<PAGE>
PURSUANT TO RULE NO. 424(b)(5)
REGISTRATION NO. 333-38792
Subject to Completion
Preliminary Prospectus Supplement dated August 4, 2000
PROSPECTUS SUPPLEMENT
(To prospectus dated June 15, 2000)
[LOGO] Merrill Lynch
PROTECTED GROWTH(SM) INVESTING
Pursuit of Growth, Protection of Principal
2,500,000 Units
Merrill Lynch & Co., Inc.
Callable Market Index Target-Term Securities(R)
due August , 2007
based upon Broadband HOLDRS (SM)
"Callable MITTS(R) Securities"
$10 principal amount per unit
--------------
The Callable MITTS Securities: Payment at the stated maturity:
. 100% principal protection at . On the stated maturity date, if the
maturity. Callable MITTS Securities have not
. Callable in August 2006 at the previously been called, for each
option of Merrill Lynch & Co., Inc. unit of the Callable MITTS
. No payments before the stated Securities you own we will pay you
maturity date unless called. the principal amount of each unit
. Senior unsecured debt securities of plus an additional amount based on
Merrill Lynch & Co., Inc. the percentage increase, if any, in
. Linked to the price of Broadband the price of Broadband HOLDRS.
HOLDRS (trading symbol "BDH").
. The Callable MITTS Securities have Payment if called by Merrill Lynch &
been approved for listing on the Co., Inc.:
American Stock Exchange under the
trading symbol "BDM". . If Merrill Lynch & Co., Inc. elects
. Expected initial settlement date: in August 2006 to call your
August , 2000. Callable MITTS Securities, you will
receive an amount expected to be
between $20 and $22 per unit. The
actual amount will be determined on
the date we price the Callable
MITTS Securities for initial sale
to the public and will appear in
the final prospectus supplement.
Investing in the Callable 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 $
Underwriting discount...................................... $ $
Proceeds, before expenses, to Merrill Lynch & Co., Inc. ... $ $
</TABLE>
The public offering price and the underwriting discount for any single
transaction to purchase:
(a) between 100,000 units and 499,999 units will be $ per unit and
$ per unit, respectively and
(b) 500,000 units or more will be $ per unit and $ per unit,
respectively.
--------------
Merrill Lynch & Co.
--------------
The date of this prospectus supplement is August , 2000.
"MITTS" and "Market Index Target-Term Securities" are registered service marks
and "Protected Growth", "HOLDRS" and "Holding Company Depositary Receipts" are
service marks of Merrill Lynch & Co., Inc.
<PAGE>
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY INFORMATION--Q&A.................................................. S-4
What are the Callable MITTS Securities?................................. S-4
What will I receive on the stated maturity date of the Callable MITTS
Securities?............................................................. S-4
How does the call feature work?......................................... S-6
Will I receive interest payments on the Callable MITTS Securities?...... S-6
What is the Broadband HOLDRS Trust?..................................... S-6
How have the Broadband HOLDRS performed historically?................... S-6
What about taxes?....................................................... S-7
Will the Callable 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
The Callable MITTS Securities are subject to early call................. 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 Broadband HOLDRS or
the securities held
by the Broadband HOLDRS Trust.......................................... S-8
There may be an uncertain trading market for the Callable MITTS
Securities.............................................................. S-8
Many factors affect the trading value of the Callable 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 Callable MITTS Securities may be limited by state
law..................................................................... S-10
No stockholder's rights................................................. S-10
Purchases and sales by us and our affiliates may affect your return..... S-10
Potential conflicts..................................................... S-10
Uncertain tax consequences.............................................. S-11
Risks related to Broadband HOLDRS....................................... S-11
DESCRIPTION OF THE CALLABLE MITTS SECURITIES.............................. S-12
Payment at maturity..................................................... S-12
Early call of the Callable MITTS Securities at the option of ML&Co...... S-14
Hypothetical returns.................................................... S-15
Events of Default and Acceleration...................................... S-16
Dilution and Reorganization Adjustments................................. S-16
Depositary.............................................................. S-19
THE BROADBAND HOLDRS TRUST................................................ S-22
Historical data......................................................... S-22
UNITED STATES FEDERAL INCOME TAXATION..................................... S-23
General................................................................. S-23
U.S. Holders............................................................ S-24
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 CALLABLE MITTS SECURITIES................................. S-30
INDEX OF DEFINED TERMS.................................................... S-31
</TABLE>
S-2
<PAGE>
Prospectus
<TABLE>
<CAPTION>
Page
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<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 WARRANTS.............................................. 10
DESCRIPTION OF CURRENCY WARRANTS.......................................... 12
DESCRIPTION OF INDEX WARRANTS............................................. 14
DESCRIPTION OF PREFERRED STOCK............................................ 19
DESCRIPTION OF DEPOSITARY SHARES.......................................... 24
DESCRIPTION OF PREFERRED STOCK WARRANTS................................... 28
DESCRIPTION OF COMMON STOCK............................................... 30
DESCRIPTION OF COMMON STOCK WARRANTS...................................... 34
PLAN OF DISTRIBUTION...................................................... 36
WHERE YOU CAN FIND MORE INFORMATION....................................... 37
INCORPORATION OF INFORMATION WE FILE WITH THE SEC......................... 37
EXPERTS................................................................... 38
</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 Callable Market Index Target-Term Securities(R) due
August , 2007 based upon Broadband HOLDRS SM. You should carefully read this
prospectus supplement and the accompanying prospectus of Merrill Lynch & Co.,
Inc. to fully understand the terms of the Callable MITTS Securities and the
tax and other considerations that are important to you in making a decision
about whether to invest in the Callable MITTS Securities. You should carefully
review the "Risk Factors" section, which highlights certain risks associated
with an investment in the Callable MITTS Securities, to determine whether an
investment in the Callable 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.
"Broadband HOLDRS" are depositary receipts issued by the Broadband HOLDRS
Trust. We have attached the prospectus dated April 5, 2000 and the prospectus
supplement dated June 30, 2000 for Broadband HOLDRS (together, the "HOLDRS
Prospectus"). You should carefully read the HOLDRS Prospectus including the
section entitled "Risk Factors" to fully understand the operation and
management of the Broadband HOLDRS Trust and risks that may affect the price
of Broadband HOLDRS. The Broadband HOLDRS Trust will not receive any of the
proceeds from the sale of the Callable MITTS Securities and will not have any
obligations with respect to the Callable MITTS Securities.
We have attached the HOLDRS Prospectus and are delivering it to you
together with this prospectus supplement and the accompanying prospectus of
ML&Co. for the convenience of reference only. The HOLDRS Prospectus does not
constitute a part of this prospectus supplement or the accompanying prospectus
of ML&Co., nor is it incorporated by reference into this prospectus supplement
or into the accompanying prospectus of ML&Co.
What are the Callable MITTS Securities?
The Callable MITTS Securities will be a series of senior debt securities
issued by ML&Co. and will not be secured by collateral. The Callable MITTS
Securities will rank equally with all of our other unsecured and
unsubordinated debt. The Callable MITTS Securities will mature on August ,
2007 unless called by ML&Co. in August 2006.
Each unit of Callable MITTS Securities represents $10 principal amount of
Callable MITTS Securities. You may transfer the Callable 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 Callable 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 Callable MITTS Securities. You should refer to the section entitled
"Description of the Callable MITTS Securities--Depositary" in this prospectus
supplement.
What will I receive on the stated maturity date of the Callable MITTS
Securities?
We have designed the Callable 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 price of Broadband HOLDRS. On the stated maturity date, if we have not
called the Callable MITTS Securities, you will receive a cash payment 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.
S-4
<PAGE>
Supplemental Redemption Amount
The "Supplemental Redemption Amount" per unit will equal:
<TABLE>
<S> <C>
( Ending Value - Starting Value )
$10 X ( ----------------------------- )
( Starting Value )
</TABLE>
but will not be less than zero.
The "Starting Value" means the closing price of Broadband HOLDRS on the
date the Callable MITTS Securities are priced for initial sale to the public
(the "Pricing Date"). We will disclose the Starting Value to you in the final
prospectus supplement delivered to you in connection with sales of the Callable
MITTS Securities.
The "Ending Value" will be the average of the closing prices of Broadband
HOLDRS, as adjusted for dilution and reorganization events described in this
prospectus supplement, on five business days shortly before the maturity of the
Callable MITTS Securities. We may calculate the Ending Value by reference to
fewer than five or even a single day's closing price if, during the period
shortly before the stated maturity date of the Callable MITTS Securities, there
is a disruption in the trading of Broadband HOLDRS.
For more specific information about the Supplemental Redemption Amount,
please see the section entitled "Description of the Callable MITTS Securities"
in this prospectus supplement.
We will pay you a Supplemental Redemption Amount only if we do not call
the Callable MITTS Securities in August 2006 and the Ending Value is greater
than the Starting Value. If the Ending Value is less than, or equal to, the
Starting Value, the Supplemental Redemption Amount will be zero. We will pay
you the principal amount of your Callable MITTS Securities regardless of
whether any Supplemental Redemption Amount is payable.
Examples
Here are two examples of Supplemental Redemption Amount calculations. If
we call the Callable MITTS Securities during the Call Period, you will
receive only the Call Price and you will not be entitled to receive any
payment on the stated maturity date.
Example 1--Ending Value is less than the Starting Value on the stated maturity
date:
Hypothetical Starting Value: $86.19
Hypothetical Ending Value at maturity: $77.57
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
( 77.57 - 86.19 ) (Supplemental
Supplemental Redemption Amount (per unit) = $10 X ( ------------- ) = $0.00 Redemption amount
( 86.19 ) cannot be less
than zero)
</TABLE>
Total payment on the stated maturity date (per unit) = $10.00 + $0.00 = $10.00
Example 2--Ending Value is greater than the Starting Value on the stated
maturity date:
Hypothetical Starting Value: $86.19
Hypothetical Ending Value at maturity: $124.98
( 124.98 - 86.19 )
Supplemental Redemption Amount (per unit) = $10 X ( -------------- ) = $4.50
( 86.19 )
Total payment on the stated maturity date (per unit) = $10.00 + $4.50 = $14.50
S-5
<PAGE>
How does the call feature work?
We may elect to call the Callable MITTS Securities at an amount expected
to be between $20 per unit and $22 per unit (the "Call Price") on any Business
Day during the month of August 2006 (the "Call Period") by giving notice to the
trustee of the Callable MITTS Securities as described in this prospectus
supplement and specifying the date on which the Call Price will be paid (the
"Payment Date"). The Payment Date will be no later than the twentieth Business
Day after the call election. We will determine the Call Price on the Pricing
Date and disclose it to you in the final prospectus supplement delivered to you
in connection with sales of the Callable MITTS Securities.
If we elect to call your Callable MITTS Securities during the Call
Period, you will receive only the Call Price and you will not receive a
Supplemental Redemption Amount based on the price of Broadband HOLDRS. If we do
not call the Callable MITTS Securities during the Call Period, the principal
amount plus the Supplemental Redemption Amount, if any, that you receive at the
stated maturity date may be greater than or less than the Call Price.
Will I receive interest payments on the Callable MITTS Securities?
You will not receive any interest payments on the Callable MITTS
Securities, but will instead receive the principal amount plus the Supplemental
Redemption Amount, if any, at maturity, or the Call Price if the Callable MITTS
Securities are called during the Call Period. We have designed the Callable
MITTS Securities for investors who are willing to forego market interest
payments on the Callable 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 price of Broadband HOLDRS.
What is the Broadband HOLDRS Trust?
The Broadband HOLDRS Trust was formed under a depositary trust agreement,
dated March 22, 2000, among The Bank of New York, as trustee, MLPF&S, as the
initial depositor, other depositors and the owners of Broadband HOLDRS. The
trust is not a registered investment company under the Investment Company Act
of 1940.
The trust holds shares of common stock issued by 20 companies generally
considered to be involved in various segments of the broadband business. The
trust issues Broadband HOLDRS that represent an undivided beneficial ownership
interest in the shares of common stock held by the trust. Broadband HOLDRS are
separate from the underlying common stocks that are represented by Broadband
HOLDRS.
Broadband HOLDRS are listed on the AMEX under the trading symbol "BDH".
You should carefully read the HOLDRS Prospectus accompanying this
prospectus supplement and prospectus of ML&Co. to fully understand the
operation and management of the Broadband HOLDRS Trust. The risks described in
the HOLDRS Prospectus under the section entitled "Risk Factors" may affect the
prices of Broadband HOLDRS and, therefore, the value of the Callable MITTS
Securities. The HOLDRS Prospectus is not incorporated by reference into this
prospectus supplement or the accompanying prospectus of ML&Co., and we make no
representation or warranty as to the accuracy or completeness of the
information.
Please note that an investment in the Callable MITTS Securities does not
entitle you to an ownership interest in Broadband HOLDRS or in the stocks held
by the Broadband HOLDRS Trust.
How have the Broadband HOLDRS performed historically?
You can find a table with the monthly high and low closing prices of the
Broadband HOLDRS from April 2000 through July 2000 in the section entitled "The
Broadband HOLDRS Trust" in this prospectus supplement. We have provided this
historical information to help you evaluate the behavior of the Broadband
HOLDRS in various economic environments; however, past performance of the
Broadband HOLDRS is not necessarily indicative of how they will perform in the
future.
S-6
<PAGE>
What about taxes?
Each year, you will be required to pay taxes on ordinary income from the
Callable MITTS Securities over their term based upon an estimated yield for the
Callable MITTS Securities, even though you will not receive any payments from
us until maturity or earlier call. 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 Callable MITTS Securities. 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 Callable MITTS Security for $10 and hold the Callable
MITTS Security until maturity, you will be required to pay taxes on the
following amounts of ordinary income from the Callable MITTS Securities each
year: $ in 2000, $ in 2001, $ in 2002, $ in 2003, $ in 2004,
$ in 2005, $ in 2006 and $ in 2007. However, in 2007, if we have not
called the Callable MITTS Securities, the amount of ordinary income that you
will be required to pay taxes on from owning each Callable 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 the section entitled "United States Federal Income Taxation"
in this prospectus supplement.
Will the Callable MITTS Securities be listed on a stock exchange?
The Callable MITTS Securities have been approved for listing on the AMEX
under the trading symbol "BDM", subject to official notice of issuance. The
listing of the Callable MITTS Securities on the AMEX will not necessarily
ensure that a liquid trading market will be available for the Callable MITTS
Securities. You should review the section entitled "Risk Factors--There may be
an uncertain trading market for the Callable 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
Callable MITTS Securities. After the initial offering, MLPF&S intends to buy
and sell Callable MITTS Securities to create a secondary market for holders of
the Callable MITTS Securities, and may stabilize or maintain the market price
of the Callable MITTS Securities during the initial distribution of the
Callable MITTS Securities. However, MLPF&S will not be obligated to engage in
any of these market activities or continue them once it has started.
MLPF&S will also be our agent for purposes of calculating, among other
things, the Ending Value and the Supplemental Redemption Amount. Under certain
circumstances, these duties could result in a conflict of interest between
MLPF&S' status as a subsidiary of ML&Co. and its responsibilities as
calculation agent. In addition, MLPF&S also acted as the initial depositor for
the Broadband HOLDRS Trust and regularly makes a market in Broadband HOLDRS.
Who is ML&Co.?
Merrill Lynch & Co., Inc. is a holding company with various subsidiaries
and affiliated companies that provide investment, financing, insurance and
related services on a global basis. For information about ML&Co., see the
section entitled "Merrill Lynch & Co., Inc." in the accompanying prospectus of
ML&Co. You should also read the other documents we have filed with the SEC,
which you can find by referring to the section entitled "Where You Can Find
More Information" in this prospectus supplement.
Are there any risks associated with my investment?
Yes, an investment in the Callable MITTS Securities is subject to risk.
Please refer to the section entitled "Risk Factors" in this prospectus
supplement.
S-7
<PAGE>
RISK FACTORS
Your investment in the Callable MITTS Securities will involve risks. You
should carefully consider the following discussion of risks before deciding
whether an investment in the Callable MITTS Securities is suitable for you.
You may not earn a return on your investment
You should be aware that if the Ending Value does not exceed the Starting
Value, the Supplemental Redemption Amount will be zero. This will be true even
if the price of Broadband HOLDRS was higher than the Starting Value at some
time during the life of the Callable MITTS Securities but later falls to or
below the Starting Value. If the Supplemental Redemption Amount is zero and the
Callable MITTS Securities are not called by us prior to the stated maturity
date, we will pay you only the principal amount of your Callable MITTS
Securities.
The Callable MITTS Securities are subject to early call
We may elect to call all of the Callable MITTS Securities by giving
notice on any Business Day during the Call Period. We are likely to call the
Callable MITTS Securities during the Call Period if the secondary market price
of the Callable MITTS Securities is approximately equal to or above the Call
Price during that period. In the event that we elect to call the Callable MITTS
Securities, you will receive only the Call Price and no Supplemental Redemption
Amount based on the trading price of Broadband HOLDRS.
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 Broadband HOLDRS or the
securities held by the Broadband HOLDRS Trust
The return on your Callable MITTS Securities will not reflect the return
you would realize if you actually owned Broadband HOLDRS and received cash
distributions, if any, paid on Broadband HOLDRS because the price of Broadband
HOLDRS is calculated without taking into consideration the value of any normal
cash distributions paid on Broadband HOLDRS. In addition, if Callable MITTS
Securities are called during the Call Period, you will receive only the Call
Price and you will not receive any additional amount based upon the
appreciation, if any, in the price of Broadband HOLDRS.
There may be an uncertain trading market for the Callable MITTS Securities
The Callable MITTS Securities have been approved for listing on the AMEX
under the trading symbol "BDM", subject to official notice of issuance. While
there have been a number of issuances of series of Market Index Target-Term
Securities, trading volumes have varied historically from one series to another
and it is therefore impossible to predict how the Callable MITTS Securities
will trade. You cannot assume that a trading market will develop for the
Callable 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 Callable MITTS Securities will depend on our
financial performance and other factors such as the increase, if any, in the
price of Broadband HOLDRS.
S-8
<PAGE>
If the trading market for the Callable MITTS Securities is limited, there
may be a limited number of buyers for your Callable 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 Callable 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 Callable 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 Callable MITTS Securities caused by another factor and that the effect of
one factor may exacerbate the decrease in the trading value of the Callable
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 Callable MITTS Securities attributable to another factor, such as an
increase in the price of Broadband HOLDRS. The following paragraphs describe
the expected impact on the market value of the Callable MITTS Securities given
a change in a specific factor, assuming all other conditions remain constant.
The price of Broadband HOLDRS is expected to affect the trading value of
the Callable MITTS Securities. We expect that the market value of the Callable
MITTS Securities will depend substantially on the amount, if any, by which the
price of Broadband HOLDRS, as adjusted for certain dilution and reorganization
events described in this prospectus supplement, exceeds the Starting Value. If
you choose to sell your Callable MITTS Securities when the price of Broadband
HOLDRS exceeds the Starting Value, you may receive substantially less than the
amount that would be payable at maturity based on that price because of the
expectation that the price of Broadband HOLDRS will continue to fluctuate until
the Ending Value is determined. If you choose to sell your Callable MITTS
Securities when the price of Broadband HOLDRS is below, or not sufficiently
above, the Starting Value, you may receive less than the $10 principal amount
per unit of Callable MITTS Securities.
Changes in the levels of interest rates are expected to affect the
trading value of the Callable MITTS Securities. Because we will pay, at a
minimum, the principal amount per unit of Callable MITTS Securities at
maturity, we expect that changes in interest rates will affect the trading
value of the Callable MITTS Securities. In general, if U.S. interest rates
increase, we expect that the trading value of the Callable MITTS Securities
will decrease and, conversely, if U.S. interest rates decrease, we expect that
the trading value of the Callable MITTS Securities will increase. Rising
interest rates may lower the price of the Broadband HOLDRS and, thus, the
Callable MITTS Securities. Falling interest rates may increase the price of the
Broadband HOLDRS and, thus, may increase the value of the Callable MITTS
Securities.
Changes in the volatility of Broadband HOLDRS are expected to affect the
trading value of the Callable MITTS Securities. Volatility is the term used to
describe the size and frequency of price and/or market fluctuations. If the
volatility of Broadband HOLDRS increases or decreases, the trading value of the
Callable MITTS Securities may be adversely affected.
As the time remaining to maturity of the Callable MITTS Securities
decreases, the "time premium" associated with the Callable MITTS Securities
will decrease. We anticipate that before their maturity, the Callable MITTS
Securities may trade at a value above that which would be expected based on the
level of interest rates and the price of Broadband HOLDRS. This difference will
reflect a "time premium" due to expectations concerning the price of Broadband
HOLDRS during the period before the stated maturity of the Callable MITTS
Securities. However, as the time remaining to the stated maturity of the
Callable MITTS Securities decreases, we expect that this time premium will
decrease, lowering the trading value of the Callable MITTS Securities.
Changes in dividend yields of the stocks held by the Broadband HOLDRS
Trust are expected to affect the trading value of the Callable MITTS
Securities. If the dividend yields on the stocks held by the
S-9
<PAGE>
Broadband HOLDRS Trust increase, we expect that the value of the Callable MITTS
Securities will decrease and, conversely, if the dividend yields on the stocks
held by the Broadband HOLDRS Trust decrease, we expect that the value of the
Callable MITTS Securities will increase.
Changes in our credit ratings may affect the trading value of the
Callable 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 Callable MITTS Securities. However,
because your return on your Callable MITTS Securities is dependent upon factors
in addition to our ability to pay our obligations under the Callable MITTS
Securities, such as the percentage increase, if any, in the price of Broadband
HOLDRS at maturity, an improvement in our credit ratings will not reduce the
other investment risks related to the Callable MITTS Securities.
In general, assuming all relevant factors are held constant, we expect
that the effect on the trading value of the Callable 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 Callable MITTS Securities than if it occurs earlier in
the term of the Callable MITTS Securities. However, we expect that the effect
on the trading value of the Callable MITTS Securities of a given change in the
price of Broadband HOLDRS will be greater if it occurs later in the term of the
Callable MITTS Securities than if it occurs earlier in the term of the Callable
MITTS Securities.
Amounts payable on the Callable MITTS Securities may be limited by state law
New York State law governs the 1983 Indenture under which the Callable
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 Callable 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 promise, for the benefit of the holders of the Callable MITTS
Securities, to the extent permitted by law, not to voluntarily claim the
benefits of any laws concerning usurious rates of interest.
No stockholder's rights
Beneficial owners of the Callable MITTS Securities will not be entitled
to any rights in Broadband HOLDRS including, for example, voting rights and
rights to receive any cash or other distributions and rights to cancel
Broadband HOLDRS and receive the underlying securities.
Purchases and sales by us and our affiliates may affect your return
We and our affiliates may from time to time buy or sell Broadband HOLDRS
or stocks of the companies held by the Broadband HOLDRS Trust for our own
accounts, for business reasons or in connection with hedging our obligations
under the Callable MITTS Securities. These transactions could affect the price
of Broadband HOLDRS in a manner that could be adverse to your investment in the
Callable MITTS Securities.
Potential conflicts
Our subsidiary MLPF&S is our agent for the purposes of calculating the
Ending Value and the Supplemental Redemption Amount. Under certain
circumstances, MLPF&S' role as our subsidiary and its responsibilities as
calculation agent for the Callable MITTS Securities could give rise to
conflicts of interests. MLPF&S is required to carry out its duties as
calculation agent in good faith and using its reasonable
S-10
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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. This subsidiary expects to make a profit in connection with this
arrangement. We did not seek competitive bids for this arrangement from
unaffiliated parties.
Uncertain tax consequences
You should consider the tax consequences of investing in the Callable
MITTS Securities, aspects of which are uncertain. See the section entitled
"United States Federal Income Taxation" in this prospectus supplement.
Risks related to Broadband HOLDRS
Broadband HOLDRS are subject to various risks which are described under
the section entitled "Risk Factors" in the HOLDRS Prospectus. Any loss of value
to Broadband HOLDRS attributable to such risks would adversely affect the value
of the Callable MITTS Securities. You should carefully consider those risks
before deciding whether an investment in the Callable MITTS Securities is
suitable for you.
S-11
<PAGE>
DESCRIPTION OF THE CALLABLE MITTS SECURITIES
ML&Co. will issue the Callable MITTS Securities as a series of senior
debt securities under the 1983 Indenture, which is more fully described in the
accompanying prospectus. Unless called by ML&Co. during the Call Period, the
Callable MITTS Securities will mature on August , 2007.
Unless the Callable MITTS Securities are called during the Call Period,
at the stated maturity a beneficial owner of a Callable MITTS Security will
receive the sum of the principal amount of the Callable MITTS Security plus the
Supplemental Redemption Amount, if any. There will be no payment of interest,
periodic or otherwise. See the section entitled "--Payment at maturity".
The Callable MITTS Securities may be called by ML&Co. as described below,
but are not subject to redemption at the option of any beneficial owner before
maturity. If an Event of Default occurs with respect to the Callable MITTS
Securities, registered owners of the Callable MITTS Securities may accelerate
the maturity of the Callable MITTS Securities, as described under the sections
entitled "--Events of Default and Acceleration" in this prospectus supplement
and "Description of Debt Securities--Events of Default" in the accompanying
prospectus of ML&Co.
ML&Co. will issue the Callable MITTS Securities in denominations of whole
units, each with a principal amount of $10.00.
The Callable MITTS Securities will not have the benefit of any sinking
fund.
Payment at maturity
If we do not call the Callable MITTS Securities during the Call Period, a
beneficial owner of a Callable MITTS Security will be entitled to receive, at
the stated maturity, the principal amount of each Callable MITTS Security plus
the Supplemental Redemption Amount, if any, all as provided below. If the
Ending Value does not exceed the Starting Value, a beneficial owner of a
Callable MITTS Security will be entitled to receive only the principal amount
of the Callable MITTS Security.
Determination of the Supplemental Redemption Amount
The "Supplemental Redemption Amount" for a Callable MITTS Security will
be determined by the calculation agent and will equal:
<TABLE>
<S> <C> <C>
( Ending Value - Starting Value )
Principal amount of each Callable 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 Price of one Broadband HOLDR on
the Pricing Date. We will disclose the Starting Value in the final prospectus
supplement delivered to you in connection with the sale of the Callable MITTS
Securities.
The "Ending Value" will be determined by the calculation agent and will
equal the value of the Reference Property determined as follows:
(A) for any portion of the Reference Property consisting of cash:
. that cash, plus
. interest on the amount accruing from and including the date of the
payment of that cash to holders of the Reference Property for
which that cash was paid to but excluding the stated
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maturity date at a fixed interest rate determined on the date of
the payment equal to the interest rate that would be paid on a
fixed rate senior non- callable debt security of ML&Co. with a
term approximately equal to the remaining term for the Callable
MITTS Securities as determined by the calculation agent;
(B) for any portion of the Reference Property consisting of property
other than cash or Reference Securities:
. the market value of that property, as determined by the
calculation agent on the date that the property was delivered to
holders of the relevant Reference Property for which the property
was distributed, plus
. interest on the amount accruing from and including the date of
delivery to but excluding the stated maturity date at a fixed
interest rate determined as described in (A) above; and
(C) for any portion of the Reference Property consisting of Reference
Securities, the average or arithmetic mean, of the Closing Prices of
each such Reference Security determined on each of the first five
Calculation Days during the Calculation Period. If there are fewer
than five Calculation Days in the Calculation Period with respect to
any Reference Security, then the Ending Value shall be calculated
using the average, arithmetic mean, of the Closing Prices of that
Reference Security on those Calculation Days, and if there is only
one Calculation Day, then the Ending Value shall be calculated using
the Closing Price of that Reference Security on such Calculation
Day. If no Calculation Days occur during the Calculation Period with
respect to that Reference Security, then the Ending Value shall be
calculated using the Closing Price of that Reference Security
determined on the last scheduled Trading Day in the Calculation
Period, regardless of the occurrence of a Market Disruption Event on
that day.
"Reference Property" initially shall mean one Broadband HOLDR, and shall
be subject to adjustment from time to time to reflect the distribution of cash,
securities and/or other property in accordance with the adjustment provisions
described below under "--Dilution and Reorganization Adjustments".
"Reference Securities" shall mean any securities included in the
Reference Property.
The "Calculation Period" means the period from and including the seventh
scheduled Trading Day prior to the stated maturity date to and including the
second scheduled Trading Day prior to the stated maturity date.
"Calculation Day" means, with respect to any Reference Security, any
Trading Day during the Calculation Period on which a Market Disruption Event
has not occurred.
"Market Disruption Event" means, for any Reference Security, the
occurrence or existence on any Trading Day during the one-half hour period that
ends when the Closing Price is determined, of any suspension of, or limitation
imposed on, trading in that Reference Security on the New York Stock Exchange,
or other market or exchange, if applicable.
"Trading Day" means a day on which the AMEX, the NYSE and the NASDAQ
National Market System ("NASDAQ NMS") are open for trading.
"Closing Price" of a Reference Security means, for a Calculation Day, the
following:
(a) If the Reference Security is listed on a national securities
exchange in the United States, is a NASDAQ NMS security or is
included in the OTC Bulletin Board Service ("OTC Bulletin Board")
operated by the National Association of Securities Dealers, Inc.
(the "NASD"), Closing Price means:
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(i) the last reported sale price, regular way, on that day on the
principal United States securities exchange registered under
the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), on which that Reference Security is listed or admitted
to trading, or
(ii) if not listed or admitted to trading on any such securities
exchange or if the last reported sale price is not obtainable,
the last reported sale price on the over-the-counter market as
reported on the NASDAQ NMS or OTC Bulletin Board on that day,
or
(iii) if the last reported sale price is not available pursuant to
(i) and (ii) above, the mean of the last reported bid and offer
price on the over-the-counter market as reported on the NASDAQ
NMS or OTC Bulletin Board on that day as determined by the
calculation agent.
The term "NASDAQ NMS security" shall include a security included in any
successor to that system, and the term "OTC Bulletin Board" shall include any
successor service to that service.
(b) If the Reference Security is not listed on a national securities
exchange in the United States or is not a NASDAQ NMS security or
included in the OTC Bulletin Board operated by the NASD, Closing
Price means the last reported sale price on that day on the
securities exchange on which the Reference Security is listed or
admitted to trading with the greatest volume of trading for the
calendar month preceding that day as determined by the calculation
agent, provided that if the last reported sale price is for a
transaction which occurred more than four hours prior to the close
of that exchange, then the Closing Price shall mean the average,
mean, of the last available bid and offer price on that exchange. If
the Reference Security is not listed or admitted to trading on any
such securities exchange or if the last reported sale price or bid
and offer are not obtainable, the Closing Price shall mean the last
reported sale price for a transaction which occurred more than four
hours prior to when trading in such over-the-counter market
typically ends, then the Closing Price shall mean the average, mean,
of the last available bid and offer prices in such market of the
three dealers which have the highest volume of transactions in the
Reference Security in the immediately preceding calendar month as
determined by the calculation agent based on information that is
reasonably available to it.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
that is not a day on which banking institutions in The City of New York are
authorized or obligated by law to close and that is a day on which the NYSE,
the NASDAQ NMS and the AMEX are open for trading.
All determinations made by the calculation agent shall be at the sole
discretion of the calculation agent and, absent a manifest error, shall be
conclusive for all purposes and binding on ML&Co. and the Holders and
beneficial owners of the Callable MITTS Securities.
Early call of the Callable MITTS Securities at the option of ML&Co.
During the Call Period, the month of August 2006, ML&Co., in its sole
discretion, may elect to call the Callable MITTS Securities, in whole but not
in part, at the Call Price, by giving notice to the trustee on any Business
Day. The Call Price is expected to be between $20 per unit and $22 per unit. We
will determine the Call Price on the Pricing Date and it will appear in the
final prospectus supplement delivered to you in connection with sales of the
Callable MITTS Securities.
If we elect to call your Callable MITTS Securities during the Call
Period, you will receive only the Call Price and you will not receive a
Supplemental Redemption Amount based on the price of Broadband HOLDRS. If we do
not call the Callable MITTS Securities, the principal amount plus the
Supplemental Redemption Amount, if any, that you receive at the stated maturity
may be greater than or less than the Call Price. ML&Co. may elect to call the
Callable MITTS Securities on any Business Day during the Call Period by giving
notice to the trustee and specifying the date on which the Call Price shall be
paid. The Payment Date
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shall be no later than the twentieth Business Day after the call election. The
trustee will provide notice of the call election to the registered holders of
the Callable MITTS Securities, specifying the Payment Date, no less than 15
calendar days prior to the Payment Date. While the Callable MITTS Securities
are held at the depositary, the registered holder will be the depositary, and
the depositary will receive the notice of the call. As more fully described
below under "--Depositary", the depositary will forward this notice to its
participants which will pass it onto the beneficial owners.
You should compare the features of the Callable MITTS Securities to other
available investments before deciding to purchase the Callable MITTS
Securities. Due to the uncertainty as to whether the Callable MITTS Securities
will earn a Supplemental Redemption Amount or be called during the Call
Period, the return on investment with respect to the Callable MITTS Securities
may be higher or lower than the return available on other securities issued by
ML&Co. or issued by others. We suggest that you reach an investment decision
only after carefully considering the suitability of the Callable MITTS
Securities in light of your particular circumstances. See the section entitled
"United States Federal Income Taxation".
Hypothetical returns
The following table illustrates, for a range of hypothetical Ending
Values during the Calculation Period:
. the percentage change from the hypothetical Starting Value to the
hypothetical Ending Value,
. the total amount payable at maturity for each unit of Callable
MITTS Securities,
. the total rate of return to beneficial owners of the Callable
MITTS Securities,
. the pretax annualized rate of return to the beneficial owners of
the Callable MITTS Securities, and
. pretax annualized rate of return of an investment in Broadband
HOLDRS.
The table also assumes we do not call the Callable MITTS Securities prior
to the stated maturity date.
<TABLE>
<CAPTION>
Percentage change Total amount Pretax
from the payable at annualized Pretax
hypothetical maturity per Total rate of rate of return annualized rate
Starting Value to unit of the return on the on the of return on
Hypothetical the hypothetical Callable Callable MITTS Callable MITTS Broadband
Ending Value Ending Value MITTS Securities Securities Securities(1) HOLDRS(1)(2)
------------ ----------------- ---------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
17.24 -80% 10.00 0.00% 0.00% -21.70%
34.48 -60% 10.00 0.00% 0.00% -12.65%
51.71 -40% 10.00 0.00% 0.00% -7.15%
68.95 -20% 10.00 0.00% 0.00% -3.15%
86.19(3) 0% 10.00 0.00% 0.00% 0.02%
103.43 20% 12.00 20.00% 2.62% 2.64%
120.66 40% 14.00 40.00% 4.86% 4.88%
137.90 60% 16.00 60.00% 6.83% 6.85%
155.14 80% 18.00 80.00% 8.57% 8.59%
172.38 100% 20.00 100.00% 10.15% 10.17%
189.61 120% 22.00 120.00% 11.58% 11.61%
206.85 140% 24.00 140.00% 12.90% 12.93%
224.09 160% 26.00 160.00% 14.12% 14.15%
</TABLE>
-------
(1) The annualized rates of return specified in the preceding table are
calculated on a semiannual bond equivalent basis.
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<PAGE>
(2) This rate of return assumes:
(a) a dividend yield of 0.02% per annum;
(b) no transaction fees or expenses;
(c) an investment term of seven years; and
(d) a percentage change in the aggregate price of Broadband HOLDRS, as
adjusted for any dilution or reorganization events described below,
that equals the percentage change from the hypothetical Starting
Value to the relevant hypothetical Ending Value.
(3) This is the hypothetical Starting Value.
The above figures are for purposes of illustration only. The actual
Supplemental Redemption Amount received by you and the resulting total and
pretax annualized rates of return will depend entirely on the actual Starting
Value and Ending Value determined by the calculation agent as provided in this
prospectus supplement.
Events of Default and Acceleration
In case an Event of Default with respect to any Callable MITTS Securities
has occurred and is continuing, the amount payable to a beneficial owner of a
Callable MITTS Security upon any acceleration permitted by the Callable MITTS
Securities, with respect to each $10 principal amount of the Callable MITTS
Securities, will be equal to the principal amount and the Supplemental
Redemption Amount, if any, calculated as though the date of early repayment was
the stated maturity date of the Callable MITTS Securities, provided, however,
if the acceleration occurs before the end of the Call Period, the maximum
amount payable with respect to each Callable MITTS Security will be the Call
Price. If a bankruptcy proceeding is commenced in respect of ML&Co., the claim
of the beneficial owner of a Callable MITTS Security may be limited, under
Section 502(b)(2) of Title 11 of the United States Code, to the principal
amount of the Callable 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 Callable MITTS Securities.
In case of default in payment of the Callable MITTS Securities, whether
at the stated maturity or upon acceleration, from and after the maturity date
the Callable MITTS Securities will bear interest, payable upon demand of their
beneficial owners, at the rate of % per annum, to the extent that payment of
any interest is legally enforceable, on the unpaid amount due and payable on
that date in accordance with the terms of the Callable MITTS Securities to the
date payment of that amount has been made or duly provided for.
Dilution and Reorganization Adjustments
The Reference Property is subject to adjustment if an issuer of any
Reference Security shall:
(i) pay a stock dividend or make a distribution on that Reference
Security in Reference Securities;
(ii) subdivide or split the outstanding units of that Reference
Security into a greater number of units;
(iii) combine the outstanding units of that Reference Security into a
smaller number of units;
(iv) issue by reclassification of units of that Reference Security any
units of another security of that issuer;
(v) issue rights or warrants to all holders of that Reference Security
entitling them to subscribe for or purchase shares, in the
aggregate, for more than 5% of the number of those Reference
Securities outstanding prior to the issuance of the rights or
warrants at a price per share less than the then current market
price of that Reference Security (other than rights to purchase
that Reference Security pursuant to a plan for the reinvestment of
dividends or interest); or
S-16
<PAGE>
(vi) pay a dividend or make a distribution to all holders of that
Reference Security of evidences of its indebtedness or other
assets:
. including in the case where the Reference Security is Broadband
HOLDRS, any of the securities underlying Broadband HOLDRS that may
be distributed by the Broadband HOLDRS Trust, but,
. excluding any stock dividends or distributions referred to in
clause (i) above or any cash dividends other than any
Extraordinary Cash Dividend or issuance to all holders of that
Reference Security of rights or warrants to subscribe for or
purchase any of its securities (other than those referred to in
clause (v) above) (any of the foregoing assets are referred to as
the "Distributed Assets" and any of the foregoing events are
referred to as the "Dilution Events").
For purposes of provision (vi) above, if the holder of a Reference Security can
elect to receive securities in lieu of cash or property other than securities,
then for purposes of provision (vi) above, the holders of the Reference
Security shall be deemed to receive only the securities.
In the case of the Dilution Events referred to in clauses (i), (ii),
(iii) and (iv) above, the Reference Property shall be adjusted to include the
number of units of the Reference Security and/or security of that issuer which
a holder of Reference Property as constituted immediately prior to the Dilution
Event would have owned or been entitled to receive as a result of that Dilution
Event. Each adjustment shall become effective immediately after the effective
date for the dividend, distribution subdivision, split, combination or
reclassification, as the case may be. Each adjustment shall be made
successively.
In the case of the Dilution Event referred to in clause (v) above, the
Reference Property shall be adjusted by multiplying the number of Reference
Securities constituting Reference Property immediately prior to the date of
issuance of the rights or warrants referred to in clause (v) above by a
fraction:
. the numerator of which shall be the number of Reference Securities
outstanding on the date immediately prior to such issuance, plus the
number of additional Reference Securities offered for subscription or
purchase pursuant to the rights or warrants, and
. the denominator of which shall be the number of Reference Securities
outstanding on the date immediately prior to such issuance, plus the
number of additional Reference Securities which the aggregate
offering price of the total number of Reference Securities so offered
for subscription or purchase pursuant to the rights or warrants would
purchase at the current market price, determined as the average
Closing Price per Reference Security for the 20 Trading Days
immediately prior to the date of such rights or warrants are issued,
subject to certain adjustments, which shall be determined by
multiplying such total number of Reference Securities by the exercise
price of the rights or warrants and dividing the product so obtained
by the current market price.
To the extent that the rights or warrants are not exercised before they expire,
or if the rights or warrants are not issued, the Reference Property shall be
readjusted to the Reference Property which would then be in effect had such
adjustments for the issuance of the rights or warrants been made upon the basis
of delivery of only the number of Reference Securities actually delivered under
the rights or warrants.
In the case of the Dilution Event referred to in clause (vi) above, the
Reference Property shall be adjusted to include, from and after the dividend,
distribution or issuance,
. for the portion of the Distributed Assets consisting of cash, the
amount of such Distributed Assets consisting of cash received on
Reference Property as constituted on the date of the dividend,
distribution or issuance, plus
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<PAGE>
. for the portion of the Distributed Assets which are other than cash,
the number or amount of each type of Distributed Assets other than
cash received on Reference Property as constituted on the date of the
dividend, distribution or issuance.
An "Extraordinary Cash Dividend" means, with respect to any consecutive
12-month period, the amount, if any, by which the aggregate amount of all cash
dividends or any other distribution made by the issuer of a Reference Security
or made pursuant to an arrangement effecting a distribution of distributable
profits or reserves, whether in cash or in specie, on any Reference Security
occurring in such 12-month period (or, if the Reference Security was not
outstanding at the commencement of such 12-month period or was not then a part
of the Reference Property, occurring in such shorter period during which such
Reference Security was outstanding and was part of the Reference Property)
exceeds on a per share basis 10% of the average of the Closing Prices per share
of such Reference Security over such 12-month period (or shorter period during
which such Reference Security was outstanding and was part of the Reference
Property); provided that, for purposes of the foregoing definition, the amount
of cash dividends paid on a per share basis will be appropriately adjusted to
reflect the occurrence during such period of any stock dividend or distribution
of shares of capital stock of the issuer of such Reference Security or any
subdivision, split, combination or reclassification of shares of such Reference
Security.
If the Reference Security is Broadband HOLDRS, the determination as to
whether any cash dividend on such Broadband HOLDRS is an Extraordinary Cash
Dividend shall be made,
. by examining which of the stocks underlying Broadband HOLDRS is
responsible for all or a portion of such cash dividend or
distribution on Broadband HOLDRS, and
. treating each such stock underlying Broadband HOLDRS as if it were a
Reference Security only for this purpose and then determining whether
such cash dividend would be an Extraordinary Cash Dividend as defined
above with respect to such deemed Reference Security.
A "Reorganization Event" shall mean:
. any consolidation or merger of an issuer of a Reference Security, or
any surviving entity or subsequent surviving entity of that issuer (a
"Successor Company"), with or into another entity, other than a
merger or consolidation in which such issuer is the continuing
corporation and in which the Reference Security outstanding
immediately prior to the merger or consolidation is not exchanged for
cash, securities or other property of such issuer or another
corporation;
. any sale, transfer, lease or conveyance to another corporation of the
property of an issuer of a Reference Security or any Successor
Company as an entirety or substantially as an entirety;
. any statutory exchange of securities of an issuer of a Reference
Security or any Successor Company with another corporation, other
than in connection with a merger or acquisition; or
. any liquidation, dissolution, winding up or bankruptcy of an issuer
of a Reference Security or any Successor Company.
If a Reorganization Event occurs, the Reference Property shall include:
. for any cash received in that Reorganization Event, the cash received
by a holder of the Reference Property as constituted on the date of
the Reorganization Event;
. for any property other than cash or securities received in that
Reorganization Event, the property received by a holder of the
Reference Property as constituted on the date of the Reorganization
Event as determined by the calculation agent; and
. for any securities received in that Reorganization Event, the
securities received by a holder of the Reference Property as
constituted on the date of the Reorganization Event (subject to
adjustment on a basis consistent with the adjustment provisions
described above).
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<PAGE>
All adjustments will be calculated to the nearest 1/10,000th of a share
of the Reference Security, or if there is not a nearest 1/10,000th of a share,
to the next lower 1/10,000th of a share. No adjustment shall be required unless
that adjustment would require an increase or decrease of at least one percent
in the Closing Price; provided, however, that any adjustments which by reason
of the foregoing are not required to be made shall be carried forward and taken
into account in any subsequent adjustment.
The foregoing adjustments shall be made by MLPF&S, as calculation agent,
and all adjustments, absent a manifest error, shall be final.
ML&Co. will, within ten Business Days following the occurrence of an
event that requires an adjustment, or if ML&Co. is not aware of such
occurrence, as soon as practicable after becoming so aware, provide written
notice to the trustee, which shall provide notice to the holders of the
Callable MITTS Securities of the occurrence of the event and, if applicable, a
statement in reasonable detail setting forth the adjusted Closing Price to be
used in determining the Ending Value.
Depositary
Description of the Global Securities
Upon issuance, all Callable 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
Callable 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 Callable MITTS Securities represented by the global
security for all purposes under the 1983 Indenture. Except as provided below,
the beneficial owners of the Callable MITTS Securities represented by a global
security will not be entitled to have the Callable MITTS Securities registered
in their names, will not receive or be entitled to receive physical delivery of
the Callable MITTS Securities in definitive form and will not be considered the
owners or holders of the Callable 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 Callable MITTS Securities.
The Callable MITTS Securities will be issued as fully registered securities
registered in the name of Cede & Co., DTC's partnership
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<PAGE>
nominee. One or more fully registered global securities will be issued for the
Callable 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 Exchange
Act. DTC holds securities that its participants deposit with DTC. DTC also
facilitates the settlement among participants of securities transactions, such
as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct participants
of DTC include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. DTC is owned by a number of its
direct participants and by the NYSE, the AMEX, and the National Association of
Securities Dealers, Inc. Access to 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 Callable MITTS Securities under DTC's system must be
made by or through direct participants, which will receive a credit for the
Callable 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 Callable MITTS Securities are to be made by entries on the
books of participants acting on behalf of beneficial owners.
To facilitate subsequent transfers, all Callable MITTS Securities
deposited with DTC are registered in the name of DTC's partnership nominee,
Cede & Co. The deposit of Callable 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 Callable
MITTS Securities; DTC's records reflect only the identity of the direct
participants to whose accounts the Callable 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
Callable 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 Callable MITTS Securities are credited on the record date.
Principal, premium, if any, and/or interest, if any, payments made in
cash on the Callable 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
S-20
<PAGE>
regulatory requirements as may be in effect from time to time. Payment of
principal, premium, if any, and/or interest, if any, to DTC is the
responsibility of ML&Co. or the trustee, disbursement of those payments to
direct participants will be the responsibility of DTC, and disbursement of
those payments to the beneficial owners will be the responsibility of direct
participants and indirect participants.
Exchange for Certificated Securities
If:
. the depositary is at any time unwilling or unable to continue as
depositary and a successor depositary is not appointed by ML&Co.
within 60 days,
. ML&Co. executes and delivers to the trustee a company order to the
effect that the global securities shall be exchangeable, or
. an Event of Default under the 1983 Indenture has occurred and is
continuing with respect to the Callable MITTS Securities,
the global securities will be exchangeable for Callable 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 Callable
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 Callable 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, Callable 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,
Callable 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 Callable 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 Callable MITTS Securities are maintained in
book-entry form.
S-21
<PAGE>
THE BROADBAND HOLDRS TRUST
ML&Co. has attached the HOLDRS Prospectus describing the Broadband HOLDRS
Trust and is delivering it to purchasers of the Callable MITTS Securities
together with this prospectus supplement and the accompanying prospectus of
ML&Co. for the convenience of reference only. The HOLDRS Prospectus does not
constitute a part of this prospectus supplement or the accompanying prospectus
of ML&Co., nor is it incorporated by reference into this prospectus supplement
or the accompanying prospectus of ML&Co. The summary description below is
qualified in its entirety by the information describing the Broadband HOLDRS
Trust and the securities held by the Trust included in the attached HOLDRS
Prospectus.
The Broadband HOLDRS Trust was formed under a depositary trust agreement,
dated as of March 22, 2000, among The Bank of New York, as trustee, MLPF&S, as
the initial depositor, other depositors and the owners of Broadband HOLDRS. The
trust is not a registered investment company under the Investment Company Act
of 1940.
The trust holds shares of common stock issued by 20 companies generally
considered to be involved in various segments of the broadband business. The
trust issues Broadband HOLDRS that represent an undivided beneficial ownership
interest in the shares of common stock held by the trust. Broadband HOLDRS are
separate from the underlying common stocks that are represented by Broadband
HOLDRS.
Broadband HOLDRS are listed on the AMEX under the trading symbol "BDH".
You should carefully read the HOLDRS Prospectus accompanying this
prospectus supplement and prospectus of ML&Co. to fully understand the
operation and management of the Broadband HOLDRS Trust. Neither the HOLDRS
Prospectus nor these other documents are incorporated by reference into this
prospectus supplement, and we make no representation or warranty as to the
accuracy or completeness of the information.
Historical data
Broadband HOLDRS are principally traded on the AMEX. The following table
sets forth the monthly high and low closing prices of Broadband HOLDRS from
April 2000 through July 2000. On August 2, 2000, the last recorded transaction
price on the AMEX of Broadband HOLDRS was $86 3/16 per share. The historical
closing prices of Broadband HOLDRS should not be taken as an indication of
future performance, and no assurance can be given that the price of Broadband
HOLDRS will not decrease.
<TABLE>
<CAPTION>
High Low
2000 ---- ---
<S> <C> <C>
April.................................................. 98 1/2 70 1/2
May.................................................... 88 11/16 70 3/8
June................................................... 92 1/8 81 5/16
July................................................... 103 1/8 85 3/4
</TABLE>
S-22
<PAGE>
UNITED STATES FEDERAL INCOME TAXATION
Set forth in full below is the opinion of Brown & Wood LLP, counsel to
ML&Co., as to certain United States Federal income tax consequences of the
purchase, ownership and disposition of the Callable 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 Callable 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 Callable MITTS Securities in a tax-deferred or tax-
advantaged account, or persons holding Callable 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 Callable MITTS Securities, as determined for United
States Federal income tax purposes, equals the principal amount thereof.
Persons considering the purchase of the Callable 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 Callable 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 Callable MITTS Security that is for United States Federal
income tax purposes (a) a citizen or resident of the United States, (b) a
corporation, partnership or other entity treated as a corporation or a
partnership created or organized in or under the laws of the United States, any
state thereof or the District of Columbia (other than a partnership that 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 Callable 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 herein, the term "non-U.S. Holder"
means a beneficial owner of a Callable 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 Callable MITTS Securities or
securities with terms substantially the same as the Callable MITTS Securities.
However, although the matter is not free from doubt, under current law, each
Callable 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 Callable 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 Callable MITTS
Securities. Prospective investors in the Callable MITTS Securities should be
aware, however, that the IRS is not bound by ML&Co.'s characterization of the
Callable MITTS Securities as indebtedness, and the IRS could possibly take a
different position as to the proper characterization of the Callable 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 Callable MITTS Securities is
based upon the assumption that each Callable MITTS Security will be treated as
a debt instrument of ML&Co. for United States Federal income tax
S-23
<PAGE>
purposes. If the Callable 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 Callable 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 Callable MITTS Security could differ from
the timing and character of income, gain or loss recognized in respect of a
Callable MITTS Security had the Callable 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 Callable MITTS
Securities, which apply to debt instruments issued on or after August 13, 1996
and, accordingly, will apply to the Callable MITTS Securities. In general, the
Final Regulations cause the timing and character of income, gain or loss
reported on a contingent payment debt instrument to substantially differ from
the timing and character of income, gain or loss reported on a contingent
payment debt instrument under general principles of prior United States Federal
income tax law. Specifically, the Final Regulations generally require a U.S.
Holder of such an instrument to include future contingent and noncontingent
interest payments in income as that interest accrues based upon a projected
payment schedule. Moreover, in general, under the Final Regulations, any gain
recognized by a U.S. Holder on the sale, exchange, or retirement of a
contingent payment debt instrument is treated as ordinary income, and all or a
portion of any loss realized could be treated as ordinary loss as opposed to
capital loss (depending upon the circumstances). The Final Regulations provide
no definitive guidance as to whether or not an instrument is properly
characterized as a debt instrument for United States Federal income tax
purposes.
In particular, solely for purposes of applying the Final Regulations to
the Callable MITTS Securities, ML&Co. has determined that the projected payment
schedule for the Callable 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 Callable MITTS
Securities equal to % per annum, compounded semiannually. Accordingly, during
the term of the Callable MITTS Securities, a U.S. Holder of a Callable MITTS
Security will be required to include in income the sum of the daily portions of
interest on the Callable 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 Callable 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 Callable MITTS Securities are
outstanding) will equal the product of this estimated yield (properly adjusted
for the length of the accrual period) and the Callable 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 Callable MITTS
Security's adjusted issue price will equal the Callable MITTS Security's issue
price (i.e., $10), increased by the interest previously accrued on the Callable
MITTS Security. At maturity of a Callable 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 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 excess of $ per unit (i.e., the
Projected Supplemental Redemption Amount) over 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 Callable MITTS
Security for the taxable year in which the maturity date occurs to the extent
of the amount of such 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
S-24
<PAGE>
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, redemption, or exchange of a Callable MITTS Security prior
to the 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 such sale or exchange and the U.S. Holder's
adjusted tax basis in the Callable MITTS Security as of the date of
disposition. A U.S. Holder's adjusted tax basis in a Callable MITTS Security
generally will equal such U.S. Holder's initial investment in the Callable
MITTS Security increased by any interest previously included in income with
respect to the Callable MITTS Security by the U.S. Holder. Any such taxable
gain will be treated as ordinary income. Any such taxable loss will be treated
as ordinary loss to the extent of the U.S. Holder's total interest inclusions
on the Callable 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 Callable 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 Callable MITTS Securities should be aware
that if a significant percentage of the total aggregate amount of the Callable
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 Callable MITTS Securities, as determined for United States Federal income
tax purposes, may be less than the principal amount of the Callable MITTS
Securities. In such event, if a U.S. Holder purchases a Callable 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 Callable 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 such date as an offset to such interest on each such
date. In addition, on each such date, the U.S. Holder's adjusted tax basis in
the Callable 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 Callable MITTS Securities, as determined for United
States Federal income tax purposes, equals the principal amount thereof and a
U.S. Holder purchases a Callable 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 Callable MITTS
Security and the amount paid by the U.S. Holder to purchase the Callable MITTS
Security generally would be allocated by the U.S. Holder to daily portions of
interest that are deemed to accrue on each such date as additional ordinary
interest includible in income by the U.S. Holder on each such date. In such
event, on each such date, the U.S. Holder's adjusted tax basis in the Callable
MITTS Security will be increased by the amount treated as additional ordinary
interest income. In addition, U.S. Holders purchasing a Callable MITTS Security
at a price that differs from the adjusted issue price of the Callable 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 such U.S.
Holders should consult their own tax advisors concerning these rules.
All prospective investors in the Callable MITTS Securities should consult
their own tax advisors concerning the application of the Final Regulations to
their investment in the Callable MITTS Securities. Investors in the Callable
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
Callable 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 Callable MITTS Securities) has
been determined solely for United States Federal income tax purposes (i.e., for
purposes of applying the Final Regulations to the Callable 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 Callable MITTS Securities
during each accrual period over an assumed term of approximately seven years
for the Callable MITTS Securities based upon a hypothetical projected payment
schedule for the Callable MITTS Securities (including both a hypothetical
Projected Supplemental Redemption Amount and a hypothetical estimated yield
equal to 7.35% per annum (compounded semiannually)) as determined by ML&Co. for
purposes of illustrating the application of the Final Regulations to the
Callable MITTS Securities as if the Callable MITTS Securities had been issued
on August 4, 2000. The following table is for illustrative purposes only. The
actual projected payment schedule for the Callable MITTS Securities (including
both the actual Projected Supplemental Redemption Amount and the actual
estimated yield) will be determined by ML&Co. on the Pricing Date and will
depend upon actual market interest rates (and thus ML&Co.'s borrowing costs for
debt instruments with comparable maturities) as of the Pricing Date. The actual
projected payment schedule for the Callable MITTS Securities (including both
the actual Projected Supplemental Redemption Amount and the actual estimated
yield) and the actual tax accrual table will be set forth in the final
prospectus supplement delivered to investors in connection with sales of the
Callable MITTS Securities:
<TABLE>
<CAPTION>
Total interest
deemed to have
accrued on the
Interest deemed MITTS Securities
to accrue during as of the end of
accrual period accrual period
Accrual Period (per unit) (per unit)
-------------- ---------------- ----------------
<S> <C> <C>
August 4, 2000 through February 4, 2001...... $0.3706 $0.3706
February 5, 2000 through August 4, 2001...... $0.3811 $0.7517
August 5, 2001 through February 4, 2002...... $0.3951 $1.1468
February 5, 2001 through August 4, 2002...... $0.4097 $1.5565
August 5, 2002 through February 4, 2003...... $0.4247 $1.9812
February 5, 2002 through August 4, 2003...... $0.4403 $2.4215
August 5, 2003 through February 4, 2004...... $0.4565 $2.8780
February 5, 2003 through August 4, 2004...... $0.4732 $3.3512
August 5, 2004 through February 4, 2005...... $0.4907 $3.8419
February 5, 2004 through August 4, 2005...... $0.5087 $4.3506
August 5, 2005 through February 4, 2006...... $0.5274 $4.8780
February 5, 2005 through August 4, 2006...... $0.5467 $5.4247
August 5, 2006 through February 4, 2007...... $0.5669 $5.9916
February 5, 2006 through August 4, 2007...... $0.5877 $6.5793
</TABLE>
Hypothetical Projected Supplemental Redemption Amount = $6.5793 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 Callable MITTS Security, unless such 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 Callable MITTS
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Security under penalties of perjury, (b) certifies that such owner is a non-
U.S. Holder and (c) provides the name and address of the beneficial owner. The
statement may be made on the applicable IRS Form W-8, IRS Form W-8BEN or a
substantially similar form, and the beneficial owner must inform the
Withholding Agent of any change in the information on the statement within 30
days of such change. After December 31, 2000, a beneficial owner may no longer
use IRS Form W-8 to certify its non-U.S. status. If a Callable 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 such case, the signed statement must be
accompanied by a copy of the applicable IRS Form W-8 or the substitute form
provided by the beneficial owner to the organization or institution.
Under current law, a Callable 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 such individual's
death, payments in respect of such Callable MITTS Security would have been
effectively connected with the conduct by such 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 Callable 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 Callable 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 Callable 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
such 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 or IRS Form W-8BEN under penalties of perjury, although in
certain cases it may be possible to submit other documentary evidence. After
December 31, 2000, a registered owner may no longer use IRS Form W-8 to certify
its non-U.S. status.
Any amounts withheld under the backup withholding rules from a payment to
a beneficial owner would be allowed as a refund or a credit against such
beneficial owner's United States Federal income tax provided the required
information is furnished to the IRS.
New withholding regulations
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations") which make certain modifications to the backup withholding
and information reporting rules described above. 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 Callable 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,
S-27
<PAGE>
subject to certain transition rules. Prospective investors are urged to consult
their own tax advisors regarding the New Regulations. After December 31, 2000,
interest accrued under the Final Regulations will not be subject to withholding
upon sale or exchange (other than a redemption) of a Callable MITTS Security
unless the Withholding Agent knows or has reason to know that such sale is with
the principal purpose of avoiding tax.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and Section 4975 of the Internal Revenue Code, as amended (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 Callable 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 Callable 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 Callable 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 any 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. The address of the SEC's Internet site is provided solely
for the information of prospective investors and is not intended to be an
active link. 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 Callable MITTS Securities and other securities. For further information on
ML&Co. and the Callable 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
MLPF&S has agreed, subject to the terms and conditions of the
underwriting agreement and a terms agreement, to purchase from ML&Co. $
aggregate principal amount of Callable MITTS Securities. The underwriting
agreement provides that the obligations of the underwriter are subject to
certain conditions and that the underwriter will be obligated to purchase all
of the Callable MITTS Securities if any are purchased.
The underwriter has advised ML&Co. that it proposes initially to offer
all or part of the Callable MITTS Securities directly to the public at the
offering prices set forth on the cover page of this prospectus supplement.
After the initial public offering, the public offering price may be changed.
The underwriter is offering the Callable MITTS Securities subject to receipt
and acceptance and subject to the underwriter's 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 Callable MITTS Securities will conform to the
requirements set forth in the applicable sections of Rule 2720 of the Conduct
Rules of the NASD.
The underwriter is permitted to engage in certain transactions that
stabilize the price of the Callable MITTS Securities. These transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Callable MITTS Securities.
If the underwriter creates a short position in the Callable MITTS
Securities in connection with the offering, i.e., if it sells more units of the
Callable MITTS Securities than are set forth on the cover page of this
prospectus supplement, the underwriter may reduce that short position by
purchasing units of the Callable MITTS Securities in the open market. In
general, purchases of a security for the purpose of stabilization or to reduce
a short position could cause the price of the security to be higher than it
might be in the absence of these purchases. Neither ML&Co. nor the underwriter
makes any representation or prediction as to the direction or magnitude of any
effect that the transactions described above may have on the price of the
Callable MITTS Securities. In addition, neither ML&Co. nor the underwriter
makes any representation that the underwriter will engage in these transactions
or that these transactions, once commenced, will not be discontinued without
notice.
MLPF&S may use this prospectus supplement and the accompanying prospectus
for offers and sales related to market-making transactions in the Callable
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.
S-29
<PAGE>
VALIDITY OF THE CALLABLE MITTS SECURITIES
The validity of the Callable MITTS Securities will be passed upon for
ML&Co. and for the underwriter by Brown & Wood LLP, New York, New York.
S-30
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business Day............................................................... S-14
Calculation Day............................................................ S-13
Calculation Period......................................................... S-13
Call Period................................................................ S-6
Call Price................................................................. S-6
Callable MITTS(R) Securities............................................... S-1
Closing Price.............................................................. S-13
Code....................................................................... S-28
depositary................................................................. S-19
Dilution Events............................................................ S-16
Distributed Assets......................................................... S-16
DTC........................................................................ S-4
Ending Value............................................................... S-5
ERISA...................................................................... S-28
Exchange Act............................................................... S-14
Extraordinary Cash Dividend................................................ S-18
Final Regulations.......................................................... S-24
HOLDRs Prospectus.......................................................... S-4
Broadband HOLDRs........................................................... S-4
Market Disruption Event.................................................... S-13
ML&Co...................................................................... S-4
MLPF&S..................................................................... S-4
NASD....................................................................... S-13
NASDAQ NMS................................................................. S-13
NASDAQ NMS security........................................................ S-14
New Regulations............................................................ S-27
non-U.S. Holder............................................................ S-23
OTC Bulletin Board......................................................... S-13
Payment Date............................................................... S-6
Pricing Date............................................................... S-5
principal amount........................................................... S-4
Projected Supplemental Redemption Amount................................... S-24
Reference Property......................................................... S-13
Reference Securities....................................................... S-13
Reorganization Event....................................................... S-18
Starting Value............................................................. S-5
Successor Company.......................................................... S-18
Supplemental Redemption Amount............................................. S-5
Trading Day................................................................ S-13
U.S. Holder................................................................ S-23
Withholding Agent.......................................................... S-26
</TABLE>
S-31
<PAGE>
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[LOGO OF MERRILL LYNCH]
2,500,000 Units
Merrill Lynch & Co., Inc.
Callable Market Index Target-Term Securities(R)
due August , 2007
based upon Broadband HOLDRS (SM)
"Callable MITTS(R) Securities"
------------------------------
PROSPECTUS SUPPLEMENT
------------------------------
Merrill Lynch & Co.
August , 2000
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