<PAGE>
FILED PURSUANT TO RULE NO. 424(b)(5)
FILE NO. 333-68747
---------
Subject to Completion
Preliminary Prospectus Supplement dated May 19, 2000
PROSPECTUS SUPPLEMENT
(To prospectus dated May 6, 1999)
[LOGO] Merrill Lynch
PROTECTED GROWTH(SM) INVESTING
Pursuit of Growth, Protection of Principal
2,500,000 Units
Merrill Lynch & Co., Inc.
S&P 500(R) Market Index Target-Term Securities(R)
due June , 2007
"MITTS(R) Securities"
$10 principal amount per unit
--------------
The MITTS Securities: Payment at maturity:
. 100% principal protection at . On the maturity date, for each unit
maturity. of the MITTS Securities you own, we
. No payments before the maturity date. will pay you an amount equal to the
. Senior unsecured debt securities of sum of the principal amount of each
Merrill Lynch & Co., Inc. unit and an additional amount based
. Linked to the value of the S&P 500 on the percentage increase, if any,
Index. in the value of the S&P 500 Index
. We have applied to have the MITTS reduced by an annual adjustment
Securities quoted on The Nasdaq factor expected to be between
National Market under the symbol 1.6% and 1.9%.
"MITT". . At maturity, you will receive no
. Expected initial settlement date: less than the principal amount of
June , 2000. your MITTS Securities.
Investing in the MITTS Securities involves risk.
See "Risk Factors" beginning on page S-8 of this prospectus supplement.
--------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus supplement or the accompanying prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
<TABLE>
<CAPTION>
Per unit Total
-------- -----
<S> <C> <C>
Public offering price............................... $10.00 $25,000,000
Underwriting discount............................... $ $
Proceeds, before expenses, to Merrill Lynch & Co.,
Inc. .............................................. $ $
</TABLE>
The public offering price and the underwriting discount for any single
transaction to purchase:
(a) between 100,000 units and 499,999 units will be $ per unit and
$ per unit, respectively, and
(b) 500,000 units or more will be $ per unit and $ per unit,
respectively.
--------------
Merrill Lynch & Co. A.G. Edwards & Sons, Inc.
--------------
The date of this prospectus supplement is June , 2000.
"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.
<PAGE>
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY INFORMATION--Q&A.................................................. S-4
What are the MITTS Securities?.......................................... S-4
What will I receive 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 I receive interest payments on the MITTS Securities?............... S-7
Will the MITTS Securities be listed on a stock exchange?................ S-7
What is the role of MLPF&S?............................................. S-7
Who is ML&Co.?.......................................................... S-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-9
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-9
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-11
Uncertain tax consequences.............................................. S-11
DESCRIPTION OF THE MITTS SECURITIES....................................... S-11
Payment at maturity..................................................... S-11
Hypothetical returns.................................................... S-13
Adjustments to the S&P 500 Index; Market Disruption Events.............. S-14
Discontinuance of the S&P 500 Index..................................... S-14
Events Of Default And Acceleration...................................... S-15
Depositary.............................................................. S-16
Description of the Global Securities.................................. S-16
DTC Procedures........................................................ S-16
Exchange for Certificated Securities.................................. S-17
Same-Day Settlement And Payment......................................... S-18
THE S&P 500 INDEX......................................................... S-18
Computation of the S&P 500 Index........................................ S-19
Historical Data on the S&P 500 Index.................................... S-20
License Agreement....................................................... S-21
UNITED STATES FEDERAL INCOME TAXATION..................................... S-22
General................................................................. S-23
U.S. Holders............................................................ S-23
Hypothetical Table...................................................... S-26
Non-U.S. Holders........................................................ S-26
Backup withholding...................................................... S-27
New withholding regulations............................................. S-27
ERISA CONSIDERATIONS...................................................... S-28
USE OF PROCEEDS AND HEDGING............................................... S-28
WHERE YOU CAN FIND MORE INFORMATION....................................... S-28
UNDERWRITING.............................................................. S-29
VALIDITY OF THE MITTS SECURITIES.......................................... S-29
</TABLE>
S-2
<PAGE>
Prospectus
<TABLE>
<CAPTION>
Page
----
<S> <C>
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 WARRANT.............................................. 10
DESCRIPTION OF CURRENCY WARRANTS......................................... 12
DESCRIPTION OF INDEX WARRANTS............................................ 14
DESCRIPTION OF PREFERRED STOCK........................................... 19
DESCRIPTION OF DEPOSITARY SHARES......................................... 24
DESCRIPTION OF COMMON STOCK WARRANTS..................................... 28
DESCRIPTION OF COMMON STOCK.............................................. 30
DESCRIPTION OF PREFERRED STOCK WARRANTS.................................. 33
PLAN OF DISTRIBUTION..................................................... 35
WHERE YOU CAN FIND MORE INFORMATION...................................... 36
INCORPORATION OF INFORMATION WE FILE WITH THE SEC........................ 36
EXPERTS.................................................................. 37
</TABLE>
S-3
<PAGE>
SUMMARY INFORMATION -- Q&A
This summary includes questions and answers that highlight selected
information from this prospectus supplement and the accompanying prospectus to
help you understand the S&P 500(R) Market Index Target-Term Securities(R) due
June , 2007. You should carefully read this prospectus supplement and the
accompanying prospectus to fully understand the terms of the MITTS Securities,
the S&P 500 Index and the tax and other considerations that are important to
you in making a decision about whether to invest in the MITTS Securities. You
should carefully review the "Risk Factors" section, which highlights certain
risks associated with an investment in the MITTS Securities, to determine
whether an investment in the MITTS Securities is appropriate for you.
References in this prospectus supplement to "ML&Co.", "we", "us" and
"our" are to Merrill Lynch & Co., Inc. and references to "MLPF&S" are to
Merrill Lynch, Pierce, Fenner & Smith Incorporated.
What are the MITTS Securities?
The MITTS Securities will be a series of senior debt securities issued by
ML&Co. and will not be secured by collateral. The MITTS Securities will rank
equally with all of our other unsecured and unsubordinated debt. The MITTS
Securities will mature on June , 2007. We cannot redeem the MITTS Securities
at any earlier date. We will not make any payments on the MITTS Securities
until maturity.
Each unit of MITTS Securities represents $10 principal amount of MITTS
Securities. You may transfer the MITTS Securities only in whole units. You
will not have the right to receive physical certificates evidencing your
ownership except under limited circumstances. Instead, we will issue the MITTS
Securities in the form of a global certificate, which will be held by The
Depository Trust Company, also known as DTC, or its nominee. Direct and
indirect participants in DTC will record your ownership of the MITTS
Securities. You should refer to the section "Description of the MITTS
Securities--Depositary" in this prospectus supplement.
What will I receive on the stated maturity date of the MITTS Securities?
We have designed the MITTS Securities for investors who want to protect
their investment by receiving at least the principal amount of their
investment at maturity and who also want to participate in possible increases
in the value of the S&P 500 Index as reduced by the Adjustment Factor. On the
stated maturity date, you will receive a cash payment on the MITTS Securities
equal to the sum of two amounts: the "principal amount" and the "Supplemental
Redemption Amount", if any.
Principal amount
The "principal amount" per unit is $10.
Supplemental Redemption Amount
The "Supplemental Redemption Amount" per unit will equal:
( Adjusted Ending Value - Starting Value )
$10 x ( -------------------------------------- )
( Starting Value )
but will not be less than zero.
The "Starting Value" means the closing value of the S&P 500 Index on the
date the MITTS Securities are priced for initial sale to the public (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" means the average or arithmetic mean of the
values of the S&P 500 Index at the close of the market on five business days
before the maturity of the MITTS Securities as reduced on each day by the
application of the Adjustment Factor. We may calculate the Adjusted Ending
Value by reference to fewer than five or even a single day's closing value if,
during the period shortly before the stated maturity date of the MITTS
Securities, there is a disruption in the trading of a sufficient number of the
stocks included in the S&P 500 Index or certain futures or options contracts
relating to the S&P 500 Index.
S-4
<PAGE>
The "Adjustment Factor" will be a fixed percentage which is expected to
be between 1.6% and 1.9% per year and will be pro-rated based on a 365-day year
and applied over the entire term of the MITTS Securities on each calendar day
to reduce the closing values 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 the Supplemental Redemption Amount during the Calculation Period
will be approximately 10.6% to 12.46% less than the actual closing value of the
S&P 500 Index on each day during the Calculation Period. We will determine the
Adjustment Factor on the Pricing Date and it will appear in the final
prospectus supplement delivered to you in connection with sales of the MITTS
Securities. For a detailed discussion of how the Adjustment Factor will affect
the value of the S&P 500 Index used to calculate the Supplemental Redemption
Amount, see "Description of the MITTS Securities--Payment at Maturity" in this
prospectus supplement.
For more specific information about the Supplemental Redemption Amount,
please see the section "Description of the MITTS Securities" in this prospectus
supplement.
We will pay you a Supplemental Redemption Amount only if the Adjusted
Ending Value is greater than the Starting Value. If the Adjusted Ending Value
is less than, or equal to, the Starting Value, the Supplemental Redemption
Amount will be zero. We will pay you the principal amount of your MITTS
Securities regardless of whether any Supplemental Redemption Amount is payable.
Examples
Here are two examples of Supplemental Redemption Amount calculations
assuming an investment term of seven years and an Adjustment Factor of
1.75% per year, the mid point of an expected range of 1.6% and 1.9%:
Example 1--The S&P 500 Index, as adjusted, is below the Starting Value at
maturity:
Hypothetical Starting Value: 1,452.36
Hypothetical average closing value of the S&P 500 Index for the calculation
period: 1,524.98
Hypothetical Adjusted Ending Value: 1,349.08
<TABLE>
<S> <C> <C>
( 1,349.08-1,452.36)
Supplemental Redemption Amount (per unit) = $10 X ( -----------------) = $0.00 (Supplemental Redemption Amount cannot
( 1,452.36 ) be less than zero)
</TABLE>
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: 1,452.36
Hypothetical average closing value of the S&P 500 Index for the calculation
period: 2,614.25
Hypothetical Adjusted Ending Value: 2,312.72
<TABLE>
<S> <C>
( 2,312.72 - 1,452.36 )
Supplemental Redemption Amount (per unit) = $10 X ( ------------------- ) = $5.92
( 1,452.36 )
</TABLE>
Total payment at maturity (per unit) = $10 + $5.92 = $15.92
S-5
<PAGE>
Who publishes the S&P 500 Index and what does the S&P 500 Index measure?
The S&P 500 Index is published by Standard & Poor's, a division of The
McGraw-Hill Companies, Inc., and is intended to provide an indication of the
pattern of common stock price movement. The value of the S&P 500 Index 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. The market value for the common stock of a company
is the product of the market price per share of the common stock and the number
of outstanding shares of common stock. As of April 28, 2000, 448 companies or
89.2% of the S&P 500 Index traded on the New York Stock Exchange; 52 companies
or 10.8% of the S&P 500 Index traded on The Nasdaq Stock Market. As of April
28, 2000, the aggregate market value of the 500 companies included in the S&P
500 Index represented approximately 75% of the aggregate market value of stocks
included in the Standard & Poor's Stock Guide Database of domestic common
stocks traded in the United States, excluding American depositary receipts and
shares of real estate investment trusts, limited partnerships and mutual funds.
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.
Please note that an investment in the MITTS Securities does not entitle
you to any ownership interest in the stocks of the companies included in the
S&P 500 Index.
How has the S&P 500 Index performed historically?
We have included tables showing the year-end closing value of the S&P 500
Index for each year from 1947 through 1999 and the month-end closing value of
the S&P 500 index from January 1990 through April 2000 in the section entitled
"The S&P 500 Index--Historical Data on the S&P 500 Index" in this prospectus
supplement. We have provided this historical information to help you evaluate
the behavior of the S&P 500 Index in various economic environments; however,
past performance of the S&P 500 Index is not necessarily indicative of how the
S&P 500 Index will perform in the future.
What about taxes?
Each year, you will be required to pay taxes on ordinary income from the
MITTS Securities over their term based upon an estimated yield for the MITTS
Securities, even though you will not receive any payments from us until
maturity. We have determined this estimated yield, in accordance with
regulations issued by the U.S. Treasury Department, solely in order for you to
figure the amount of taxes that you will owe each year as a result of owning a
MITTS Security. This estimated yield is neither a prediction nor a guarantee of
what the actual Supplemental Redemption Amount will be, or that the actual
Supplemental Redemption Amount will even exceed zero. We have determined that
this estimated yield will equal % per annum, compounded semiannually.
Based upon this estimated yield, if you pay your taxes on a calendar year
basis and if you buy a MITTS Security for $10 and hold the MITTS Security until
maturity, you will be required to pay taxes on the following amounts of
ordinary income from the MITTS Security each year: $ in 2000, $ in 2001,
$ in 2002, $ in 2003, $ in 2004, $ in 2005, $ in 2006 and $ in
2007. However, in 2007, the amount of ordinary income that you will be required
to pay taxes on from owning each MITTS Security may be greater or less than
$ , depending upon the Supplemental Redemption Amount, if any, you receive.
Also, if the Supplemental Redemption Amount is less than $ , you may have a
loss which you could deduct against other income you may have in 2007, but
under current tax regulations, you would neither be required nor allowed to
amend your tax returns for prior years. For further information, see "United
States Federal Income Taxation" in this prospectus supplement.
S-6
<PAGE>
Will I receive interest payments on the MITTS Securities?
You will not receive any interest payments on the MITTS Securities, but
will instead receive the principal amount plus the Supplemental Redemption
Amount, if any, at maturity. We have designed the MITTS Securities for
investors who are willing to forego market interest payments on the MITTS
Securities, such as floating interest rates paid on standard senior non-
callable debt securities, in exchange for the ability to participate in
possible increases in the S&P 500 Index.
Will the MITTS Securities be listed on a stock exchange?
We have applied to have the MITTS Securities quoted on The Nasdaq
National Market under the symbol "MITT". You should be aware that the listing
of the MITTS Securities on The Nasdaq National Market will not necessarily
ensure that a liquid trading market will be available for the MITTS Securities.
You should review "Risk Factors--There may be an uncertain trading market for
the MITTS Securities" in this prospectus supplement.
What is the role of MLPF&S?
Our subsidiary, MLPF&S, is an underwriter for the offering and sale of
the MITTS Securities. After the initial offering, MLPF&S intends to buy and
sell the MITTS Securities to create a secondary market for holders of the MITTS
Securities, and may stabilize or maintain the market price of the MITTS
Securities during the initial distribution of the MITTS Securities. However,
MLPF&S will not be obligated to engage in any of these market activities or
continue them once it has started.
MLPF&S will also be our agent for purposes of calculating, among other
things, the Adjusted Ending Value and the Supplemental Redemption Amount. Under
certain circumstances, these duties could result in a conflict of interest
between MLPF&S' status as a subsidiary of ML&Co. and its responsibilities as
calculation agent.
Who is ML&Co.?
Merrill Lynch & Co., Inc. is a holding company with various subsidiary
and affiliated companies that provide investment, financing, insurance and
related services on a global basis. For information about ML&Co. see the
section "Merrill Lynch & Co., Inc." in the accompanying prospectus. You should
also read the other documents we have filed with the SEC, which you can find by
referring to the section "Where You Can Find More Information" in this
prospectus supplement.
Are there any risks associated with my investment?
Yes, an investment in the MITTS Securities is subject to risk. Please
refer to the section "Risk Factors" in this prospectus supplement.
S-7
<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
In 1998, we acquired the outstanding shares of Midland Walwyn Inc., in a
transaction accounted for as a pooling-of-interests. The following information
for the fiscal years 1995 through 1997 has been restated as if the two entities
had always been combined.
The following table sets forth the historical ratios of earnings to fixed
charges and ratio of earnings to combined fixed charges and preferred stock
dividends for the periods indicated:
<TABLE>
<CAPTION>
Year Ended Last Friday in December
--------------------------------------
1995 1996 1997 1998 1999
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges(a).. 1.2 1.2 1.2 1.1 1.3
Ratio of earnings to combined fixed
charges and preferred stock
dividends(a).......................... 1.2 1.2 1.2 1.1 1.3
</TABLE>
- --------
(a) The effect of combining Midland Walwyn did not change the ratios reported
for the fiscal years of 1995 through 1997.
For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" consist of earnings from continuing operations before income taxes
and fixed charges, excluding capitalized interest and preferred security
dividend requirements. "Fixed charges" consist of interest costs, the interest
factor in rentals, amortization of debt issuance costs, preferred security
dividend requirements of subsidiaries, and capitalized interest.
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
S-8
<PAGE>
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
We have applied to have the MITTS Securities quoted on The Nasdaq
National Market under the symbol "MITT". 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 U.S. interest rates may offset some
or all of any increase in the trading value of the MITTS Securities
attributable to another factor, such as an increase in the value of the 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.
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.
S-9
<PAGE>
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 U.S. 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.
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
S-10
<PAGE>
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 or
unavailability 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 have entered 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.
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 June , 2007.
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, holders 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
each with a principal amount of $10.00 per unit.
The MITTS Securities do not have the benefit of any sinking fund.
Payment at maturity
At maturity a holder 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 described below. If the Adjusted
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Ending Value does not exceed the Starting Value, you will be entitled to
receive only the principal amount of your MITTS Securities.
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 Index Business Day.
The "Adjustment Factor" will be a fixed percentage which is expected to
be between 1.6% to 1.9% per year and will be applied over the entire term of
the MITTS Securities. For each calendar day during the term of the MITTS
Securities, we will apply this percentage on a pro-rated basis based on a 365-
day year to reduce the values 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 10.6% to 12.46% 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 Nasdaq Stock
Market 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.
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<PAGE>
Hypothetical returns
The following table illustrates, for a range of hypothetical average
closing values of the S&P 500 Index during the Calculation Period:
. the percentage change from the Starting Value to the hypothetical
average 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 1.11% per annum, as more fully described below.
For the purposes of calculating this table, we have applied the
Adjustment Factor of 1.75% per annum (the midpoint of the expected range of
1.6% and 1.9%).
<TABLE>
<CAPTION>
Total Pretax
Hypothetical Percentage change amount Pretax annualized
average closing from the payable annualized rate of return
value Starting Value at maturity Total rate of rate of stocks
during the to hypothetical Adjusted per unit of return on of return on included
calculation average closing Ending the MITTS the MITTS the MITTS in the S&P 500
period value Value(1) Securities Securities Securities(2) Index(2)(3)
--------------- ----------------- -------- ----------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
290.47 -80.00% 256.97 $10.00 0.00% 0.00% -20.50%
580.94 -60.00% 513.94 $10.00 0.00% 0.00% -11.55%
871.42 -40.00% 770.91 $10.00 0.00% 0.00% -6.07%
1,161.89 -20.00% 1,027.88 $10.00 0.00% 0.00% -2.06%
1,452.36(4) 0.00% 1,284.85 $10.00 0.00% 0.00% 1.11%
1,742.83 20.00% 1,541.82 $10.62 6.16% 0.86% 3.75%
2,033.30 40.00% 1,798.78 $12.39 23.85% 3.08% 6.01%
2,323.78 60.00% 2,055.75 $14.15 41.55% 5.02% 8.00%
2,614.25 80.00% 2,312.72 $15.92 59.24% 6.76% 9.77%
2,904.72 100.00% 2,569.69 $17.69 76.93% 8.32% 11.37%
3,195.19 120.00% 2,826.66 $19.46 94.63% 9.74% 12.83%
3,485.66 140.00% 3,083.63 $21.23 112.32% 11.05% 14.17%
3,776.14 160.00% 3,340.80 $23.00 130.01% 12.26% 15.41%
4,066.61 180.00% 3,597.57 $24.77 147.71% 13.38% 16.57%
4,357.08 200.00% 3,854.54 $26.54 165.40% 14.44% 17.66%
</TABLE>
- --------
(1) The Adjusted Ending Values specified in this column are approximately
11.53% less than the hypothetical average closing values of the S&P 500
Index as a result of the application of the Adjustment Factor of 1.75% 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 average closing value;
(b) a constant dividend yield of 1.11% 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
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<PAGE>
assuming this value increases or decreases linearly from the Starting
Value to the applicable hypothetical average closing value;
(c) no transaction fees or expenses; and
(d) a seven-year investment term.
(4) This is the hypothetical Starting Value of the S&P 500 Index for the
purpose 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 actual Adjusted
Ending Value determined by the calculation agent as described 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 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 Standard & Poor's discontinues publication of the S&P 500 Index and
Standard & Poor's or another entity publishes a successor or substitute index
that the calculation agent determines, in its sole discretion, to be
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<PAGE>
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 Standard & Poor's 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 Standard & Poor's 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, and the Calculation Period and the Calculation Days
shall be determined as if each Business Day were an Index Business Day.
If Standard & Poor's 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 Nasdaq Stock Market
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
holder 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.
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<PAGE>
In case of default in payment of the MITTS Securities, whether at the
stated maturity date or upon acceleration, from and after the maturity date the
MITTS Securities will bear interest, payable upon demand of their holders, at
the rate of % per annum to the extent that payment of any interest is legally
enforceable on the unpaid amount due and payable on that date in accordance
with the terms of the MITTS Securities to the date payment of that amount has
been made or duly provided for.
Depositary
Description of the Global Securities
Upon issuance, all MITTS Securities will be represented by one or more
fully registered global securities. Each global security will be deposited
with, or on behalf of, DTC (DTC, together with any successor, being a
"depositary"), as depositary, registered in the name of Cede & Co., DTC's
partnership nominee. Unless and until it is exchanged in whole or in part for
MITTS Securities in definitive form, no global security may be transferred
except as a whole by the depositary to a nominee of the depositary or by a
nominee of the depositary to the depositary or another nominee of the
depositary or by the depositary or any nominee to a successor of the depositary
or a nominee of that successor.
So long as DTC, or its nominee, is a registered owner of a global
security, DTC or its nominee, as the case may be, will be considered the sole
owner or holder of the MITTS Securities represented by the global security for
all purposes under the 1983 Indenture. Except as provided below, the beneficial
owners of the MITTS Securities represented by a global security will not be
entitled to have the MITTS Securities represented by a global security
registered in their names, will not receive or be entitled to receive physical
delivery of the MITTS Securities in definitive form and will not be considered
the owners or holders of the MITTS Securities including for purposes of
receiving any reports delivered by ML&Co. or the trustee under the 1983
Indenture. Accordingly, each person owning a beneficial interest in a global
security must rely on the procedures of DTC and, if that person is not a
participant of DTC, on the procedures of the participant through which that
person owns its interest, to exercise any rights of a holder under the 1983
Indenture. ML&Co. understands that under existing industry practices, in the
event that ML&Co. requests any action of holders or 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
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<PAGE>
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.
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,
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<PAGE>
. 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.
THE S&P 500 INDEX
Standard & Poor's publishes the 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 April 28, 2000,
448 companies or 89.2% of the S&P 500 Index traded on the NYSE; 52 companies or
10.8% of the S&P 500 Index traded on The Nasdaq Stock Market. As of April 28,
2000, the aggregate market value of the 500 companies included in the S&P 500
Index represented approximately 75% of the aggregate market value of stocks
included in the Standard & Poor's Stock Guide Database of domestic common
stocks traded in the United States, excluding American depositary receipts and
shares of real estate investment trusts, limited partnerships and mutual funds.
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 (378), Utilities (40),
Transportation (11) and Financial (71). 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.
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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
as the return 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.
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 the issuer,
. 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:
New Market Value
Old Base Value X ---------------- = New Base Value
Old Market Value
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<PAGE>
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 1999, 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 Closing Values 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 135.76 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
1999 1,469.25
</TABLE>
S-20
<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 April 2000. 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 2000
------ ------ ------ ------ ------ ------ ------ ------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
January................. 329.08 343.93 408.79 438.78 481.61 470.42 636.02 786.16 980.28 1,279.64 1,394.46
February................ 331.89 367.07 412.70 443.38 467.14 487.39 640.43 790.82 1,049.34 1,238.33 1,366.42
March................... 339.94 375.22 403.69 451.67 445.77 500.71 645.50 757.12 1,101.75 1,286.37 1,498.58
April................... 330.80 375.34 414.95 440.19 450.91 514.71 654.17 801.34 1,111.75 1,335.18 1,452.43
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 1,372.71
July.................... 356.15 387.81 424.22 448.13 458.26 562.06 639.95 954.29 1,120.67 1,328.72
August.................. 322.56 395.43 414.03 463.56 475.50 561.88 651.99 899.47 957.28 1,320.41
September............... 306.05 387.86 417.80 458.93 462.71 584.41 687.31 947.28 1,017.01 1,282.71
October................. 304.00 392.45 418.68 467.83 472.35 581.50 705.27 914.62 1,098.67 1,362.93
November................ 322.22 375.22 431.35 461.79 453.69 605.37 757.02 955.40 1,163.63 1,388.91
December................ 330.22 417.09 435.71 466.45 459.27 615.93 740.74 970.43 1,229.23 1,469.25
</TABLE>
The following graph sets forth the performance of the S&P 500 Index at
the end of each month from January 1990 to April 2000. Past movements of the
S&P 500 Index are not necessarily indicative of the future S&P 500 Index
values. On May 15, 2000, the closing value of the S&P 500 Index was 1,452.36.
Month-End Closing Values
[THE GRAPH APPEARING HERE SETS FORTH THE MONTH-END CLOSING VALUES OF THE S&P 500
INDEX FROM JANUARY 1990 THROUGH APRIL 2000, AS SET FORTH IN THE TABLE ABOVE
ON THIS PAGE. THE VERTICAL AXIS HAS A RANGE OF NUMBERS FROM 0 TO 1600 IN
INCREMENTS OF 200. THE HORIZONTAL AXIS HAS A RANGE OF DATES FROM JANUARY 30,
1990 THROUGH APRIL 30, 2000 IN INCREMENTS OF ONE MONTH.]
License Agreement
Standard & Poor's ("S&P") does not guarantee the accuracy and/or the
completeness of the S&P 500 Index or any data included in the S&P 500 Index.
S&P makes no warranty, express or implied, as to results to
S-21
<PAGE>
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 500 Index or any data included in the
S&P 500 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 500
Index or any data included in the S&P 500 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 S&P 500 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 S&P 500 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 S&P 500 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, traders in
securities that elect to mark to market, tax-exempt entities, persons holding
MITTS Securities in a tax-deferred or tax-advantaged account, or persons
holding MITTS Securities as a hedge against currency risks, as a position in a
"straddle" or as part of a "hedging" or "conversion" transaction for tax
purposes. It also does not deal with holders other than original purchasers,
except where otherwise specifically noted in this prospectus supplement. The
following discussion also assumes that the issue price of the MITTS Securities,
as determined for United States Federal income tax purposes, equals the
principal amount thereof. Persons considering the purchase of the MITTS
Securities should consult their own tax advisors concerning the application of
the United States Federal income tax laws to their particular situations as
well as any consequences of the purchase, ownership and disposition of the
MITTS Securities arising under the laws of any other taxing jurisdiction.
As used in this prospectus supplement, the term "U.S. Holder" means a
beneficial owner of a MITTS Security that is for United States Federal income
tax purposes (a) a citizen or resident of the United States, (b)
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<PAGE>
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 U.S. Holders. 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-23
<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 or exchange 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 or exchange 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-24
<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., Corporate
Secretary's Office, 222 Broadway, 17th Floor, New York, New York 10038, (212)
670-0432; [email protected].
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-25
<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 7.72% per annum (compounded
semiannually)) as determined by ML&Co. for purposes of illustrating the
application of the Final Regulations to the MITTS Securities as if the MITTS
Securities had been issued on May 16, 2000. 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 the 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>
May 16, 2000 through November 16,
2000................................. $0.3892 $0.3892
November 17, 2000 through May 16,
2001................................. $0.4011 $0.7903
May 17, 2001 through November 16,
2001................................. $0.4165 $1.2068
November 17, 2001 through May 16,
2002................................. $0.4325 $1.6393
May 17, 2002 through November 16,
2002................................. $0.4493 $2.0886
November 17, 2002 through May 16,
2003................................. $0.4666 $2.5552
May 17, 2003 through November 16,
2003................................. $0.4847 $3.0399
November 17, 2003 through May 16,
2004................................. $0.5033 $3.5432
May 17, 2004 through November 16,
2004................................. $0.5228 $4.0660
November 17, 2004 through May 16,
2005................................. $0.5429 $4.6089
May 17, 2005 through November 16,
2005................................. $0.5639 $5.1728
November 17, 2005 through May 16,
2006................................. $0.5857 $5.7585
May 17, 2006 through November 16,
2006................................. $0.6083 $6.3668
November 17, 2006 through May 16,
2007................................. $0.6317 $6.9985
</TABLE>
- --------
Hypothetical Projected Supplemental Redemption Amount = $6.9985 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 1042-S. 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
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<PAGE>
beneficial owner must inform the Withholding Agent of any change in the
information on the statement within 30 days of that change. If a MITTS Security
is held through a securities clearing organization or certain other financial
institutions, the organization or institution may provide a signed statement to
the Withholding Agent. However, in that case, the signed statement must be
accompanied by a copy of the IRS Form W-8 or the substitute form provided by
the beneficial owner to the organization or institution. The Treasury
Department is considering implementation of further certification requirements.
Under current law, a MITTS Security will not be includible in the estate
of a non-U.S. Holder unless the individual is a direct or indirect 10% or
greater shareholder of ML&Co. or, at the time of that individual's death,
payments in respect of the MITTS Security would have been effectively connected
with the conduct by that individual of a trade or business in the United
States.
Backup withholding
Backup withholding of United States Federal income tax at a rate of 31%
may apply to payments made in respect of the MITTS Securities to registered
owners who are not "exempt recipients" and who fail to provide certain
identifying information (such as the registered owner's taxpayer identification
number) in the required manner. Generally, individuals are not exempt
recipients, whereas corporations and certain other entities generally are
exempt recipients. Payments made in respect of the MITTS Securities to a U.S.
Holder must be reported to the IRS, unless the U.S. Holder is an exempt
recipient or establishes an exemption. Compliance with the identification
procedures described in the preceding section would establish an exemption from
backup withholding for those non-U.S. Holders who are not exempt recipients.
In addition, upon the sale of a MITTS Security to (or through) a broker,
the broker must withhold 31% of the entire purchase price, unless either (a)
the broker determines that the seller is a corporation or other exempt
recipient or (b) the seller provides, in the required manner, certain
identifying information and, in the case of a non-U.S. Holder, certifies that
the seller is a non-U.S. Holder (and certain other conditions are met). Such a
sale must also be reported by the broker to the IRS, unless either (a) the
broker determines that the seller is an exempt recipient or (b) the seller
certifies its non-U.S. status (and certain other conditions are met).
Certification of the registered owner's non-U.S. status would be made normally
on an IRS Form W-8 under penalties of perjury, although in certain cases it may
be possible to submit other documentary evidence.
Any amounts withheld under the backup withholding rules from a payment to
a beneficial owner would be allowed as a refund or a credit against that
beneficial owner's United States Federal income tax provided that the required
information is furnished to the IRS.
New withholding regulations
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations") which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New
Regulations attempt to unify certification requirements and modify reliance
standards. The New Regulations will provide alternative methods for satisfying
the certification requirement described under "Non-U.S. Holders" above. The New
Regulations also will require, in the case of MITTS Securities held by a
foreign partnership, that (x) the certification described under "Non-U.S.
Holders" above be provided by the partners rather than by the foreign
partnership and (y) the partnership provide certain information, including a
United States taxpayer identification number. A look-through rule would apply
in the case of tiered partnerships. 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.
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<PAGE>
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and Section 4975 of the Internal Revenue Code (the "Code") prohibit
various transactions between certain parties and the assets of employee benefit
plans, unless an exemption is available; governmental plans may be subject to
similar prohibitions. Because transactions between a plan and ML&Co. may be
prohibited absent an exemption, each fiduciary, by its purchase of any MITTS
Security on behalf of any plan, represents on behalf of itself and the plan,
that the acquisition, holding and any subsequent disposition of the MITTS
Security will not result in a violation of ERISA, the Code or any other
applicable law or regulation.
USE OF PROCEEDS AND HEDGING
The net proceeds from the sale of the MITTS Securities will be used as
described under "Use of Proceeds" in the accompanying prospectus and to hedge
market risks of ML&Co. associated with its obligation to pay the principal
amount and the Supplemental Redemption Amount.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the SEC. Our
SEC filings are also available over the Internet at the SEC's web site at
http://www.sec.gov. You may also read and copy any document we file at the
SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for more information
on the public reference rooms and their copy charges. You may also inspect our
SEC reports and other information at the New York Stock Exchange, Inc., 20
Broad Street, New York, New York 10005.
We have filed a registration statement on Form S-3 with the SEC covering
the MITTS Securities and other securities. For further information on ML&Co.
and the MITTS Securities, you should refer to our registration statement and
its exhibits. The prospectus accompanying this prospectus supplement summarizes
material provisions of contracts and other documents that we refer you to.
Because the prospectus may not contain all the information that you may find
important, you should review the full text of these documents. We have included
copies of these documents as exhibits to our registration statement.
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.
S-28
<PAGE>
UNDERWRITING
The underwriters named below have each severally agreed, subject to the
terms and conditions of the underwriting agreement and a terms agreement, to
purchase from ML&Co. the principal amount of MITTS Securities set forth
opposite their respective names. The underwriting agreement provides that the
obligations of the underwriters are subject to certain conditions and that the
underwriters will be obligated to purchase all of the MITTS Securities if any
are purchased.
<TABLE>
<CAPTION>
Principal
Underwriters Amount
------------ ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated .......................................... $
A.G. Edwards & Sons, Inc. ......................................... $
Total.................................................. $
</TABLE>
The underwriters have advised ML&Co. that they propose 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 and to certain
dealers at such prices less a concession not in excess of % of the principal
amount of the MITTS Securities. The underwriters may allow, and such dealers
may reallow, a discount not in excess of % of the principal amount of the
MITTS Securities to certain dealers. After the initial public offering, the
public offering price, concession and discount may be changed. The underwriters
are offering the MITTS Securities subject to receipt and acceptance and subject
to the underwriters' right to reject any order in whole or in part. Proceeds to
be received by ML&Co. will be net of the underwriting discount and expenses
payable by ML&Co.
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 underwriters are permitted to engage in certain transactions that
stabilize the price of the MITTS Securities. These transactions consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
MITTS Securities.
If the underwriters create a short position in the MITTS Securities in
connection with the offering, i.e., if they sell more units of the MITTS
Securities than are set forth on the cover page of this prospectus supplement,
the underwriters 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 any of the underwriters 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 any of the underwriters makes any representation
that the underwriters will engage in these transactions or that these
transactions, once commenced, will not be discontinued without notice.
MLPF&S may use this prospectus supplement and the accompanying prospectus
for offers and sales related to market-making transactions in the MITTS
Securities. MLPF&S 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. by
Brown & Wood LLP, New York, New York and for the underwriters by Sullivan &
Cromwell, New York, New York.
S-29
<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
Code....................................................................... S-28
Depositary................................................................. S-16
ERISA...................................................................... S-28
Final Regulations.......................................................... S-23
Index Business Day......................................................... S-12
Market Disruption Event.................................................... S-14
MITTS Securities........................................................... S-1
ML&Co...................................................................... S-4
MLPF&S..................................................................... S-4
New Regulations............................................................ S-27
Non-U.S. Holder............................................................ S-23
Pricing Date............................................................... S-4
Principal amount........................................................... S-4
Projected Supplemental Redemption Amount................................... S-24
S&P........................................................................ S-21
S&P 500 Index.............................................................. S-6
Starting Value............................................................. S-4
Successor Index............................................................ S-15
Supplemental Redemption Amount............................................. S-4
U.S. Holder................................................................ S-22
Withholding Agent.......................................................... S-26
</TABLE>
S-30
<PAGE>
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[LOGO OF MERRILL LYNCH & CO., INC.]
2,500,000 Units
Merrill Lynch & Co., Inc.
S&P 500(R) Market Index Target-Term Securities(R)
due June , 2007
"MITTS(R) Securities"
------------------------------
PROSPECTUS SUPPLEMENT
------------------------------
Merrill Lynch & Co.
A.G. Edwards & Sons, Inc.
June , 2000
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