Securities. However, we expect that the effect on the trading value of the
MITTS Securities of a given increase in the value of the S&P 500 Index will be
greater if it occurs later in the term of the MITTS Securities than if it
occurs earlier in the term of the MITTS Securities.
S-9
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Amounts payable on the MITTS Securities may be limited by state law
New York State law governs the 1983 Indenture under which the MITTS
Securities will be issued. New York has usury laws that limit the amount of
interest that can be charged and paid on loans, which includes debt securities
like the MITTS Securities. Under present New York law, the maximum rate of
interest is 25% per annum on a simple interest basis. This limit may not apply
to debt securities in which $2,500,000 or more has been invested.
While we believe that New York law would be given effect by a state or
Federal court sitting outside of New York, many other states also have laws
that regulate the amount of interest that may be charged to and paid by a
borrower. We will promise, for the benefit of the holders of the MITTS
Securities, to the extent permitted by law, not to voluntarily claim the
benefits of any laws concerning usurious rates of interest.
Purchases and sales by us and our affiliates may affect your return
We and our affiliates may from time to time buy or sell the stocks
included in the S&P 500 Index or futures or options contracts on the S&P 500
Index for our own accounts for business reasons or in connection with hedging
our obligations under the MITTS Securities. These transactions could affect the
price of these stocks and, in turn, the value of the S&P 500 Index in a manner
that would be adverse to your investment in the MITTS Securities.
Potential conflicts
Our subsidiary, MLPF&S, is our agent for the purposes of calculating the
Adjusted Ending Value and the Supplemental Redemption Amount payable to you at
maturity. Under certain circumstances, MLPF&S' role as our subsidiary and its
responsibilities as calculation agent for the MITTS Securities could give rise
to conflicts of interests. These conflicts could occur, for instance, in
connection with its determination as to whether the value of the S&P 500 Index
can be calculated on a particular trading day, or in connection with judgments
that it would be required to make in the event of a discontinuance of the S&P
500 Index. See "Description of the MITTS Securities--Adjustments to the S&P 500
Index; Market Disruption Events" and "--Discontinuance of the S&P 500 Index" in
this prospectus supplement. MLPF&S is required to carry out its duties as
calculation agent in good faith and using its reasonable judgment. However, you
should be aware that because we control MLPF&S, potential conflicts of interest
could arise.
We anticipate entering into an arrangement with one of our subsidiaries
to hedge the market risks associated with our obligation to pay the amounts due
at maturity on the MITTS Securities. This subsidiary expects to make a profit
in connection with this arrangement. We did not seek competitive bids for this
arrangement from unaffiliated parties.
Uncertain tax consequences
You should also consider the tax consequences of investing in the MITTS
Securities, aspects of which are uncertain. See "United States Federal Income
Taxation" below.
S-10
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DESCRIPTION OF THE MITTS SECURITIES
ML&Co. will issue the MITTS Securities as a series of senior debt
securities under the 1983 Indenture, which is more fully described in the
accompanying prospectus. The MITTS Securities will mature on July , 2006.
While at maturity a beneficial owner of a MITTS Security will receive the
sum of the principal amount of the MITTS Security plus the Supplemental
Redemption Amount, if any, there will be no other payment of interest, periodic
or otherwise. See "--Payment at maturity".
The MITTS Securities are not subject to redemption by ML&Co. or at the
option of any beneficial owner before maturity. If an Event of Default occurs
with respect to the MITTS Securities, beneficial owners of the MITTS Securities
may accelerate the maturity of the MITTS Securities, as described under --
Events of Default and Acceleration" in this prospectus supplement and
"Description of Debt Securities--Events of Default" in the accompanying
prospectus.
ML&Co. will issue the MITTS Securities in denominations of whole units of
$10 per unit.
The MITTS Securities do not have the benefit of any sinking fund.
Payment at maturity
At maturity, a beneficial owner of a MITTS Security will be entitled to
receive the principal amount of that MITTS Security plus a Supplemental
Redemption Amount, if any, all as provided below. If the Adjusted Ending Value
does not exceed the Starting Value, you will be entitled to receive only the
principal amount of your MITTS Securities.
Determination of the Supplemental Redemption Amount
The "Supplemental Redemption Amount" for a MITTS Security will be
determined by the calculation agent and will equal:
<TABLE>
<S> <C> <C>
(Adjusted Ending Value - Starting Value)
principal amount of each MITTS Security ($10 per unit) X (--------------------------------------)
( Starting Value )
</TABLE>
provided, however, that in no event will the Supplemental Redemption Amount
be less than zero.
The "Starting Value" means the closing value of the S&P 500 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 MITTS Securities.
The "Adjusted Ending Value" will be determined by the calculation agent
and will equal the average or arithmetic mean of the closing values of the S&P
500 Index, as reduced by the application of the Adjustment Factor on each
Calculation Day, determined on each of the first five Calculation Days during
the Calculation Period. If there are fewer than five Calculation Days during
the Calculation Period, then the Adjusted Ending Value will equal the average
or arithmetic mean of the closing values of the S&P 500 Index on those
Calculation Days, as reduced by the application of the Adjustment Factor on
each Calculation Day. If there is only one Calculation Day during the
Calculation Period, then the Adjusted Ending Value will equal the closing value
of the S&P 500 Index on that Calculation Day, as reduced by the application of
the Adjustment Factor on that Calculation Day. If no Calculation Days occur
during the Calculation Period, then the Adjusted Ending Value will equal the
closing value of the S&P 500 Index determined on the last scheduled Index
Business Day in the Calculation Period, as reduced by the application of the
Adjustment Factor on that day, regardless of the occurrence of a Market
Disruption Event on that day.
S-11
<PAGE>
The "Adjustment Factor" will be a fixed percentage which is expected to
be between 2.1% and 2.6% per year and will be prorated based on a 365-day year
and applied over the entire term of the MITTS Securities on each calendar day
to reduce the value of the S&P 500 Index used to calculate the Supplemental
Redemption Amount during the Calculation Period. As a result of the cumulative
effect of this reduction, the values of the S&P 500 Index used to calculate
your Supplemental Redemption Amount during the Calculation Period will be
approximately 13.68% to 16.65% less than the actual value of the S&P 500 Index
on each day during the Calculation Period. We will determine the Adjustment
Factor on the date the MITTS Securities are priced for initial sale to the
public and it will appear in the final prospectus supplement delivered to you
in connection with sales of the MITTS Securities.
The "Calculation Period" means the period from and including the seventh
scheduled Index Business Day before the maturity date to and including the
second scheduled Index Business Day before the maturity date.
A "Calculation Day" means any Index Business Day during the Calculation
Period on which a Market Disruption Event has not occurred.
An "Index Business Day" is any day on which the NYSE and the AMEX are
open for trading and the S&P 500 Index or any successor index is calculated and
published.
All determinations made by the calculation agent shall be at the sole
discretion of the calculation agent and, absent a determination by the
calculation agent of a manifest error, shall be conclusive for all purposes and
binding on ML&Co. and the holders and beneficial owners of the MITTS
Securities.
Hypothetical Returns
The following table illustrates, for a range of hypothetical closing
values of the S&P 500 Index during the Calculation Period:
. the percentage change from the Starting Value to the hypothetical
closing value,
. the Adjusted Ending Value used to calculate the Supplemental
Redemption Amount,
. the total amount payable at maturity for each unit of MITTS
Securities,
. the total rate of return to beneficial owners of the MITTS
Securities,
. the pretax annualized rate of return to beneficial owners of MITTS
Securities, and
. the pretax annualized rate of return of an investment in the stocks
included in the S&P 500 Index, which includes an assumed aggregate
dividend yield of 1.23% per annum, as more fully described below.
S-12
<PAGE>
This table assumes an Adjustment Factor of 2.35% per annum (the midpoint
of the expected range of 2.1% to 2.6%).
<TABLE>
<CAPTION>
Total Pretax
Hypothetical amount Pretax annualized
closing Percentage Change payable annualized rate of return
value from the at maturity Total rate of rate of stocks
during the Starting Value Adjusted per unit of return on of return on included
Calculation to hypothetical Ending the MITTS the MITTS the MITTS in the S&P 500
Period closing value Value(1) Securities Securities Securities(2) Index(2)(3)
- ------------ ----------------- -------- ----------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
263.06 -80.00% 223.13 $10.00 0.00% 0.00% -20.36%
526.12 -60.00% 446.26 $10.00 0.00% 0.00% -11.43%
789.19 -40.00% 669.39 $10.00 0.00% 0.00% -5.95%
1,052.25 -20.00% 892.52 $10.00 0.00% 0.00% -1.95%
1,315.31(4) 0.00% 1,115.65 $10.00 0.00% 0.00% 1.23%
1,578.37 20.00% 1,338.78 $10.18 1.78% 0.25% 3.87%
1,841.43 40.00% 1,561.91 $11.87 18.75% 2.47% 6.14%
2,104.50 60.00% 1,785.04 $13.57 35.71% 4.41% 8.13%
2,367.56 80.00% 2,008.17 $15.27 52.68% 6.13% 9.90%
2,630.62 100.00% 2,231.30 $16.96 69.64% 7.69% 11.50%
2,893.68 120.00% 2,454.43 $18.66 86.60% 9.11% 12.96%
3,156.74 140.00% 2,677.56 $20.36 103.57% 10.41% 14.30%
3,419.81 160.00% 2,900.69 $22.05 120.53% 11.61% 15.55%
3,682.87 180.00% 3,123.82 $23.75 137.50% 12.74% 16.71%
3,945.93 200.00% 3,346.95 $25.45 154.46% 13.79% 17.80%
</TABLE>
- --------
(1) The Adjusted Ending Values specified in this column are approximately
15.18% less than the hypothetical closing values of the S&P 500 Index as a
result of the application of an Adjustment Factor of 2.35% per annum over
an assumed investment term of seven years.
(2) The annualized rates of return specified in the preceding table are
calculated on a semiannual bond equivalent basis.
(3) This rate of return assumes:
(a) a percentage change in the aggregate price of the stocks that equals
the percentage change in the S&P 500 Index from the Starting Value to
the relevant hypothetical closing value;
(b) a constant dividend yield of 1.23% per annum, paid quarterly from the
date of initial delivery of the MITTS Securities, applied to the value
of the S&P 500 Index at the end of each quarter assuming this value
increases or decreases linearly from the Starting Value to the
applicable hypothetical closing value;
(c) no transaction fees or expenses; and
(d) a seven-year investment term.
(4) This is the hypothetical Starting Value for the purposes of this table. The
actual Starting Value will equal the closing value of the S&P 500 Index on
the Pricing Date.
The above figures are for purposes of illustration only. The actual
Supplemental Redemption Amount received by you and the resulting total and
pretax annualized rate of return will depend entirely on the Starting Value,
the Adjustment Factor and the actual Adjusted Ending Value determined by the
calculation agent as provided in this prospectus supplement.
Adjustments to the S&P 500 Index; Market Disruption Events
If at any time Standard & Poor's changes its method of calculating the
S&P 500 Index, or the value of the S&P 500 Index changes, in any material
respect, or if the S&P 500 Index is in any other way modified so that the S&P
500 Index does not, in the opinion of the calculation agent, fairly represent
the value of the S&P
S-13
<PAGE>
500 Index had those changes or modifications not been made, then, from and
after that time, the calculation agent shall, at the close of business in New
York, New York, on each date that the closing value of the S&P 500 Index is to
be calculated, make those 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 S&P 500 Index as if those changes or
modifications had not been made, and calculate the closing value with reference
to the S&P 500 Index, as so adjusted. Accordingly, if the method of calculating
the S&P 500 Index is modified so that the value of the S&P 500 Index is a
fraction or a multiple of what it would have been if it had not been modified,
e.g., due to a split, then the calculation agent shall adjust the S&P 500 Index
in order to arrive at a value of the S&P 500 Index as if it had not been
modified, e.g., as if a split had not occurred.
"Market Disruption Event" means either of the following events as
determined by the calculation agent:
(A) the suspension or material limitation on trading for more than two
hours of trading, or during the one-half hour period preceding the
close of trading on the applicable exchange, in 20% or more of the
stocks which then comprise the S&P 500 Index; or
(B) the suspension or material limitation, 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, whether by reason
of movements in price otherwise exceeding levels permitted by the
relevant exchange or otherwise, in option contracts or futures
contracts related to the S&P 500 Index, or any successor index,
which are traded on any major U.S. exchange.
For the purpose of the above definition:
(1) 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 and
(2) for the purpose of clause (A) above, any limitations on trading
during significant market fluctuations under NYSE Rule 80A, or any
applicable rule or regulation enacted or promulgated by the NYSE or
any other self regulatory organization or the SEC of similar scope
as determined by the calculation agent, will be considered
"material".
Discontinuance of the S&P 500 Index
If the S&P discontinues publication of the S&P 500 Index and the S&P or
another entity publishes a successor or substitute index that the calculation
agent determines, in its sole discretion, to be comparable to the S&P 500 Index
(a "successor index"), then, upon the calculation agent's notification of its
determination to the trustee and ML&Co., the calculation agent will substitute
the successor index as calculated by the S&P or any other entity for the S&P
500 Index and calculate the Adjusted Ending Value as described above under
"Payment at maturity". Upon any selection by the calculation agent of a
successor index, ML&Co. shall promptly give notice to the beneficial owners of
the MITTS Securities by publication in a United States newspaper with a
national circulation.
In the event that the S&P discontinues publication of the S&P 500 Index
and:
. the calculation agent does not select a successor index, or
. the successor index is no longer published on any of the Calculation
Days,
the calculation agent will compute a substitute value for the S&P 500 Index in
accordance with the procedures last used to calculate the S&P 500 Index before
any discontinuance. If a successor index is selected or the calculation agent
calculates a value as a substitute for the S&P 500 Index as described below,
the successor index or value will be used as a substitute for the S&P 500 Index
for all purposes, including for purposes of determining whether a Market
Disruption Event exists.
S-14
<PAGE>
If the S&P discontinues publication of the S&P 500 Index before the
Calculation Period and the calculation agent determines that no successor index
is available at that time, then on each Business Day until the earlier to occur
of:
. the determination of the Adjusted Ending Value and
. a determination by the calculation agent that a successor index is
available,
the calculation agent will determine the value that would be used in computing
the Supplemental Redemption Amount as described in the preceding paragraph as
if that day were a Calculation Day. The calculation agent will cause notice of
each value to be published not less often than once each month in "The Wall
Street Journal" or another newspaper of general circulation, and arrange for
information with respect to these values to be made available by telephone.
A "Business Day" is any day on which the NYSE and the AMEX are open for
trading.
Notwithstanding these alternative arrangements, discontinuance of the
publication of the S&P 500 Index may adversely affect trading in the MITTS
Securities.
Events of Default and Acceleration
In case an Event of Default with respect to any MITTS Securities has
occurred and is continuing, the amount payable to a beneficial owner of a MITTS
Security upon any acceleration permitted by the MITTS Securities, with respect
to each $10 principal amount of MITTS Securities, will be equal to the
principal amount and the Supplemental Redemption Amount, if any, calculated as
though the date of early repayment were the stated maturity date of the MITTS
Securities, "provided", "however", the Adjustment Factor will be applied to the
values used to calculate the Supplemental Redemption Amount as if the MITTS
Securities had not been accelerated and had remained outstanding to the stated
maturity date. See "--Payment at maturity" in this prospectus supplement. If a
bankruptcy proceeding is commenced in respect of ML&Co., the claim of the
beneficial owner of a MITTS Security may be limited, under Section 502(b)(2) of
Title 11 of the United States Code, to the principal amount of the MITTS
Security plus an additional amount of contingent interest calculated as though
the date of the commencement of the proceeding were the maturity date of the
MITTS Securities.
In case of default in payment of the MITTS Securities, whether at the
stated maturity or upon acceleration, from and after the maturity date the
MITTS Securities will bear interest, payable upon demand of their beneficial
owners, at the rate of % per annum to the extent that payment of any interest
is legally enforceable on the unpaid amount due and payable on that date in
accordance with the terms of the MITTS Securities to the date payment of that
amount has been made or duly provided for.
Depositary
Description of the Global Securities
Upon issuance, all MITTS Securities will be represented by one or more
fully registered global securities. Each global security will be deposited
with, or on behalf of, DTC (DTC, together with any successor, being a
"depositary"), as depositary, registered in the name of Cede & Co., DTC's
partnership nominee. Unless and until it is exchanged in whole or in part for
MITTS Securities in definitive form, no global security may be transferred
except as a whole by the depositary to a nominee of the depositary or by a
nominee of the depositary to the depositary or another nominee of the
depositary or by the depositary or any nominee to a successor of the depositary
or a nominee of that successor.
So long as DTC, or its nominee, is a registered owner of a global
security, DTC or its nominee, as the case may be, will be considered the sole
owner or holder of the MITTS Securities represented by the global security for
all purposes under the 1983 Indenture. Except as provided below, the beneficial
owners of the
S-15
<PAGE>
MITTS Securities represented by a global security will not be entitled to have
the MITTS Securities represented by a global security registered in their
names, will not receive or be entitled to receive physical delivery of the
MITTS Securities in definitive form and will not be considered the owners or
holders of the MITTS Securities including for purposes of receiving any reports
delivered by ML&Co. or the trustee under the 1983 Indenture. Accordingly, each
person owning a beneficial interest in a global security must rely on the
procedures of DTC and, if that person is not a participant of DTC, on the
procedures of the participant through which that person owns its interest, to
exercise any rights of a holder under the 1983 Indenture. ML&Co. understands
that under existing industry practices, in the event that ML&Co. requests any
action of holders or that an owner of a beneficial interest in a global
security desires to give or take any action which a holder is entitled to give
or take under the 1983 Indenture, DTC would authorize the participants holding
the relevant beneficial interests to give or take that action, and those
participants would authorize beneficial owners owning through those
participants to give or take that action or would otherwise act upon the
instructions of beneficial owners. Conveyance of notices and other
communications by DTC to participants, by participants to indirect participants
and by participants and indirect participants to beneficial owners will be
governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
DTC Procedures
The following is based on information furnished by DTC:
DTC will act as securities depositary for the MITTS Securities. The MITTS
Securities will be issued as fully registered securities registered in the name
of Cede & Co., DTC's partnership nominee. One or more fully registered global
securities will be issued for the MITTS Securities in the aggregate principal
amount of such issue, and will be deposited with DTC.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended. DTC holds securities that its participants
deposit with DTC. DTC also facilitates the settlement among participants of
securities transactions, such as transfers and pledges, in deposited securities
through electronic computerized book-entry changes in participants' accounts,
thereby eliminating the need for physical movement of securities certificates.
Direct participants of DTC include securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations. DTC is owned
by a number of its direct participants and by the NYSE, the AMEX, and the
National Association of Securities Dealers, Inc. Access to DTC's system is also
available to others such as securities brokers and dealers, banks and trust
companies that clear through or maintain a custodial relationship with a direct
participant, either directly or indirectly. The rules applicable to DTC and its
participants are on file with the SEC.
Purchases of the MITTS Securities under DTC's system must be made by or
through direct participants, which will receive a credit for the MITTS
Securities on DTC's records. The ownership interest of each beneficial owner is
in turn to be recorded on the records of direct and indirect participants.
Beneficial owners will not receive written confirmation from DTC of their
purchase, but beneficial owners are expected to receive written confirmations
providing details of the transaction, as well as periodic statements of their
holdings, from the direct or indirect participants through which the beneficial
owner entered into the transaction. Transfers of ownership interests in the
MITTS Securities are to be made by entries on the books of participants acting
on behalf of beneficial owners.
To facilitate subsequent transfers, all MITTS Securities deposited with
DTC are registered in the name of DTC's partnership nominee, Cede & Co. The
deposit of MITTS Securities with DTC and their registration in the name of Cede
& Co. effect no change in beneficial ownership. DTC has no knowledge of the
actual beneficial owners of the MITTS Securities; DTC's records reflect only
the identity of the direct participants to whose accounts the MITTS Securities
are credited, which may or may not be the beneficial owners. The participants
will remain responsible for keeping account of their holdings on behalf of
their customers.
S-16
<PAGE>
Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants, and by direct
participants and indirect participants to beneficial owners will be governed
by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Neither DTC nor Cede & Co. will consent or vote with respect to the
MITTS Securities. Under its usual procedures, DTC mails an omnibus proxy to
ML&Co. as soon as possible after the applicable record date. The omnibus proxy
assigns Cede & Co.'s consenting or voting rights to those direct participants
identified in a listing attached to the omnibus proxy to whose accounts the
MITTS Securities are credited on the record date.
Principal, premium, if any, and/or interest, if any, payments made in
cash on the MITTS Securities will be made in immediately available funds to
DTC. DTC's practice is to credit direct participants' accounts on the
applicable payment date in accordance with their respective holdings shown on
the depositary's records unless DTC has reason to believe that it will not
receive payment on that date. Payments by participants to beneficial owners
will be governed by standing instructions and customary practices, as is the
case with securities held for the accounts of customers in bearer form or
registered in "street name", and will be the responsibility of that
participant and not of DTC, the trustee or ML&Co., subject to any statutory or
regulatory requirements as may be in effect from time to time. Payment of
principal, premium, if any, and/or interest, if any, to DTC is the
responsibility of ML&Co. or the trustee, disbursement of those payments to
direct participants will be the responsibility of DTC, and disbursement of
those payments to the beneficial owners will be the responsibility of direct
participants and indirect participants.
Exchange for Certificated Securities
If:
. the depositary is at any time unwilling or unable to continue as
depositary and a successor depositary is not appointed by ML&Co.
within 60 days,
. ML&Co. executes and delivers to the trustee a company order to the
effect that the global securities shall be exchangeable, or
. an Event of Default under the 1983 Indenture has occurred and is
continuing with respect to the MITTS Securities,
the global securities will be exchangeable for MITTS Securities in definitive
form of like tenor and of an equal aggregate principal amount, in
denominations of $10 and integral multiples of $10. The definitive MITTS
Securities will be registered in the name or names as the depositary shall
instruct the trustee. It is expected that instructions may be based upon
directions received by the depositary from participants with respect to
ownership of beneficial interests in the global securities.
DTC may discontinue providing its services as securities depositary with
respect to the MITTS Securities at any time by giving reasonable notice to
ML&Co. or the trustee. Under these circumstances, in the event that a
successor securities depositary is not obtained, MITTS Security certificates
are required to be printed and delivered.
ML&Co. may decide to discontinue use of the system of book-entry
transfers through DTC or a successor securities depositary. In that event,
MITTS Security certificates will be printed and delivered.
The information in this section concerning DTC and DTC's system has been
obtained from sources that ML&Co. believes to be reliable, but ML&Co. takes no
responsibility for its accuracy.
Same-Day Settlement and Payment
Settlement for the MITTS Securities will be made by the underwriter in
immediately available funds. ML&Co. will make all payments of principal and
the Supplemental Redemption Amount, if any, in immediately available funds so
long as the MITTS Securities are maintained in book-entry form.
S-17
<PAGE>
THE S&P 500 INDEX
Standard & Poor's publishes S&P 500 Index. The S&P 500 Index is intended
to provide an indication of the pattern of common stock price movement. The
calculation of the value of the S&P 500 Index, discussed below in further
detail, is based on the relative value of the aggregate market value of the
common stocks of 500 companies as of a particular time compared to the
aggregate average market value of the common stocks of 500 similar companies
during the base period of the years 1941 through 1943. As of June 15, 1999, the
500 companies included in the S&P 500 Index represented approximately 78% of
the aggregate market value of common stocks traded on the NYSE; however, these
500 companies are not the 500 largest companies listed on the NYSE and not all
of these 500 companies are listed on the NYSE. As of June 15, 1999, the
aggregate market value of the 500 companies included in the S&P 500 Index
represented approximately 70% of the aggregate market value of United States
domestic, public companies. Standard & Poor's chooses companies for inclusion
in the S&P 500 Index with the aim of achieving a distribution by broad industry
groupings that approximates the distribution of these groupings in the common
stock population of the NYSE, which Standard & Poor's uses as an assumed model
for the composition of the total market. Relevant criteria employed by Standard
& Poor's include the viability of the particular company, the extent to which
that company represents the industry group to which it is assigned, the extent
to which the market price of that company's common stock is generally
responsive to changes in the affairs of the respective industry and the market
value and trading activity of the common stock of that company. Four main
groups of companies comprise the S&P 500 Index with the number of companies
currently included in each group indicated in parentheses: Industrials (375),
Utilities (40), Transportation (11) and Financial (74). Standard & Poor's may
from time to time, in its sole discretion, add companies to, or delete
companies from, the S&P 500 Index to achieve the objectives stated above.
The S&P 500 Index does not reflect the payment of dividends on the stocks
included in the S&P 500 Index. Because of this, and due to the application of
the Adjustment Factor, the return on the MITTS Securities will not be the same
that you would receive if you were to purchase these stocks and hold them for a
period equal to the term of the MITTS Securities.
Computation of the S&P 500 Index
Standard & Poor's currently computes the S&P 500 Index as of a particular
time as follows:
(a) the product of the market price per share and the number of then
outstanding shares of each component stock is determined as of that
time (referred to as the "market value" of that stock);
(b) the market values of all component stocks as of that time are
aggregated;
(c) the mean average of the market values as of each week in the base
period of the years 1941 through 1943 of the common stock of each
company in a group of 500 substantially similar companies is
determined;
(d) the mean average market values of all these common stocks over the
base period are aggregated (the aggregate amount being referred to
as the "base value");
(e) the current aggregate market value of all component stocks is
divided by the Base Value; and
(f) the resulting quotient, expressed in decimals, is multiplied by ten.
While Standard & Poor's currently employs the above methodology to
calculate the S&P 500 Index, no assurance can be given that Standard & Poor's
will not modify or change this methodology in a manner that may affect the
Supplemental Redemption Amount, if any, payable to beneficial owners of MITTS
Securities upon maturity or otherwise.
S-18
<PAGE>
Standard & Poor's adjusts the foregoing formula to offset the effects of
changes in the market value of a component stock that are determined by
Standard & Poor's to be arbitrary or not due to true market fluctuations. These
changes may result from causes such as
. the issuance of stock dividends,
. the granting to shareholders of rights to purchase additional shares
of stock,
. the purchase of shares by employees pursuant to employee benefit
plans,
. consolidations and acquisitions,
. the granting to shareholders of rights to purchase other securities
of ML&Co.,
. the substitution by Standard & Poor's of particular component stocks
in the S&P 500 Index, and
. other reasons.
In these cases, Standard & Poor's first recalculates the aggregate market
value of all component stocks, after taking account of the new market price per
share of the particular component stock or the new number of outstanding shares
of that stock or both, as the case may be, and then determines the new base
value in accordance with the following formula:
<TABLE>
<S> <C> <C>
New Market Value
Old Base Value X ---------------- = New Base Value
Old Market Value
</TABLE>
The result is that the base value is adjusted in proportion to any change
in the aggregate market value of all component stocks resulting from the causes
referred to above to the extent necessary to negate the effects of these causes
upon the S&P 500 Index.
Historical Data on the S&P 500 Index
The following table sets forth the closing values of the S&P 500 Index on
the last business day of each year from 1947 through 1998, as published by
Standard & Poor's. The historical experience of the S&P 500 Index should not be
taken as an indication of future performance, and no assurance can be given
that the value of the S&P 500 Index will not decline and thereby reduce or
eliminate the Supplemental Redemption Amount which may be payable to holders of
the MITTS Securities at the maturity date.
Year-End Value of the S&P 500 Index
<TABLE>
<CAPTION>
Closing Closing Closing Closing
Year Value Year Value Year Value Year Value
- ---- ------- ---- ------- ---- ------- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C>
1947 15.30 1960 58.11 1973 97.55 1986 242.17
1948 15.20 1961 71.55 1974 68.56 1987 247.08
1949 16.76 1962 63.10 1975 90.19 1988 277.72
1950 20.41 1963 75.02 1976 107.46 1989 353.40
1951 23.77 1964 84.75 1977 95.10 1990 330.22
1952 26.57 1965 92.43 1978 96.11 1991 417.09
1953 24.81 1966 80.33 1979 107.94 1992 435.71
1954 35.98 1967 96.47 1980 35.76 1993 466.45
1955 45.48 1968 103.86 1981 122.55 1994 459.27
1956 46.67 1969 92.06 1982 140.64 1995 615.93
1957 39.99 1970 92.15 1983 164.93 1996 740.74
1958 55.21 1971 102.09 1984 167.24 1997 970.43
1959 59.89 1972 118.05 1985 211.28 1998 1,229.23
</TABLE>
S-19
<PAGE>
The following table sets forth the value of the S&P 500 Index at the end
of each month, in the period from January 1990 through May 1999. These
historical data on the S&P 500 Index are not necessarily indicative of the
future performance of the S&P 500 Index or what the value of the MITTS
Securities may be. Any historical upward or downward trend in the value of the
S&P 500 Index during any period set forth below is not any indication that the
S&P 500 Index is more or less likely to increase or decrease at any time during
the term of the MITTS Securities.
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ ------ ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
January................. 329.08 343.93 408.78 438.78 481.61 470.42 636.02 786.16 980.28 1,279.64
February................ 331.89 367.07 412.70 443.38 467.14 487.39 640.43 790.82 1,049.34 1,238.33
March................... 339.94 375.22 403.69 451.67 445.77 500.71 645.50 757.12 1,101.75 1,286.37
April................... 330.80 375.34 414.95 440.19 450.91 514.71 654.17 801.34 1,111.75 1,335.18
May..................... 361.23 389.83 415.35 450.19 456.51 533.40 669.12 848.28 1,090.82 1,301.84
June.................... 358.02 371.16 408.14 450.53 444.27 544.75 670.63 885.14 1,133.84 --
July.................... 356.15 387.81 424.22 448.13 458.26 562.06 639.95 954.29 1,120.67 --
August.................. 322.56 395.43 414.03 463.56 475.50 561.88 651.99 899.47 957.28 --
September............... 306.05 387.86 417.80 458.93 462.71 584.41 687.31 947.28 1,017.01 --
October................. 304.00 392.45 418.68 467.83 472.35 581.50 705.27 914.62 1,098.67 --
November................ 322.22 375.22 431.35 461.79 453.69 605.37 757.02 955.40 1,163.63 --
December................ 330.22 417.09 435.71 466.45 459.27 615.93 740.74 970.43 1,229.23 --
</TABLE>
The following graph sets forth the performance of the S&P 500 Index at
the end of each month from January 1990 to May 1999. Past movements of the S&P
500 Index are not necessarily indicative of the future S&P 500 Index values. On
June 25, 1999, the closing value of the S&P 500 Index was 1,315.31.
Month-End Closing Values
[THE GRAPH APPEARING HERE SETS FORTH THE HISTORICAL MONTH-END CLOSING VALUES OF
THE S&P 500 INDEX FROM JANUARY 1990 TO MAY 1999. THE VERTICAL AXIS HAS A RANGE
OF NUMBERS FROM 0 TO 1,400 IN INCREMENTS OF 200. THE HORIZONTAL AXIS HAS A RANGE
OF MONTHS FROM JANUARY 1990 TO MAY 1999 IN INCREMENTS OF ONE MONTH.]
S-20
<PAGE>
License Agreement
Standard & Poor's ("S&P") does not guarantee the accuracy and/or the
completeness of the Index or any data included in the Index. S&P makes no
warranty, express or implied, as to results to be obtained by ML&Co., MLPF&S,
holders of the MITTS Securities, or any other person or entity from the use of
the S&P Index or any data included in the Index in connection with the rights
licensed under the license agreement described in this prospectus or for any
other use. S&P makes no express or implied warranties, and hereby expressly
disclaims all warranties of merchantability or fitness for a particular purpose
with respect to the S&P Index or any data included in the Index. Without
limiting any of the above information, in no event shall S&P have any liability
for any special, punitive, indirect or consequential damage, including lost
profits, even if notified of the possibility of these damages.
S&P and Merrill Lynch Capital Services, Inc. have entered into a non-
exclusive license agreement providing for the license to Merrill Lynch Capital
Services, Inc., in exchange for a fee, of the right to use indices owned and
published by S&P in connection with some securities, including the MITTS
Securities, and ML&Co. is an authorized sublicensee of Merrill Lynch Capital
Services, Inc.
The license agreement between S&P and Merrill Lynch Capital Services,
Inc. provides that the following language must be stated in this prospectus:
"The MITTS Securities are not sponsored, endorsed, sold or promoted by
S&P. S&P makes no representation or warranty, express or implied, to the
holders of the MITTS Securities or any member of the public regarding the
advisability of investing in securities generally or in the MITTS Securities
particularly or the ability of the Index to track general stock market
performance. S&P's only relationship to Merrill Lynch Capital Services, Inc.
and ML&Co. (other than transactions entered into in the ordinary course of
business) is the licensing of certain servicemarks and trade names of S&P and
of the Index which is determined, composed and calculated by S&P without regard
to ML&Co. or the MITTS Securities. S&P has no obligation to take the needs of
ML&Co. or the holders of the MITTS Securities into consideration in
determining, composing or calculating the Index. S&P is not responsible for and
has not participated in the determination of the timing of the sale of the
MITTS Securities, prices at which the MITTS Securities are to initially be
sold, or quantities of the MITTS Securities to be issued or in the
determination or calculation of the equation by which the MITTS Securities are
to be converted into cash. S&P has no obligation or liability in connection
with the administration, marketing or trading of the MITTS Securities."
UNITED STATES FEDERAL INCOME TAXATION
Set forth in full below is the opinion of Brown & Wood LLP, tax counsel
to ML&Co., as to certain United States Federal income tax consequences of the
purchase, ownership and disposition of the MITTS Securities. This opinion is
based upon laws, regulations, rulings and decisions now in effect, all of which
are subject to change (including retroactive changes in effective dates) or
possible differing interpretations. The discussion below deals only with MITTS
Securities held as capital assets and does not purport to deal with persons in
special tax situations, such as financial institutions, insurance companies,
regulated investment companies, dealers in securities or currencies, tax-exempt
entities, persons holding MITTS Securities in a tax-deferred or tax-advantaged
account, or persons holding MITTS Securities as a hedge against currency risks,
as a position in a "straddle" or as part of a "hedging" or "conversion"
transaction for tax purposes. It also does not deal with holders other than
original purchasers, except where otherwise specifically noted in this
prospectus supplement. The following discussion also assumes that the issue
price of the MITTS Securities, as determined for United States Federal income
tax purposes, equals the principal amount thereof. Persons considering the
purchase of the MITTS Securities should consult their own tax advisors
concerning the application of the United States Federal income tax laws to
their particular situations as well as any consequences of the purchase,
ownership and disposition of the MITTS Securities arising under the laws of any
other taxing jurisdiction.
S-21
<PAGE>
As used in this prospectus supplement, the term "U.S. Holder" means a
beneficial owner of a MITTS Security that is for United States Federal income
tax purposes (a) a citizen or resident of the United States, (b) a corporation,
partnership or other entity treated as a corporation or a partnership for
United States Federal income tax purposes created or organized in or under the
laws of the United States, any state thereof or the District of Columbia (other
than a partnership that is not treated as a United States person under any
applicable Treasury regulations), (c) an estate the income of which is subject
to United States Federal income taxation regardless of its source, (d) a trust
if a court within the United States is able to exercise primary supervision
over the administration of the trust and one or more United States persons have
the authority to control all substantial decisions of the trust, or (e) any
other person whose income or gain in respect of a MITTS Security is effectively
connected with the conduct of a United States trade or business.
Notwithstanding clause (d) of the preceding sentence, to the extent provided in
Treasury regulations, certain trusts in existence on August 20, 1996, and
treated as United States persons prior to that date that elect to continue to
be treated as United States persons also will be a U.S. Holder. As used in this
prospectus supplement, the term "Non-U.S. Holder" means a beneficial owner of a
MITTS Security that is not a U.S. Holder.
General
There are no statutory provisions, regulations, published rulings or
judicial decisions addressing or involving the characterization, for United
States Federal income tax purposes, of the MITTS Securities or securities with
terms substantially the same as the MITTS Securities. However, although the
matter is not free from doubt, under current law, each MITTS Security should be
treated as a debt instrument of ML&Co. for United States Federal income tax
purposes. ML&Co. currently intends to treat each MITTS Security as a debt
instrument of ML&Co. for United States Federal income tax purposes and, where
required, intends to file information returns with the Internal Revenue Service
in accordance with this treatment, in the absence of any change or
clarification in the law, by regulation or otherwise, requiring a different
characterization of the MITTS Securities. Prospective investors in the MITTS
Securities should be aware, however, that the IRS is not bound by ML&Co.'s
characterization of the MITTS Securities as indebtedness, and the IRS could
possibly take a different position as to the proper characterization of the
MITTS Securities for United States Federal income tax purposes. The following
discussion of the principal United States Federal income tax consequences of
the purchase, ownership and disposition of the MITTS Securities is based upon
the assumption that each MITTS Security will be treated as a debt instrument of
ML&Co. for United States Federal income tax purposes. If the MITTS Securities
are not in fact treated as debt instruments of ML&Co. for United States Federal
income tax purposes, then the United States Federal income tax treatment of the
purchase, ownership and disposition of the MITTS Securities could differ from
the treatment discussed below with the result that the timing and character of
income, gain or loss recognized in respect of a MITTS Security could differ
from the timing and character of income, gain or loss recognized in respect of
a MITTS Security had the MITTS Securities in fact been treated as debt
instruments of ML&Co. for United States Federal income tax purposes.
U.S. Holders
On June 11, 1996, the Treasury Department issued final regulations (the
"Final Regulations") concerning the proper United States Federal income tax
treatment of contingent payment debt instruments such as the MITTS Securities,
which apply to debt instruments issued on or after August 13, 1996 and,
accordingly, will apply to the MITTS Securities. In general, the Final
Regulations cause the timing and character of income, gain or loss reported on
a contingent payment debt instrument to substantially differ from the timing
and character of income, gain or loss reported on a contingent payment debt
instrument under general principles of prior United States Federal income tax
law. Specifically, the Final Regulations generally require a U.S. Holder of
such an instrument to include future contingent and noncontingent interest
payments in income as that interest accrues based upon a projected payment
schedule. Moreover, in general, under the Final Regulations, any gain
recognized by a U.S. Holder on the sale, exchange, or retirement of a
contingent payment debt instrument is treated as ordinary income, and all or a
portion of any loss realized could be treated as ordinary loss as opposed to
capital loss (depending upon the circumstances). The Final Regulations provide
no definitive guidance as to whether or not an instrument is properly
characterized as a debt instrument for United States Federal income tax
purposes.
S-22
<PAGE>
In particular, solely for purposes of applying the Final Regulations to
the MITTS Securities, ML&Co. has determined that the projected payment schedule
for the MITTS Securities will consist of payment on the maturity date of the
principal amount thereof and a projected Supplemental Redemption Amount equal
to $ per unit (the "Projected Supplemental Redemption Amount"). This
represents an estimated yield on the MITTS Securities equal to % per annum
(compounded semiannually). Accordingly, during the term of the MITTS
Securities, a U.S. Holder of a MITTS Security will be required to include in
income as ordinary interest an amount equal to the sum of the daily portions of
interest on the MITTS Security that are deemed to accrue at this estimated
yield for each day during the taxable year (or portion of the taxable year) on
which the U.S. Holder holds the MITTS Security. The amount of interest that
will be deemed to accrue in any accrual period (i.e., generally each six-month
period during which the MITTS Securities are outstanding) will equal the
product of this estimated yield (properly adjusted for the length of the
accrual period) and the MITTS Security's adjusted issue price (as defined
below) at the beginning of the accrual period. The daily portions of interest
will be determined by allocating to each day in the accrual period the ratable
portion of the interest that is deemed to accrue during the accrual period. In
general, for these purposes a MITTS Security's adjusted issue price will equal
the MITTS Security's issue price (i.e., $10), increased by the interest
previously accrued on the MITTS Security. At maturity of a MITTS Security, in
the event that the actual Supplemental Redemption Amount, if any, exceeds $
per unit (i.e., the Projected Supplemental Redemption Amount), a U.S. Holder
will be required to include the excess of the actual Supplemental Redemption
Amount over $ per unit (i.e., the Projected Supplemental Redemption Amount)
in income as ordinary interest on the stated maturity date. Alternatively, in
the event that the actual Supplemental Redemption Amount, if any, is less than
$ per unit (i.e., the Projected Supplemental Redemption Amount), the amount
by which the Projected Supplemental Redemption Amount (i.e., $ per unit)
exceeds the actual Supplemental Redemption Amount will be treated first as an
offset to any interest otherwise includible in income by the U.S. Holder with
respect to the MITTS Security for the taxable year in which the stated maturity
date occurs to the extent of the amount of that includible interest. Further, a
U.S. Holder will be permitted to recognize and deduct, as an ordinary loss that
is not subject to the limitations applicable to miscellaneous itemized
deductions, any remaining portion of the Projected Supplemental Redemption
Amount (i.e., $ per unit) in excess of the actual Supplemental Redemption
Amount that is not treated as an interest offset pursuant to the foregoing
rules.
Upon the sale, exchange or redemption of a MITTS Security prior to the
stated maturity date, a U.S. Holder will be required to recognize taxable gain
or loss in an amount equal to the difference, if any, between the amount
realized by the U.S. Holder upon the sale, exchange or redemption and the U.S.
Holder's adjusted tax basis in the MITTS Security as of the date of
disposition. A U.S. Holder's adjusted tax basis in a MITTS Security generally
will equal that U.S. Holder's initial investment in the MITTS Security
increased by any interest previously included in income with respect to the
MITTS Security by the U.S. Holder. Any taxable gain will be treated as ordinary
income. Any taxable loss will be treated as ordinary loss to the extent of the
U.S. Holder's total interest inclusions on the MITTS Security. Any remaining
loss generally will be treated as long-term or short-term capital loss
(depending upon the U.S. Holder's holding period for the MITTS Security). All
amounts includible in income by a U.S. Holder as ordinary interest pursuant to
the Final Regulations will be treated as original issue discount.
Prospective investors in the MITTS Securities should be aware that if a
significant percentage of the total aggregate amount of the MITTS Securities
originally issued are sold at a discount from the principal amount thereof,
which is not expected to be the case, then the issue price of the MITTS
Securities, as determined for United States Federal income tax purposes, may be
less than the principal amount of the MITTS Securities. In that event, if a
U.S. Holder purchases a MITTS Security in connection with the original issuance
thereof for an amount equal to the principal amount thereof, the amount of the
difference between the principal amount of the MITTS Securities and the issue
price thereof generally should be allocated by the U.S. Holder to daily
portions of interest that are deemed to accrue on each relevant date as an
offset to that interest on each relevant date. In addition, on each relevant
date, the U.S. Holder's adjusted tax basis in the MITTS Security will be
reduced by the amount treated as an interest offset pursuant to the foregoing
rule. Alternatively, in the event that the issue price of the MITTS Securities,
as determined for United States Federal income tax
S-23
<PAGE>
purposes, equals the principal amount thereof and a U.S. Holder purchases a
MITTS Security in connection with the original issuance thereof for an amount
that is less than the principal amount thereof, the amount of the difference
between the principal amount of the MITTS Security and the amount paid by the
U.S. Holder to purchase the MITTS Security generally would be allocated by the
U.S. Holder to daily portions of interest that are deemed to accrue on each
relevant date as additional ordinary interest includible in income by the U.S.
Holder on each relevant date. In that event, on each relevant date, the U.S.
Holder's adjusted tax basis in the MITTS Security will be increased by the
amount treated as additional ordinary interest income. In addition, U.S.
Holders purchasing a MITTS Security at a price that differs from the adjusted
issue price of the MITTS Security as of the purchase date (e.g., subsequent
purchases) will be subject to rules providing for certain adjustments to the
foregoing rules and these U.S. Holders should consult their own tax advisors
concerning these rules.
All prospective investors in the MITTS Securities should consult their
own tax advisors concerning the application of the Final Regulations to their
investment in the MITTS Securities. Investors in the MITTS Securities may also
obtain the projected payment schedule, as determined by ML&Co. for purposes of
the application of the Final Regulations to the MITTS Securities, by submitting
a written request for such information to Merrill Lynch & Co., Inc., Attn:
Darryl W. Colletti, Corporate Secretary's Office, 100 Church Street, 12th
Floor, New York, New York 10080-6512.
The projected payment schedule (including both the Projected Supplemental
Redemption Amount and the estimated yield on the MITTS Securities) has been
determined solely for United States Federal income tax purposes (i.e., for
purposes of applying the Final Regulations to the MITTS Securities), and is
neither a prediction nor a guarantee of what the actual Supplemental Redemption
Amount will be, or that the actual Supplemental Redemption Amount will even
exceed zero.
S-24
<PAGE>
Hypothetical Table
The following table sets forth the amount of interest that will be deemed
to have accrued with respect to each unit of the MITTS Securities during each
accrual period over an assumed term of approximately seven years for the MITTS
Securities based upon a hypothetical projected payment schedule for the MITTS
Securities (including both a hypothetical Projected Supplemental Redemption
Amount and a hypothetical estimated yield equal to 7.02% per annum (compounded
semiannually)) as determined by ML&Co. for purposes of illustrating the
application of the Final Regulations to the MITTS Securities as if the MITTS
Securities had been issued on June 28, 1999. The following table is for
illustrative purposes only. The actual projected payment schedule for the MITTS
Securities (including both the actual Projected Supplemental Redemption Amount
and the actual estimated yield) will be determined by ML&Co. on the date the
MITTS Securities are priced for initial sale to the public and will depend upon
actual market interest rates (and thus ML&Co.'s borrowing costs for debt
instruments with comparable maturities) as of that date. The actual projected
payment schedule for the MITTS Securities (including both the actual Projected
Supplemental Redemption Amount and the actual estimated yield) and the actual
tax accrual table will be set forth in the final prospectus supplement
delivered to investors in connection with sales of the MITTS Securities:
<TABLE>
<CAPTION>
Total interest deemed
Interest deemed to have accrued on
to accrue during MITTS Securities as of
accrual period end of accrual period
Accrual Period (per unit) (per unit)
-------------- ---------------- ----------------------
<S> <C> <C>
June 28, 1999 through December 28,
1999................................. $0.3520 $0.3520
December 29, 1999 through June 28,
2000................................. $0.3633 $0.7153
June 29, 2000 through December 28,
2000................................. $0.3761 $1.0914
December 29, 2000 through June 28,
2001................................. $0.3894 $1.4808
June 29, 2001 through December 28,
2001................................. $0.4029 $1.8837
December 29, 2001 through June 28,
2002................................. $0.4171 $2.3008
June 29, 2002 through December 28,
2002................................. $0.4318 $2.7326
December 29, 2002 through June 28,
2003................................. $0.4469 $3.1795
June 29, 2003 through December 28,
2003................................. $0.4626 $3.6421
December 29, 2003 through June 28,
2004................................. $0.4789 $4.1210
June 29, 2004 through December 28,
2004................................. $0.4956 $4.6166
December 29, 2004 through June 28,
2005................................. $0.5130 $5.1296
June 29, 2005 through December 28,
2005................................. $0.5311 $5.6607
December 29, 2005 through June 28,
2006................................. $0.5497 $6.2104
</TABLE>
- --------
Hypothetical Projected Supplemental Redemption Amount = $6.2104 per unit.
Non-U.S. Holders
A non-U.S. Holder will not be subject to United States Federal income
taxes on payments of principal, premium (if any) or interest (including
original issue discount, if any) on a MITTS Security, unless the non-U.S.
Holder is a direct or indirect 10% or greater shareholder of ML&Co., a
controlled foreign corporation related to ML&Co. or a bank receiving interest
described in section 881(c)(3)(A) of the Internal Revenue Code of 1986, as
amended. However, income allocable to non-U.S. Holders will generally be
subject to annual tax reporting on IRS Form 1042S. For a non-U.S. Holder to
qualify for the exemption from taxation, the last United States payor in the
chain of payment prior to payment to a non-U.S. Holder (the "Withholding
Agent") must have received in the year in which a payment of interest or
principal occurs, or in either of the two preceding calendar years, a statement
that (a) is signed by the beneficial owner of the MITTS Security under
penalties of perjury, (b) certifies that the owner is not a U.S. Holder and (c)
provides the name and address of the beneficial owner. The statement may be
made on an IRS Form W-8 or a substantially similar form, and the beneficial
owner must inform the Withholding Agent of any change in the information on the
statement within 30 days of that change. If a MITTS Security is held through a
securities clearing organization or certain other
S-25
<PAGE>
financial institutions, the organization or institution may provide a signed
statement to the Withholding Agent. However, in that case, the signed statement
must be accompanied by a copy of the IRS Form W-8 or the substitute form
provided by the beneficial owner to the organization or institution. The
Treasury Department is considering implementation of further certification
requirements.
Under current law, a MITTS Security will not be includible in the estate
of a non-U.S. Holder unless the individual is a direct or indirect 10% or
greater shareholder of ML&Co. or, at the time of that individual's death,
payments in respect of the MITTS Security would have been effectively connected
with the conduct by that individual of a trade or business in the United
States.
Backup withholding
Backup withholding of United States Federal income tax at a rate of 31%
may apply to payments made in respect of the MITTS Securities to registered
owners who are not "exempt recipients" and who fail to provide certain
identifying information (such as the registered owner's taxpayer identification
number) in the required manner. Generally, individuals are not exempt
recipients, whereas corporations and certain other entities generally are
exempt recipients. Payments made in respect of the MITTS Securities to a U.S.
Holder must be reported to the IRS, unless the U.S. Holder is an exempt
recipient or establishes an exemption. Compliance with the identification
procedures described in the preceding section would establish an exemption from
backup withholding for those non-U.S. Holders who are not exempt recipients.
In addition, upon the sale of a MITTS Security to (or through) a broker,
the broker must withhold 31% of the entire purchase price, unless either (a)
the broker determines that the seller is a corporation or other exempt
recipient or (b) the seller provides, in the required manner, certain
identifying information and, in the case of a non-U.S. Holder, certifies that
the seller is a non-U.S. Holder (and certain other conditions are met). Such a
sale must also be reported by the broker to the IRS, unless either (a) the
broker determines that the seller is an exempt recipient or (b) the seller
certifies its non-U.S. status (and certain other conditions are met).
Certification of the registered owner's non-U.S. status would be made normally
on an IRS Form W-8 under penalties of perjury, although in certain cases it may
be possible to submit other documentary evidence.
Any amounts withheld under the backup withholding rules from a payment to
a beneficial owner would be allowed as a refund or a credit against that
beneficial owner's United States Federal income tax provided that the required
information is furnished to the IRS.
New withholding regulations
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations") which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New
Regulations attempt to unify certification requirements and modify reliance
standards. The New Regulations will generally be effective for payments made
after December 31, 2000, subject to certain transition rules. Prospective
investors are urged to consult their own tax advisors regarding the New
Regulations.
USE OF PROCEEDS AND HEDGING
The net proceeds from the sale of the MITTS Securities will be used as
described under "Use of Proceeds" in the accompanying prospectus and to hedge
market risks of ML&Co. associated with its obligation to pay the principal
amount and the Supplemental Redemption Amount.
S-26
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the SEC. Our
SEC filings are also available over the Internet at the SEC's web site at
http://www.sec.gov. You may also read and copy any document we file at the
SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for more information
on the public reference rooms and their copy charges. You may also inspect our
SEC reports and other information at the New York Stock Exchange, Inc., 20
Broad Street, New York, New York 10005.
We have filed a registration statement on Form S-3 with the SEC covering
the MITTS Securities and other securities. For further information on ML&Co.
and the MITTS Securities, you should refer to our registration statement and
its exhibits. The prospectus accompanying this prospectus supplement summarizes
material provisions of contracts and other documents that we refer you to.
Because the prospectus may not contain all the information that you may find
important, you should review the full text of these documents. We have included
copies of these documents as exhibits to our registration statement.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We
have not, and the underwriter has not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriter is not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted.
You should assume that the information appearing in this prospectus
supplement and the accompanying prospectus is accurate as of the date on the
front cover of this prospectus supplement only. Our business, financial
condition and results of operations may have changed since that date.
UNDERWRITING
MLPF&S, the underwriter of the offering, has agreed, subject to the terms
and conditions of the underwriting agreement and a terms agreement, to purchase
from ML&Co. $ aggregate principal amount of MITTS Securities. The
underwriting agreement provides that the obligations of the underwriter are
subject to certain conditions and that the underwriter will be obligated to
purchase all of the MITTS Securities if any are purchased.
The underwriter has advised ML&Co. that it proposes initially to offer
all or part of the MITTS Securities directly to the public at the offering
prices set forth on the cover page of this prospectus supplement. After the
initial public offering, the public offering price may be changed. The
underwriter is offering the MITTS Securities subject to receipt and acceptance
and subject to the underwriter's right to reject any order in whole or in part.
In addition to the commissions payable at the time of the original sale
of the MITTS Securities, the underwriter will pay a commission on each of up to
six anniversary dates of the issuance of the MITTS Securities to brokers whose
clients purchased the units in the initial distribution and who continue to
hold their MITTS Securities.
The underwriting of the MITTS Securities will conform to the requirements
set forth in the applicable sections of Rule 2720 of the Conduct Rules of the
NASD.
The underwriter is permitted to engage in certain transactions that
stabilize the price of the MITTS Securities. These transactions consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
MITTS Securities.
S-27
<PAGE>
If the underwriter creates a short position in the MITTS Securities in
connection with the offering, i.e., if it sells more units of the MITTS
Securities than are set forth on the cover page of this prospectus supplement,
the underwriter may reduce that short position by purchasing units of the MITTS
Securities in the open market. In general, purchases of a security for the
purpose of stabilization or to reduce a short position could cause the price of
the security to be higher than it might be in the absence of these purchases.
Neither ML&Co. nor the underwriter makes any representation or prediction as to
the direction or magnitude of any effect that the transactions described above
may have on the price of the MITTS Securities. In addition, neither ML&Co. nor
the underwriter makes any representation that the underwriter will engage in
these transactions or that these transactions, once commenced, will not be
discontinued without notice.
The underwriter may use this prospectus supplement and the accompanying
prospectus for offers and sales related to market-making transactions in the
MITTS Securities. The underwriter may act as principal or agent in these
transactions, and the sales will be made at prices related to prevailing market
prices at the time of sale.
VALIDITY OF THE MITTS SECURITIES
The validity of the MITTS Securities will be passed upon for ML&Co. and
for the underwriter by Brown & Wood LLP, New York, New York.
S-28
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Adjusted Ending Value...................................................... S-4
Adjustment Factor.......................................................... S-5
Business Day............................................................... S-15
Calculation Day............................................................ S-12
Calculation Period......................................................... S-12
Depositary................................................................. S-15
Final Regulations.......................................................... S-22
Index Business Day......................................................... S-12
Market Disruption Event ................................................... S-14
ML&Co. .................................................................... S-4
MLPF&S..................................................................... S-4
New Regulations............................................................ S-26
Non-U.S. Holder............................................................ S-22
Pricing Date............................................................... S-4
Principal Amount........................................................... S-4
Projected Supplemental Redemption Amount .................................. S-23
Starting Value............................................................. S-4
Successor Index............................................................ S-14
Supplemental Redemption Amount ............................................ S-4
S&P 500 Index.............................................................. S-18
U.S. Holder................................................................ S-22
Withholding Agent ......................................................... S-25
</TABLE>
S-29
<PAGE>
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[LOGO]
2,500,000 Units
Merrill Lynch & Co., Inc.
S&P 500(R) Index MITTS Securities(R)
due July , 2006
"MITTS(R) Securities"
------------------------------
PROSPECTUS SUPPLEMENT
------------------------------
Merrill Lynch & Co.
July , 1999
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